Wednesday, October 10, 2012

Consumer Stocks Surprising On The Upside Today

The market is flattish in early trading as earnings reports are starting to trickle in.  There hasn't been much in the way of market moving economic data today, so participants are trying to read the tealeaves of corporate datapoints, which today show a bit of a divergence between consumer stocks and industrials.

On the plus side, Yum Brands (YUM) beat earnings and raised full year guidance.  Sentiment in the stock had been cautious due to the slowdown in China, so the positive report has resulted in an 8% spike in the stock today.

Costco (COST) also beat earnings expectations and is higher today.  And FedEx (FDX) reaffirmed its 2012 guidance and announced a $1.7 billion cost reduction program that is boosting its stock.

True Religion (TRLG) is up 25% today after reports saying the company will put itself up for sale.  On the flip side H&R Block (HRB) is down significantly after saying it will shed its banking unit due to regulations that make it unattractive to maintain.

As far as industrial stocks go, most are lower after Cummins (CMI) lowered its Q3 and 2012 guidance due to weak demand.  Tech supplier Avnet (AVT) is also down some 10% after lowering its guidance citing "uncertain macroeconomic conditions".

So while the consumer related stocks are hanging in today, there seems to be an increasing number of signs pointing to the continued economic slowdown and companies that are geared toward riding the global economy seem to be starting to feel the slowdown.  I don't know if domestic companies will be all that insulated as the US economy is also slowing down, even as the consumer still feels okay right now.

Asian markets were down across the board overnight, expect for China which was barely higher.  S&P said India still faces the chance (33%) of a downgrade.  And China is increasing subsidies for things like farm equipment and automobiles in rural areas.

Europe's markets are also mostly lower after reports that Spain is struggling to achieve its 6.3% deficit to GDP targets.  I think as austerity kicks in it will make it even harder for most of these southern European countries to meet their deficit goals.  They really need to balance reforms with promoting economic growth.  Also, Germany's Finance Minister is reportedly unsatisfied with the progress of Greek reforms.

The dollar is lower today, helping most commodities.  Oil prices are higher again to $93.55.  Gold prices are only slightly higher to $1765.

The 10-year yield is up a bit to 1.74%.  And the volatility index is down fractionally to 16.25.

Trading comment: Tech stocks have began to lag recently.  We have seen these rotations before, and my guess is the defensive trade will come back into focus in the near-term.  That means defensive sectors like consumer staples and utilities will hold up better than economically sensitive sectors.  A lot will also depend on earnings reports coming up.  Those stocks that beat estimates and had positive reactions last quarter should be okay.  But stocks that had a rough quarter last time and sold off hard are likely to experience the same reactions this time around.  Time to do some homework.

KAM Advisors has long positions in YUM


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