On any given day, I will receive two types of finance-related inquiries. The first and more frequent comes from people who are concerned that the economy is not expanding enough at this point in the cycle and that equities don't deserve to trade where they do in terms of valuations. Hence, these people bet against the broad market and hope to be right at some moment in the future.
The other inquiry comes from people who believe the economy is nicely on the mend, especially after the dreadful winter, and they are ready to pay a higher market multiple to own a best-in-class operator, say a Starbucks (SBUX). But what I often will tell this rather optimistic person is that just because the general economy is slowly accelerating, it doesn't mean that all companies will come along for the ride in the next quarter, or even six quarters from today.
A taste of this guidance was on display this week. Despite a surprise on March personal spending, and a solid ADP employment report, companies that have structural issues are minefields for investors. For example:
Beazer Homes (BZH): "Slower than expected start to the spring," noted management. Yet there is more than meets the eye, as the company's backlog in units declined, while values rose. The read to that dynamic: The homebuyer is not being sold on the value proposition of a Beazer home and will sit tight until incentives pour in from the company, or else they will shop elsewhere.
Church & Dwight (CHD) Clorox (CLX): Blood is being spilled -- or should I say laundry detergent -- on the shelves of Wal-Mart (WMT) and Target (TGT). Both companies have engaged in promotional wars that are weighing on profit margins. Exiting a price war in food aisles is tough to do, so I deem it a structural impediment to growth in the face of a strengthening U.S. economy.
Kellogg (K) had a brutal quarter that had the same characteristics as the ones from Church & Dwight and Clorox. On a side note, Kellogg has been operating very poorly for well over a year, so where is the activist involvement here?
The 10-year note has fallen 7% in the past month, as the yield has moved down from 2.8% to 2.6%. Why is this important? It suggests the market is trading on corporate and economic fundamentals as the Federal Reserve's tapering of quantitative easing is ongoing.
So in other words, we needed a rock-solid April jobs report. We got it, not only on the headline but within the upward revisions for February and March, even as weather crippled so many businesses. The first sense I received via Twitter is that this report will push forward the timing of the dreaded taper. I don't believe it will, as we could level out in terms of employment gains as the weather impact normalizes. However, if we receive a revision to over 300,000 for April and that figure for May, then the Fed may be forced to move a bit earlier.
Only one thing continues to solidify that view of a Fed that does not deviate from its recent dovish commentary: Wage growth is basically nonexistent in spite of job gains accelerating. You should be watching consumer names today. If they don't act favorably, that would be a red flag on the rally's near-term sustainability.