Today's Coffee - 3 Good Reasons to Be Weary
(Stocks in this article: NYSE: KMB, NYSE: YUM, NYSE: TAP, LSE: SAB.L, NYSE: SLM, NYSE: T, NYSE: HRL, NYSE: NEM, AMEX: MNG, Nasdaq: PLCE, NYSE: JPM, NYSE: ANN, NYSE: JCG, NYSE: AEO, NYSE: LTD, NYSE: CHS)
The Dow, S&P 500 and Nasdaq Indices are all edging higher today. After the Fed move and better than expected jobs report, the market would seem free to move forward except for three key obstacles. First, there's the overhang that exists because of rising concern about the pending Halloween FOMC Policy decision. We fully expect the Fed to hold steady at that meeting, and we believe the market has built in expectations for a follow-through rate cut. See our discussion of this topic in "The Greek's Week Ahead - Fed Follow Through Matters."
The second important factor weighing down equities is the likely earnings drag from the financial sector this quarter. Financial sector stocks account for 20.1% of the S&P 500's market cap, making it the single most important sector in the index. Because of the sector's importance, analyst estimates for the broader market in third quarter are severely burdened, and currently stand at a level representing less than 2% growth, according to Thomson Financial. Now, we've seen analysts underestimate performance consistently over the past year or two, and we would expect performance to beat their expectations again this time around, but not by much.
The third and equally important factor tripping up the market is a likely weak retail outlook that should increasingly come to the fore. We expect gloomy consumer confidence to find a new factor helping it to influence consumer trends. We expect reduced consumer spending in Q3 and Q4 to be partly driven by relatively warmer weather this fall versus last. On Tuesday, an early signal of things to come emanated from The Children's Place (Nasdaq: PLCE), which warned that its Q3 earnings could be 60% or more short of its previously issued EPS guidance range of $0.94 to $1.02.
While investors and some analysts will likely initially assume the company made poor purchase decisions, we feel confident the results had much to do with the weather. PLCE even stated that the earnings miss was partly driven by "unseasonably warm weather over the last ten days of the quarter." As we have mentioned several times recently, the variance in temperature this year versus last should impact a broad span of retailers, as fall and winter lines remain shelved. As a result of PLCE's just reported 3% September same-store sales decline over the five-weeks ended October 6, the company is marking down a good portion of inventory. PLCE's forecast also includes a $0.07 severance charge for the recent departure of its CEO.
Building an even stronger case for a poor retail outlook, Tuesday's Store Sales Report from the International Council of Shopping Centers - UBS, showed same-store sales were unchanged in the week ended October 6, compared to the week just prior. When compared to the year ago period, same-store sales rose a meager 2.1%. Most retailers will report chain-store sales for the month of September on Thursday, while overall monthly retail sales are due for release on Friday. Bloomberg's consensus of economists expects the metric to show 0.3% month-to-month growth for September, excluding autos. This compares with August's 0.3% increase. Nonetheless, the Wall Street Greek expects disappointing results to rule the week on the retail front.
The Dow, S&P 500 and Nasdaq Indices are all edging higher today. After the Fed move and better than expected jobs report, the market would seem free to move forward except for three key obstacles. First, there's the overhang that exists because of rising concern about the pending Halloween FOMC Policy decision. We fully expect the Fed to hold steady at that meeting, and we believe the market has built in expectations for a follow-through rate cut. See our discussion of this topic in "The Greek's Week Ahead - Fed Follow Through Matters."
The second important factor weighing down equities is the likely earnings drag from the financial sector this quarter. Financial sector stocks account for 20.1% of the S&P 500's market cap, making it the single most important sector in the index. Because of the sector's importance, analyst estimates for the broader market in third quarter are severely burdened, and currently stand at a level representing less than 2% growth, according to Thomson Financial. Now, we've seen analysts underestimate performance consistently over the past year or two, and we would expect performance to beat their expectations again this time around, but not by much.
The third and equally important factor tripping up the market is a likely weak retail outlook that should increasingly come to the fore. We expect gloomy consumer confidence to find a new factor helping it to influence consumer trends. We expect reduced consumer spending in Q3 and Q4 to be partly driven by relatively warmer weather this fall versus last. On Tuesday, an early signal of things to come emanated from The Children's Place (Nasdaq: PLCE), which warned that its Q3 earnings could be 60% or more short of its previously issued EPS guidance range of $0.94 to $1.02.
While investors and some analysts will likely initially assume the company made poor purchase decisions, we feel confident the results had much to do with the weather. PLCE even stated that the earnings miss was partly driven by "unseasonably warm weather over the last ten days of the quarter." As we have mentioned several times recently, the variance in temperature this year versus last should impact a broad span of retailers, as fall and winter lines remain shelved. As a result of PLCE's just reported 3% September same-store sales decline over the five-weeks ended October 6, the company is marking down a good portion of inventory. PLCE's forecast also includes a $0.07 severance charge for the recent departure of its CEO.
Building an even stronger case for a poor retail outlook, Tuesday's Store Sales Report from the International Council of Shopping Centers - UBS, showed same-store sales were unchanged in the week ended October 6, compared to the week just prior. When compared to the year ago period, same-store sales rose a meager 2.1%. Most retailers will report chain-store sales for the month of September on Thursday, while overall monthly retail sales are due for release on Friday. Bloomberg's consensus of economists expects the metric to show 0.3% month-to-month growth for September, excluding autos. This compares with August's 0.3% increase. Nonetheless, the Wall Street Greek expects disappointing results to rule the week on the retail front.
Thus, there may be some near-term short opportunities in the retail space. PLCE dropped approximately 5% through midday trading, and Limited Brands (NYSE: LTD), which reports its September results on October 11, was down 3% in sympathy. While the children's apparel retailer showed poor results, we think the short search is probably better served in non-school age categories, since there may be some "back to school" spillover into September that could add noise to the trend we are looking to exploit. Chico's FAS (NYSE: CHS) was down over 1% through midday Tuesday, as was AnnTaylor (NYSE: ANN). J. Crew Group (NYSE: JCG) and American Eagle Outfitters (NYSE: AEO) were also down in sympathy. Taking short positions in several names would help to limit the risk of shorting an individual name that may have a positive driver we are unaware of, and some further research would help. One thing is certain, apparel firms should consider creating a new executive position, Chief Meteorologist!
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posted by The Greek | 1:38 PM
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