I exit the week personally fired up for a litany of reasons -- partly because of earnings season, but also because it looks as though many investors aren't conducting deeper-level analysis, and are thus ill-prepared for a range of future events that will either make or break a portfolio.
Allow me to point out what you "learned" this week:
● Herbalife (HLF) has two mega-rich guys jockeying for the love of the shareholder base.
● Railroad stocks caught a downgrade -- which may be bad, but isn't right now, for some reason.
● Apple possibly has some new products set for release this year, but it doesn't matter.
● Tiffany (TIF) is not doing well -- guess it's a result of fiscal-cliff hangover.
● A group of private-equity firms led by Cerberus is buying the broken supermarket chain that is Supervalu (SVU).
● Europe is fine; European Central Bank President Mario Draghi said so.
None of this is analysis. These are moments in time that will tend to be forgotten in short order, and I refuse to play the surface analysis game. Now, take these tidbits and compare them with the following extrapolations.
Prepared for a February Market Plunge?
One central theme, dating back to the debt-ceiling travesty in the summer of 2011, is the market's unwillingness to discount future events that have a better than 50% chance of bringing pain to asset values. Blame the machines, I suppose. The same pattern is currently settling in to place now -- many leading indicators I track suggest we should have no concern for a series of real negatives. For example, the Philadelphia Semiconductor Index (SOX) is not crumbling, and we're seeing strength in the Dow Jones Transportation Average, oil prices and small-caps. In addition, leading stocks have continued to lead.
The scenario I have tentatively in mind is this:
● The market exits January with mild enthusiasm that corporate earnings have survived the start of fiscal tightening.
● By mid-February, earnings season concludes and the enthusiasm is handed off to multiple headline risks associated with the debt-ceiling debate. One concern that's chief among them: credit-rating downgrades.
● Stocks are whacked at the end of February. The suckers will hang on too long while the smart money dumps -- yet, outwardly, the latter will continue to sell hope by reiterating year-end price targets on the S&P 500.
Remember, you heard it here first.
Hey, Listen, the Consumer Is Speaking
From Tiffany's holiday dread, finally, here are five thoughts I've constructed:
1. Near-term, traditional luxury consumers -- think household with $1 million annual income or more -- could still be working with their tax teams to strategize for 2013. Either way, tax hikes on this consumer mean fewer dollars sloshing around Fifth Avenue.
2. Traditionally, January has been the month when luxury gets a sales boost as people receive their bonuses -- which is why analysts had been slow in marking down Tiffany's holiday-quarter targets. Now I sense that, post-fiscal cliff, bonuses will be allocated in a different manner.
3. One secret of luxury is in offering enticing products to lure in aspirational consumers -- those households earning maybe $80,000 to $150,000 a year. To make the purchase, these folks toss it on their credit cards. Is that likely to happen following the obliteration of the payroll tax credit? I don't think it will. This fiscal tightening means consumers will once again have to readjust their standard of living.
4. At its very core, what are luxury goods? They are show pieces that, in reality, offer very little functionality. For example, what can a person do with a Louis Vuitton bag other than show it off on a night that costs even more money? I think luxury is battling the tech industry. People want the hottest gadgets, and they are more willing to pay full price for these because of their usefulness. Will it be an iPhone 5, which could fundamentally alter your life for the next two years, or a Louis Vuitton bag that doesn't match all your outfits? You decide.
5. It's hard to quantify this, but I think the quality of luxury goods overall has come down a touch given previous years of inflation in gold, silver and so on. With lower quality comes fewer big, bold ideas. Consumers, in turn, are unable to see the value in the purchase -- they have gotten much smarter.