What a week indeed. Up has seemed like down, and down has seemed like up. Corporate earnings, good or bad, have generally fueled fears on the part of investors. When logic of that nature (where good news is bad and bad news is viewed as end-of-the-world stuff) permeates a market, it usually makes the investing process tougher than the norm.
Netflix (NFLX) was crushed, a reaction by the market that sure sounded akin to a bubble exploding. Google's (GOOG) earnings report disappointed, again, and I wouldn't be surprised if the market doesn't penalize the stock more than it did in after-hours trading. If you were long the stock into earnings shame on you, just look at the weakening fundamental trends over the past year. Sears (SHLD) shares have oddly remained resilient amidst the selloff, as has J.C. Penney (JCP). As I just referenced, crazy stuff indeed.
In total, the European-led stock rout has erased some $5.5 billion from worldwide equities since September. Ouch. Now we are looking at a news-driven market, and that is very dangerous as it's removed from the fundamentals of companies, which are supposed to fuel asset valuations. Once more, we are learning the detrimental long-run impacts of the extraordinary stimulus pumped into the economic system during, and post, the 2009 crisis. Just take a gander at the news that has soothed markets in the last 24 hours -- none of it earnings or Apple (AAPL) iPad mini-related...
- European Central Bank Executive Board member Benoit Coeure said the bank will start purchasing assets within days.
- St. Louis Federal Reserve President James Bullard, who is looked at as a future indicator on policy, voiced his support for extending quantitative easing. As soon as those comments hit yesterday, the market rallied. Interestingly, I received a Bloomberg alert on my phone Wednesday saying that Fed Chair Janet Yellen could come out in support of equities, and the market stopped its freefall.
Nonetheless, I encourage you to do the following this weekend in preparation for what could be another ugly week as more earnings reports hit the wires:
1. Study the exposure of companies you own to Ebola-related news. Don't laugh. I am already fielding questions from folks who want to reduce exposure to consumer stocks on fear that travel bans this holiday season will crush earnings. Hello SARS outbreak part two.
2. Know where each member of the Federal Reserve stands on Fed policy. If these individuals are going to be driving the market in the weeks ahead, you have to be aware of their most recent comments. Re-read the latest Fed minutes, too.
3. Read earnings calls transcripts from the global trade companies that have reported this week, including CSX Corp. (CSX), JB Hunt Transport Services (JBHT), General Electric (GE), etc. These companies are confirming or denying the murmurs in the market regarding economic crushing deflation in Europe. I would also be investigating China for a slowdown.
Pre-Earnings Take: Chipotle
Earnings for the restaurant chain Chipotle (CMG) are expected this coming Monday after the close. Read this interview I did with the company's CEO for TheStreet, then the notes below.
Price increases: A key question is have price increases cooled demand after being in the mix for the second straight quarter? From everything I can see, from social media to actually in the restaurants, Chipotle easily had another double-digit comp quarter.
Sentiment: The company will have to show another sequential acceleration in comps, as it has been doing, but it will be tough to post another blowout figure as it did in Q2. Oddly, if there is no acceleration in comp growth q/q, the market may sell the stock, the logic being comp growth peaked in Q2 and hence valuation is full.
Costs: Given the comp in Q2, one would have thought Q2 earnings per share would have been even stronger. The culprit: sticky levels of inflation in proteins and veggies. Inflation was likely elevated in Q3 (see cheese at Domino's Pizza (DPZ)), but has since begun to moderate.
Quarter to date: Chipotle usually provides insight on traffic at the start of the quarter, so all eyes will be on if a recent consumer spending slowdown has found its way to the U.S.' favorite place to eat fast food. I don't believe it has.
I expect earnings and sales to beat.