Someone remarked to me on Thursday that in order to see the real news, sometimes you have to step away from the news for a day or two.
So I did just that Thursday, instead focusing all of my attention on a day-long visit to Dunkin Donuts (DNKN) HQ in Massachusetts (liked what I heard) to meet with executives. In between sampling new donuts with bacon and egg sandwiches, I would check the news, including the frenzied minutes after Fed release. While the Fed did pretty much what I expected (perhaps was a bit more downbeat on the economy than I thought/would have liked), it wasn't until the car ride home that something stuck out to me: the third quarter for businesses did not shape up too well.
And that assessment isn't solely based on the Fed's major warning on the global economy, or the slowing of China that Yellen had to mention emphatically. Just take a look at several developments in the past couple of weeks.
Hewlett-Packard (HPQ): Announces job cuts days before the quarter is set to end. The moves aren't going to help this quarter, but will give the company a hopeful story (layoffs equals earnings upside) to pitch to investors who will likely hate the ugly third quarter numbers. CEO Meg Whitman will pitch that hope, when the reality is the global economy is in such shape Hewlett Packard needs to massively cut even more jobs. Moreover, the tech industry is evolving much more quickly than many expect, suggesting pricing pressures throughout the supply chain (from Twitter mobile ads to PC makers) that make recouping big-time investments in human capital and infrastructure harder.
Apple: CEO Tim Cook comes out and appears on a late-night talk show weeks before third-quarter earnings of this company (which is a holding of the Action Alerts PLUS portfolio), are detailed. Anyone else think this was weird? Personally, I took it as Cook trying to put on a brave face that his claims made earlier on the quarter about China being great remain intact. In truth, if the Federal Reserve is warning on the global economy, that means even Apple's growth in China may be slowing at a rate that negatively surprises investors.
McDonald's (MCD): The struggling fast food joint gave its long-time chief strategy officer the axe this month, weeks before the quarter ended. Yet another indication the quarter is unlikely shaping up too well for a globally exposed company.
Cablevision (CVC): The Dolan family cashed out just before the holiday season. For real? Is this deal actually happening? To me, Dolan is not only worried about the company's valuation in a world of cord-cutting, but may be seeing signs of soft macro-related results for the third quarter. If the economy is increasingly in rough shape (you are now thinking a September employment report before 150,000) as the Fed suggested Thursday, people are tightening up on expenses, and a great area to cut is on premium cable channels -- or the entire cable bill, moving to Hulu or Netflix (NFLX), for example.
Wal-Mart (WMT) and Toys R' Us: For the last few holiday seasons, I have gotten used to major retailers keeping hiring levels consistent year over year. Like most employers nowadays, the push is on to drive worker productivity, especially during peak demand periods (doing so maximizes profits). But, we have heard all year that the U.S. economy is increasingly in better shape -- if that was the case, why is Wal-Mart keeping its hiring levels the same year over year? I think the world's largest retailer is having a challenging third quarter in the U.S. and in emerging markets. Furthermore, Toys R' Us is actually hiring 5,000 fewer workers despite a supposed holiday toy rush related to Star Wars. The news flow here hints retailers saw sales trend changes for the worst in late August and September, and would rather approach early hiring plans for the holiday cautiously.
Maybe I am reading too much into all of these stories. But the clarity that surfaces from stepping back from the daily grind of news analysis indicates maybe I am on to something here. Thanks to the Fed, you have to be in the mindset that earnings warnings are on the horizon and the market has not priced them into valuations. There are some crazy things going on out there, believe me. Be prepared, or else.
