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November 3, 2006

Seeing the Whole Picture

Whole Foods got drilled today after bombing their earnings report and sharply lowering guidance. The grocery chain and its investors have enjoyed the high margins that come along with bringing a new concept to market, but seeing them succeed has brought imitators to the forefront. In addition, Kroger, Publix, and other established chains would only sit around so long and watch their customers disappear before trying to lure them back.

Whole Foods is a story I've followed for a while but did not discuss here because I have stayed away from trading it. It doesn't really fit into the themes on which I am focused these days, not to mention discerning the turning point of a high-growth story takes much more time than I was willing to commit. However, now that WFMI has missed two straight earnings periods, I may scoot their chart higher in my watch list and hunt for technical points to try some shorts.

This morning's labor report showed a surprisingly low unemployment rate (unless you're a conspiracy theorist watching next Tuesday's election) and initially weighed on stocks as traders interpreted the news as meaning we have to wait longer for the Fed to start unwinding its rate hikes. Stocks recovered most of their early losses to close the session modestly lower, but it felt more like a technical bounce than the start of strong buying. I guess we'll know for sure next week.

Bonds, on the other hand, got crushed, with the yield on the 10-year note popping 12 basis points. I think bonds were simply ready to sell off, and the employment report was more of a catalyst than a reason. I anticipate bonds to trade much lower over the next 1-2 years, not because the Fed isn't cutting rates but because they are, and foreigners and other large holders will sell U.S. bonds to reduce dollar exposure.

Disclosure: None


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