It's take-no-mercy time for yours truly. Retail earnings are acting all wave-on-the-shoreline-like. I put a hole in my balsa-wood-constructed Ikea office desk yesterday after whopping it up when TJX (TJX) reversed intra-session.
There is a broader market to watch carefully (no more covering only 50 retail companies and scribbling a newsletter). But I can proudly proclaim that organic research is still being done. To me, organic research occurs when those teensy-weensy thoughts that emerge from countless hours of burning the midnight oil transform into investable themes for choosing stocks. In close to 10 years paying homage to the stock market and EDGARS, I have no clue how this research is mentally formed -- it literally just appears.
Let me share a few quick and dirty items that may not be so visibly apparent as they will be in coming sessions and weeks.
- Strong upside to the July retail sales report confirms, at least for those old and newly crowned bulls, that the employment report was no fluke and that trends on the ground are not as catastrophic as the data imply (and hey, Home Depot (HD) is paying more bonuses to its associates anyway).
- The July retail sales report was the first brick in the wall that signs of life in macro releases in July were real, hence manufacturing readings at the end of the week will be of the recovering nature (and according to the market, may join forces with an increasing contribution from the housing market as a component of GDP).
- The July retail sales report is a one-off, partially explaining why retail stocks did not pop dramatically in response (and Wal-Mart (WMT) still grinded higher -- what's up with that?). Along this line of thinking, I found it interesting that the Street completely disregarded the modestly bullish second-half earnings guidance from the usually conservative Dick's Sporting Goods (DKS). Granted, I am not a one of these people who will say, "Never bet against the U.S. consumer," and I do believe we are headed for a fiscal-cliff-induced downside to fourth-quarter GDP, but the Dick's selloff seemed to be an overreaction, given a very likely acceleration in high-margin product sales, plus an encouraging start to the back-to-school selling season.
- We are in a wacky zone of the market, silently rooting against above-consensus macro reports and individual company earnings. The market would prefer incremental strides on the macro data front in order to lure the Fed into additional accommodation, in turn creating a euphoric backdrop for stocks in the second half (actually in the third quarter, as stocks are bought in advance, and then they could be dumped as fiscal cliff mania kicks into overdrive by the holidays).
Don't be too sure that the July retail sales report removes the Fed from the equation at the September meeting. The month benefited from early back-to-school buying, as noted by Dick's; also remember that comparisons to last year were very weak. Not enough retail chains doing are well at once in terms of same-store sales and gross margin (which is where reads on price sensitivity are gleaned) to support the view that the consumer is happy go lucky, as I heard on numerous occasions yesterday.
The buying is targeted in categories that offer the best possible price for their intended purpose in a person's life (think basics) or skewed to higher-end purchases, where they are also targeted instead of across the board.
As a follow-up to yesterday's piece, we may have to keep riding the carousel, especially as the July retail report confirmed what the market began to price in weeks back and perhaps underestimated (upside to data).
- Reiteration: Dabble in Lowe's (LOW) at your own peril. Home Depot is the share-gain story in a slow-growth business, and I am worried about a shift in Lowe's' capital allocation strategy, which has supported the stock and earnings.
- True story: Want a good example why overtime continues to be nonexistent? A Home Depot (and Wal-Mart) is using technology to plan staffing at peak demand periods, and then sends workers packing for home when the stores are less crowded.