We are deep in earnings season, with rather mixed results so far and a market that continues to gyrate as wildly as a Miley Cyrus video.
Last week the S&P 500 rose on Monday to the week's high of 1,912.09 only to drop 5% by Wednesday to 1,820.66 then close at 1,886.76 on Friday for a little more than a 1% drop from the prior Friday's close. The rebound was aided significantly by comments out of Federal Reserve officials. Janet Yellen voiced confidence in the durability of the U.S. economic recovery and James Bullard on Thursday commented on Bloomberg TV that the Fed may want to keep up bond buying until seeing how the data shake out in December.
As of yesterday's close, the S&P 500 was up 2.89% from Friday's close on very little economic news, with the index having had its largest one-day gain since October 10, 2013.
Speaking of wobbles, the epic (according to Hawkins) stiletto-maker Jimmy Choo (CHOO.L) debuted on the London Stock Exchange last week at the bottom of its range, but has been getting its footing and trending up since then. Versace is convinced it is because of Hawkins' financial support (high-volume of orders placed) for the company's new customized shoe offering. The company joins a brethren of high-end fashion names that have struggled so far this year, such as Tiffany (TIF), Hermès International (HESAF), LVMH Moet Hennessy Louis Vuitton (MC.PA), Salvatore Ferragamo (SFER.MI), Moncler (MONC.MI) and Prada (PRDSF).
On Monday, Apple (AAPL) delivered a huge beat on EPS at $1.42 vs. expectations of $1.30 coupled with its biggest revenue surprise since its Q4 2011 report at 12.4% year-over-year growth. CEO Tim Cook reported that the iPhone 6 rollout is currently the fastest ever in the company's history, with production unable to keep up with demand. The company sold 39.3 million iPhones last quarter, a 16% year-over-year increase, but iPad sales fell 13% from the previous year. A big surprise was sales of Mac computers rising 18% in a PC market that has been rather stagnant, giving Apple its best share position in the PC market since 1995 and making the company one of the five biggest computer sellers in the world.
With Apple rolling out iPhone sales in more countries, and in particular China, during the current quarters, we see robust demand continuing. That bodes well for suppliers like Qualcomm (QCOM), Skyworks (SWKS), NXP Semiconductor (NXPI) and others.
This is all good news for your two, all-things-Apple lovers know as Hawkins and Versace, but a comment during Chipotle's (CMG) earnings call has us both concerned. Chief Marketing and Development Officer Mark Crumpacker mentioned that incorporating Apple Pay into the app they are rolling out next year has been very difficult, so difficult that, "right now, we don't have imminent plans to roll out Apple Pay support." With all the hullabaloo about this potentially tectonic shift in payment systems, this is something that warrants continued attention.
Chipotle's report was another one to cheer, with 20% same-store sales growth, its highest since its 2006 IPO. The company reported having seen little resistance to price increases as a result of its efforts to improve the quality of its ingredients. On the downside, the company expects low- to single-digit same-store sales growth and is expecting food price inflation to outpace price increases with respect to beef, dairy and avocados. This allows Versace to puff out his chest, much the way Hawkins has done when it comes to the housing industry, and reinforces his favorable views on Sanderson Farms (SAFM) and Pilgrim's Pride (PPC). For now this stock looks to be rather priced to perfection. Things aren't so rosy over at the Golden Arches.
Globally, McDonald's (MCD) Q3 sales declined by 3.8% to $6.99 billion, far short of the $7.19 billion that analysts were expecting. In Asia, sales fell by a whopper of 9.9%. Profits fell 30%, coming in at $1.09 a share, again well short of the $1.37 expected and well below $1.52 a year earlier. Sales in U.S. stores open for at least 13 months fell 3.3% in 3Q, worse than the expected decline of 2.9%. Overall, U.S. sales have gone 11 months without posting a month-over-month increase, which according to Zero Hedge is the worst stretch on record. It goes to show that while you can offer free coffee, the quality of the product is what really draws in consumers.
Of particular interest on the call was the comment that the closure of nine restaurants in Russia and the Ukraine led to a penny-per-share drop in earnings. If the tensions between Russian and the U.S. continue and Russia, with clearly no other interests outside of the safety of its own citizens (snarky tone intended), decides to force the closure of the remaining 440 restaurants in the country, that could theoretically lead to a nearly 48-cent-a-share reduction next quarter. Looks like Putin just isn't lovin' it.
