1. Fed's Dovish Tilt to Make Earnings Great Again?
In the unpredictability of the busiest week of corporate earnings, the strength of the dollar was singled out as the cartoon villain holding back growth.
But dollar strength may be on borrowed time after the Fed's dovish tilt.
"With the Fed on hold, pressure on the USD to retreat broadly from still-expensive levels is likely to persist," BNP Paris said in a note earlier this week.
It’s not hard to see that a stronger dollar rains on the earnings parade, with roughly half of S&P 500 companies' revenues coming from overseas.
The relative strength of the U.S. dollar not only makes products more expensive in many parts of the world, reducing their competitiveness, but also creates currency translation headwinds.
The impact of a stronger dollar played out in various quarterly results this past week, none more so than heavy-equipment maker Caterpillar (NYSE:CAT). It pinned blame for slowing revenue on "currency impacts due to a stronger U.S. dollar." The equipment maker generated 51% of revenue in the fourth quarter from overseas.
Apple (NASDAQ:AAPL), meanwhile, served up an apt recount of how a strong dollar hurt performance.
"In Turkey, for example, the lira depreciated by 33% over the course of calendar 2018 and in the December quarter, our revenue there was down by almost $700 million from the previous year," Apple CEO Tim Cook said on the earnings call.
The weaker dollar may not be the panacea for all woes, but it does plot a course for a sunnier outlook.
2. McDonald's Deals Aren’t Bringing in the Diners
McDonald’s (NYSE:MCD) shares took a tumble on Wednesday when the iconic fast-food chain reported quarterly results. While global sales were strong, investors were unhappy that U.S. comparable sales rose 2.3%, below the Wall Street forecast of 2.4%.
But what investors may have missed -- and what is concerning for the stock -- is that the number of customers going to McDonald’s fell 2.2% last year.
A decline in comparable guests counts came as the company shuttered another 122 restaurants in 2018 (hat tip Jonathan Maze of Restaurant Business Magazine), bringing its U.S. store count to 13,914, below that of Starbucks (NASDAQ:SBUX).
This may look like just evidence of McDonald’s getting leaner and focusing on stores that can easily adapt to kiosks and other technology initiatives. But a key strategy of McDonald’s has been to use promotions to drive guest count higher.
Those promotions (large discounts like the Dollar Menu and meal deals) have sparked a backlash from franchise operators who are feeling margin pressure. And by the looks of the 2018 traffic numbers, the strategy simply hasn’t worked.
Franchise owners, who control more than 90% of the global total of about 37,000 restaurants, have made their concerns known.
In the U.S. an advocacy group called the National Owners Association had a meeting last month in Dallas with more than 1,200 franchise owners in attendance.
In addition to calling for more owner control of menu pricing, the association has raised strong objections to company demands for what McDonald’s calls a service area modernization (SAM) wall between the cashiers and the kitchen, seen as another financial burden imposed on the operators.
3. No Powell Put? How About a Shale Put
This week Fed Chief Jerome Powell denied the existence of a Powell Put, a theory that the central bank will ensure equities don’t suffer too much from rate hikes, even if stricter tightening is required.
But the oil market saw a different option-analogy postulated last week, as a rally powered by Saudi crude export cuts, sanctions on Venezuelan oil and steady interest rates continued.
As U.S. crude futures hit 10-week highs on Thursday, the market was abruptly cut down by the data showing U.S. oil production hit a record 12 million barrels per day -- two months ahead of expectations.
You could call that the Shale Put, where every time OPEC cuts, shale “intervenes” to push the market back towards oversupply.
Thursday’s domestic oil production estimates from the Energy Information Administration indicate that OPEC will find it exceedingly difficult to shake its shale nemesis and cartel members will be looking over their shoulders for output surprises from the Permian to Bakken basins.
Of course, any spike in U.S. crude output would be foretold by a surging rig count.
To the relief of oil bulls, the closely-watched U.S. oil rig count by Baker Hughes showed a drop of 15 in the just-ended week. The rig reading has been volatile lately, rising by 10 and falling by 21 in the previous two weeks. But the price-sensitive barometer could move into a rising trend if U.S. crude prices advance north of $55 through February.