Traders "patient" ahead of Fed 2pm, Williams-Sonoma needs to keep winning
Here are three things you should keep an eye on today when wading into the market.
Number 1:
There’s no neat formula for deciphering the meaning of the Fed’s policy statement this afternoon, but let’s propose one anyway: The formula to watch is "ten minus two."
That is, keep track of how the 10-year Treasury yield (^TNX) moves in relation to the two-year yield after the Fed statement is released at 2pm and Chair Janet Yellen takes media questions at 2:30.
Assuming the statement excludes the phrase saying the Fed can remain patient in moving toward higher interest rates, as most expect, it will at least nominally open the way for a hike over the summer.
Now, any language shift is mostly about Yellen preserving flexibility, rather than a hawkish turn. But if, say, the two-year note rises in yield, it’ll mean the market is pulling forward the chance of higher rates.
If, at the same time, the 10-year yield falls or rises less than the two-year, it will be hinting that such a hike will pressure economic growth uncomfortably. Without getting alarmist, it will mean investors are at least keeping one eye on the risk of a “policy error.”
This kind of anxious anticipation might be more on traders’ minds after yesterday’s widely shared talk that esteemed hedge-fund chief Ray Dalio is focused on the Fed’s grievous policy error of 1937, when it tightened and choked off a fragile recovery.
But that doesn’t mean this scenario is at all a lock. Markets could simply shrug. Or the 10-year yield may jump at the hint of more “normal” Fed policy - which might not be taken well by stocks, but would at least not suggest we were on alert for a premature misstep by Yellen’s Fed.
Number 2:
When Macerich (MAC) spurned an unwelcome $22 billion takeover bid from rival mall owner Simon Property Group (SPG) Tuesday, it seemed like a standard tactic to stay independent or draw a higher offer.
Yet the fact that Macerich stock only gave up 3.5% of the 35% it had gained since the November bid implies the market still sees the chance for higher values being realized from the business.
Sure, these are high-end malls, relatively immune to altered shopping patterns, but maybe retail real estate is now in greater demand. They aren’t, after all, building any more malls, and indeed the industry is closing some.
Which makes me take note of Sears Holdings (SHLD). The stock was up nearly 4% on no news Tuesday and is on the verge of hitting $40 – up from $23 in October despite nothing but lousy sales trends and ceaseless operating losses.
Is some clever money starting to give credence to Sears chairman and principal shareholder Eddie Lampert’s plan to carve a few hundred of its best properties into a real estate investment trust?
Sears has for years been a salvage operation, a slow-motion liquidation, with its retail business in retreat. We’re back in a phase where investors are shaking their heads and saying, “Eddie might just pull this off.”
Number 3:
In a soft and slippery retail environment, Americans still can’t seem to get enough throw pillows and olive-oil misters.
That’s the apparent message from the tremendous performance by Williams-Sonoma (WSM), which runs Pottery Barn and West Elm, too. The stock is up 26% in a year and more than 80% over the past two. This, despite single-digit sales and earnings gains over the past several quarters.
When the company reports results late this afternoon, it will be for the holiday quarter, and analysts have fairly aggressive expectations. Profit of $1.52 a share is projected, above the range of the company’s own guidance. The stock is up better than 10% year to day, versus 4% for the SPDR S&P Retail sector ETF (XRT). And it’s expensive, at more than 23-times forecast earnings for the coming year.
Williams-Sonoma probably has to have a clean report at least hitting forecasts and an upbeat outlook for the stock to hold current levels or add to them.
