If you were to ask us about the last five days of trading, we'd say the chart looks like one of the many potholes you'd find if you were driving up or down either the country's left or right coasts. We've seen some consume whole tires only to spit out a car that is practically crippled and a driver that is either scared stiff or extremely pissed off. Even though the S&P 500 recovered from the Greek inspired drop last Friday, the most recent earnings headlines are more than likely to revive those post pothole emotions.
With only a modest amount of economic data slated to hit the headlines this week, the March quarter earnings have taken the lead similar to how the pole position driver kicks off the Indianapolis 500. Much like that race and many others, the real excitement tends to come as we move deeper into the race. That's what we've started to see with March quarter earnings.
There have been some positive surprises, thank you Amgen (AMGN), Morgan Stanley (MS), Goldman Sachs (GS) and Blackstone Group (BX). Those companies surprised on both the top and bottom line, but so far those are proving to be the exception, not the rule. Instead, what has been mostly the norm thus far has been companies eking out better than expected bottom line results, no doubt helped by all those stock buyback plans, but falling short on the top line. Kimberly Clark (KMB), IBM (IBM), Haliburton (HAL), General Electric (GE), American Express (AXP), Bank of America (BAC), Citigroup (C), and Philip Morris International (PM) all fall into that camp.
Stepping back, this jives with the narrative of the March quarter that has been severe winter weather, port closures, the strong dollar and other factors that would not only slow the economy, but also hit corporate revenues. In many respects, we all saw the data painting an increasingly somber picture over the last several weeks, and now we're seeing the fallout.
Surprising? We think not. But, then again, we've taken a more defensive approach as the 2015 first quarter marched on. We were not alone in our views, given the 15% drop in S&P 500 trading volume over the last ten trading days, compared to the 20 trading days before that, proving that many are anxious about March quarter earnings. The combination of lighter than usual volume and missed earnings, revenues or both--as was the case with Yahoo! (YHOO), TD Ameritrade (AMTD), Chipotle Mexican Grill (CMG) and others--leads to some wild swings when it comes to stock prices. As we've said, that can present opportunity for the prepared investor, if the underlying fundamentals and thesis remain intact. We continue to recommend that you fine tune your shopping list as we navigate deeper into earnings season.
One quick thought on McDonald's (MCD), which delivered more disappointing results this morning. This remains one to avoid, both in terms of the shares and the products.
To us, the question that will soon have chins wagging is what's the real condition of not only the U.S. economy, but also the other global economic horsemen that are the Eurozone, China and Japan? The latest scoop on those and other monetary stimulus inducing nations comes tomorrow via flash PMI data from Markit Economics. We've been gravitating toward more international exposure as the "benefits" of those easier money policies take hold, but we caution balancing against significant upward moves.
For example, despite the new round of easing in China, iShares FTSE/Xinhua China 25 Index ETF (FXI) shares have climbed more than 23% in the last seven weeks. It's a bit rich for our blood. We'd prefer investing in the Eurozone where the European Central Bank's one trillion-euro stimulus is starting to be felt, according to recent comments from ECB President Mario Draghi. If Draghi is like other central bankers, we'd prefer sifting through tomorrow's flash PMI data for confirmation, rather than the Svengali-speak for which central bankers are known.
As we move from winter and port-closure-impacted-data, we should start to see a clearer picture of the economy. Will we see some snap back, some pent up demand if you will, in the U.S., now that the weather has normalized? Probably, and Versace, in particular, is down on his knees praising the temperatures that are finally north of 50 degrees. But for investors, the upside in the stock market will hinge on the sustainable strength of the global economy, not the rubber band post-weather and port snap back that will overstate things for only a brief period of time. That's why even though we're still getting March data, our collective view is that for the U.S., it's the April, May and June economic data that will be truly telling.
Consider the housing industry that has seen single family home starts fall in recent months. It's a bit difficult to build in snow and break ground that is frozen. But per this morning's March Existing Home Sales, which hit the highest level in 18 months and climbed 6.1% month-over-month, activity has picked up. While we'd love to be as optimistic as all get out, the reality that shows the housing market is tied to job creation has us still cautious on this industry. We'll need to see more jobs and higher quality ones created (wage growth!) to get our juices going on this sector. The fact that the Bureau of Labor Statistics reported yesterday that 31 states saw reduction in nonfarm payroll employment gives us cause for concern.
On the downside, the market will continue to be buoyed by the Fed's lack of tightening. Absent a pickup in inflation, it continues to look like very late 2015 at the earliest for any rate increase. The net takeaway is we expect the range-bound market of the last few weeks to continue on a bit longer. To us this means being selective when buying off your shopping list with an eye for what's to come in the second half of 2015.
Earlier this week Versace appeared on TheStreetTV talking about the latest and greatest cyber attack data and how to play it. Shockingly, the size and scope of attacks continues to grow as hackers continue to zero in on companies and individuals. Late last night, the inspector general of the State Department confirmed in Senate testimony that the State Department network at some point was hacked. While not the kind of news we want to necessarily hear, the glass half full view uses it as reminder to say that everyone should be owning cyber security stocks in one form or another. Individual stocks like FireEye (FEYE), Palo Alto Networks (PAWN) or Lifelock (LOCK) fit the bill, but for those that want more diversification, we continue to like PureFunds ISE Cyber Security ETF (HACK) shares.