"What's past is prologue"

The Tempest

-Shakespeare

One of my basic investing rules is to avoid long-term investing in companies that have missed the Street over the past year.  There are times we’ll go long such  stocks for trading ideas or with higher-risk subscribers.  However, for the most part, I have rarely seen earnings misses as anomalies.  In other words, it will happen again.  Such is the cautionary tale of Yum (YUM) Brands, which laid an egg last night and will stink up the joint big time today.

Heading into yesterday’s session, the company had a long history of earnings misses, which happened twice in the last four quarters.

Earnings History	Sep 14	Dec 14	Mar 15	Jun 15
EPS Est	0.88	0.66	0.72	0.62
EPS Actual	0.87	0.61	0.80	0.69
Difference	-0.01	-0.05	0.08	0.07
Surprise %	-1.10%	-7.60%	11.10%	11.30%

Yum was crushed, mostly on its misadventures in China.  I don’t think there’s any way to extrapolate the company coming up short in China with the state of the Chinese economy- this is a company-specific story.  A massive food scandal will probably continue to linger.  The 19% drubbing will begin the session, which seems excessive, but the stock will have company with Nu Skin (NUS), which warned about the  revenue of $573 million this quarter since the Street was looking for $622 million.

Yes, Nu Skin management blamed China, too.  The stock will open, down 14%.

Adobe (ABDE), which also has a long history of coming up short on Wall Street consensus, warned after the close yesterday.  In the case of Adobe, however, it has grown its business and the execution had been good enough to get the stock to a new 52- week high this week. Until last night, there had been so many earnings warnings that analysts, including yours truly, began scratching their heads.  The names that disappointed last night should not have been a complete surprise because ‘what’s past is prologue.’

Commodities Erupting

By now, we’ve come to expect periodic bounces in devastated areas of investing; the commodities bounce isn’t necessarily unusual.  If it is sustained much longer, we’ll have to consider the ramifications.  As a harbinger, commodities are a good proxy of economic things to come.  Yesterday, several forces played a role in extending the rebound of crude oil, which is on the cusp of a major breakout.  However, there’s another side of the equation.

The Role of the U.S. Dollar

Recently, the dollar has drifted against a basket of six other currencies that represent 24 separate countries.  China’s currency, the Yuan, which zoomed to the fourth most used currency in global transactions from 35^th place in October 2000, isn’t weighed.

Dollar Index	% Basket
Euro	57.6%
Japanese Yen	13.6%
Great British Pound	11.9%
Canadian Dollar	9.1%
Swedish Krona	4.2%
Swiss Franc	3.6%

The dollar is slipping and straddling its 50-day moving average.  Under 94, it could really come unglued and the world (including major U.S. corporations) would rejoice.

On that theme, all that’s past is prolougue and there are still a lot of Wall Street technicians saying that the absolute lows of August must be retested.  More often than not, bottoms and tops are tested, but we came close enough and the rebound has been impressive, but it is not a general buy signal.  Because of the wide trading range, the Dow needs to close above 16,900 then 17,500.

Moreover, earnings season should take the lead from here, although any hiccup in China –beside the slowing demand for Kentucky Fried Chicken (KFC), could derail this rebound attempt.

Today’s Session

A guge spike in mortgage applications (up 25%) could be a good sign, but it comes with caveat, there’s a big rush to beat new regulations.  Still, I don’t want to dismiss the news out of hand.

From a 10,000 foot view, we are looking at the action in Rio Tinto and BH Billiton as the commodities rebound continues and these embattled battleships show signs of life.

Also government bond yields are stubbornly holding up with the ten year lifting through 2.0% (biggest one day move in years).  Part of that could be China dumping.

Tweet

 

Home | Products & Services | Education | In The Media | Help | About Us | Disclaimer | Privacy Policy | Terms of Use | All Rights Reserved.