In an effort to shake off rumors, McDonald's is using Twitter (TWTR), Facebook (FB) and YouTube to address consumers' concerns over just what is in its food, going so far as to launch a YouTube video campaign staring "Myth Busters" co-host Grant Imahara inspecting burger production facilities at Cargill. It looks to us that the cash-strapped and increasingly health-conscious consumer has decided that McDonald's menu options are no longer inspiring, its price-to-quality equation is questionable and with 145 items on its menu, as fast food, it's often not fast enough. There is no quick fix here, so we suggest avoiding going long for the foreseeable future, despite the attractive dividend yield of 3.7%.
Three weeks ago, Hawkins came out of the macro closet and confessed her fears over the potentially big challenges a rapidly-appreciating dollar could place on a still-struggling U.S. economy. Turns out her fears were warranted. According to Factset, of the 68 companies that reported earnings through October 16, 29, or 42.6%, cited some negative impact or expressed a negative sentiment about the stronger dollar during their calls. This was the highest number of companies to cite a negative impact or express a negative sentiment about a single issue. So far, only six (8.8%) have cited Ebola during their conference calls and of those only PPG Industries (PPG) discussed a negative impact.
Yesterday, another company added itself to the dollar-worries list when Coca-Cola (KO), the world's largest beverage maker, delivered another disappointment to the Street with top-line revenue coming in at $11.98 billion, well below estimates of $12.12 billion and resulting in a 2% year-to-date decline in net revenues from $12.03 billion a year ago. Sales declined 1% in North American last quarter, while global volume rose 1%. That overseas volume didn't translate directly to the bottom line thanks to the strengthening U.S. dollar. Without the strengthening dollar, EPS would have increased 6%, but with the stronger dollar, it actually declined 13%!
Further, the company expects an approximately seven-point headwind to operating income during the fourth quarter of 2014 and a six-point headwind on full-year operating income thanks to fluctuations in exchange rates. Shares fell the most in six years on the announcement.
If this strengthening dollar trend continues, those firms that derive less of their revenue from overseas and more domestically will likely outperform the large multinationals such as Coca-Cola, which would translate into a reversal of the years predominant trend in which small-caps were underperforming larger-caps. Indeed, in the past week and a half we have seen such a reversal with the Russell 2000 outpacing larger-cap indices.
As for the strength of the U.S. economy and its ability to withstand the headwinds posed by a strengthening dollar, a recent report from the National Association for Business Economics found that just 49% of companies reported that their sales rose in the 3Q vs. 57% in 2Q, the lowest percentage in a year. In addition, 14% also reported declining profit margins, again the largest portion in a year. Unsurprisingly, the impact of the slowing sales growth will be felt in wages with only 24% of companies planning to boost pay in 3Q 2014 vs. 43% that reported giving raises in 2Q 2014. This is the first drop after three quarters of increases. Meanwhile, more than 9.3 million people are still out of work in September vs. 7.6 million before the Great Recession. In addition, more than 7 million are working part-time, but want full-time work.
Which leads us back to Hawkins' repeated claim that housing won't get the kind of traction it needs until labor participation rates and household income levels improve. Just today the Bureau of Labor Statistics announced that real average hourly earnings fell 0.2% from August to September. Real average hourly earnings increased 0.3% on an annual basis, a testament to just how non-existent household income growth has become. Mortgage rates fell last week to their lowest level in nearly 18 months, leading to an 11.6% rising in mortgage applications. Good news for housing, right? Wrong. The increase was all about the refi!
But what about this week's report that existing home sales rebounded from the worst miss in 2014 in August to reach the highest since last September? That's great, right? Yes, but the surge was primarily driven by increases in multi-family, rather than single-family homes, which only rose 2%. That first-time homebuyer remains an elusive creature, remaining at 29% for the third-consecutive month, representing less than 30% of all buyers in 17 of the past 18 months. We need the first-timer to buy a home from an existing homeowner, who is then able to purchase a more expensive home, which allows that homeowner to buy an even more expensive home and so on. Over the past 30 years, first-time homebuyers represented 40% of existing home sales. With stagnant wages and continued underemployment it'll be tough to get that cycle ignited domestically.
But if the dollar continues to strengthen, we wouldn't be surprised to see overseas investors look to U.S. housing as a way to protect purchasing power when their domestic currency depreciates. There is always a silver lining somewhere.