Headwinds Or Just Wind?

Daily State of the Markets 
Tuesday Morning – February 15, 2011

Publishing Note: I am attending a conference Wednesday and Thursday with very early meeting times and as such, I am unlikely to have time to publish the Daily State report. The morning reports will return on Friday.

Good morning. Although the stock market did manage to grind its way to yet another green number on Monday, there really wasn’t a whole lot of activity. Sure, there were some sell programs and some buy programs run just to keep us on our toes. But for the most part, Monday was a day where one could ponder some bigger-picture issues. So, given that the winter winds pounded most of the country with snow recently and whipped up all kinds of trouble for all kinds of people, the question of the day for the financial markets is if the weather will become a headwind for profits (and the economy)?

This issue moved front and center after the close on Monday as FedEx (FDX) announced that it was reducing its earnings per share estimates by a fair amount (the company’s EPS Range was cut to $0.70 – $0.90 from $0.95 – $1.05) due to “disruptions from winter storms in the United States and Europe.” The company went on to suggest that higher fuel costs were also an issue, but that is a story for a different day. After all, the government removes those pesky items such as food and energy from their calculation of inflation. So, why worry, right?

Although you might think that the problems at FedEx could be quickly dismissed by the bulls as a company-specific issue, this is simply not the case. Rival UPS (UPS) called the recent bout of bad weather a “headwind” when it reported its most recent quarter. But so far at least, we haven’t heard the company talk about any reduction in earnings guidance. In fact, the last we heard from UPS was that their earnings had come in above expectations and that the company was upbeat on its prospects.

However, despite the fact that things still appear to be hunky dory at UPS, the impact of the big winter winds is being felt by other industries. For example the Association of American Railroads said on Thursday that intermodal freight was down and rail carloads were flat on the week. Both of these trends have been on a clear uptrend until just recently.

Next, the airlines are likely to take a charge here and there in response to the thousands of flights that have been cancelled since the winter winds started to howl. Delta Airlines (DAL) said that the storms in January would cut something on the order of $30 million from their revenues. This is on top of the $45 million hit the company is expected to take from the Christmas snowstorms.

And then there are the retailers. Given that the nation’s retailers are quick to blame just about any hiccup in sales on just about any weather event, it will be very interesting to see what the retail sales numbers look like this month.

The points here are: (1) In addition to being continuously flooded with money, the stock market is currently pricing in better days ahead for the economy and (2) there are bound to be some weather weather-related difficulties in some of the economic data in the near-term. Thus, the question of the day is will the bulls be able to continue to simply brush aside any and all bad news by blaming it on the weather? Or will the bears be able to use any of the wind-induced weak numbers as a reason to say enough is enough?

Turning to this morning… China’s CPI came in a bit below expectations, which may relieve some of the pressure on the Chinese to act quickly. But here at home, we’ve got a slew of economic data (including Retail Sales) – so let’s get to it.

On the Economic front… The government reported that Import Prices for the month of January rose by +1.5%, which was above the consensus for an increase of +1.1%. Export prices rose by +1.2%, above last month’s unrevised +0.6%.

Next up, the Commerce Department reported that Retail Sales rose in the month of January by just +0.3%. This was below the consensus for +0.6%. When you strip out the sales of autos, sales were up +0.3%, which was also below the consensus for an increase of +0.6%. Sales for the month of December were revised lower to +0.5% (November: +0.8%). Blame it on the weather?

And finally, the Empire Manufacturing Index (designed to indicate the state of the manufacturing sector in the New York region) for February was reported at 15.43, which was above the consensus expectations for a reading of 14.8.

Thought for the day: They say that it’s best to avoid sweating the small stuff. And remember, it’s all small stuff…

Pre-Game Indicators

Here are the Pre-Market indicators we review each morning before the opening bell…

• Major Foreign Markets:
  • Australia: -0.08%
  • Shanghai: +0.02%
  • Hong Kong: -0.96%
  • Japan: +0.20%
  • France: +0.36%
  • Germany: +0.11%
  • London: -0.09%

   

• Crude Oil Futures: +$0.75 to $85.56
• Gold: +$11.00 to $1376.10
• Dollar: lower against the Yen, Euro and Pound
• 10-Year Bond Yield: Currently trading at 3.625%

   

• Stocks Futures Ahead of Open in U.S. (relative to fair value): 
  • S&P 500: -4.22
  • Dow Jones Industrial Average: -27
  • NASDAQ Composite: -5.20

Wall Street Research Summary

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