"Last quarter wasn't too great for my 401k; it was pretty crappy actually," said mom to me on a Sunday morning phone call. The conversation took place before I re-read the Alcoa (AA) earnings call. The reply by her financial services son was: "no worries, Warren Buffett advises you to hold the stock of a great company forever; you should be fine with your holdings." Obviously, that was said tongue in cheek, and brought little comfort to dear old mom. But, the momentary interaction underscores the returning fear on the part of average investors (those who have no clue who Janet Yellen is) just prior to the holiday shopping season.
I believe stocks are reacting to a souring European economy, and perhaps one in China that has quietly begun to moderate and bring with it negative 4Q data surprises when reports are issued at night. But it's the weakening view of the finances of U.S. households that could make it another volatile quarter for equities. Heck, J.C. Penney (JCP) shares have been destroyed in the last week on concerns its 4Q guidance is too optimistic. Why that interpretation? Sales after back-to-school, which coincided with more volatile stock markets, softened.
This week will bring a host of earnings, so be ready. But per the usual, you can't dive into earnings reports unaware of what information and comments the market has already digested.
Alcoa: Kept its global aluminum demand outlook, a positive amid the rising level of global gloom and doom. However, the market didn't reward the news. The stock fell 6.6% last week, underperforming both the Dow and S&P 500. I always throw a caution flag on the field when seemingly positive news on earnings day, as seen at Alcoa, is not rewarded accordingly. It signals disbelief in forward guidance, as the executive likely dropped a keyword on the earnings call that didn't exactly support the bullishness typed on a public-relations scrubbed press release.
PepsiCo (PEP): Nothing wrong with this quarter and outlook, other than CEO Indra Nooyi noting the usual "sluggish" demand environment in developed markets. The comments have me likely to reiterate a sell rating on Wal-Mart (WMT) ahead of its Oct. 15 investor day, and suspect that Coca-Cola (KO) was the share donor in many product categories. Disclosure: I recently went to a NY Giants game with PepsiCo management.
Fastenal (FAST): From a company-specific aspect, the market may have overreacted to the long-term implications of a lowered 2014 gross margin outlook. The company does have a cost-cutting campaign in effect, which should cushion operating margins. But its gross margin reduction sheds a good deal of light on the renewed pricing pressures in softening European markets. The next tells for me on this subject will come from earnings out of Stanley Black & Decker (SWK), Snap-On (SNA), and Whirlpool (WHR).
Around the Horn
- Toys "R" Us is a privately held company, but I expect it to share some form of restructuring plan in 2015 as it continues to struggle with driving toy sales and profitability. Thanks, Amazon (AMZN) and Apple (AAPL) iTunes.
- You do not want long exposure, for now, on Papa John (PZZA) into earnings. The pizza business is getting very competitive in terms of promotions.
- Things will get uglier for McDonald's (MCD) into 2015; expect a management shakeup at the top.
- Sears (SHLD) is in no way financially able to handle a payout to people impacted by the Kmart data hack. Moreover, it's in no way financially able to handle the capital investment needed to safeguard its infrastructure from future threats.