The Day Ahead: Here Are the Bottom Lines

 | Jan 30, 2013 | 8:00 AM EST
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Every human is in search of something. Food, water and decent enough night's sleep while a stock portfolio is exposed to overnight markets and social media commentary are three that spring to mind. As far as the market goes, investors tend to be in the hot pursuit of profits based on an absolute certainty.

Hate to be the Grim Reaper, but there are zero, zilch, no certainties in the investment field, hence green and red flickering boxes are referred to as risk assets. But there are bottom lines to every minute story in the market, whether it's borne from a company, a trading floor, a computer or from the lips of a prominent investment bank strategist. It's my job to construct the bottom lines and bring them to life in a language that doesn't freak people out and naturally helps to bank mad coin (that would be make money).

Here are a couple of the bottom lines underneath the events you will be subjected to today.

Why Amazon Shares Have Detached from Basic Investment Principles

I often am prodded by Twitter folk to engage in a public debate on stocks. My Twitter following is fiercely supportive and encouraging and I love them all (the bots, too). But there is always that one comment from a random one that riles up one who is heavily trained in attack-and-defend strategies. That comment came on the topic of Amazon (AMZN) yesterday. 

Summing up the tweet, apparently Amazon's ROIC (this stuff matters) ripping out XYZ item/s was an impressive 11%, and way better than the real number of 4% that I tweeted after reading the depressing SEC filing. I do not care about gamed numbers from Amazon designed to support acts of prayers at the altar of a man that refuses to disclose Kindle unit numbers and spearhead weak earnings calls (Howard Schultz is a visionary and he offers a ton of detailed information), as the Street has opted to do for basically a year. It's critical to deal in facts on Amazon at this particular juncture as the stock is trading on the type of hopium that could dissipate with any modest shift in sell-side sentiment.

Bottom Line

The market continues to have an intense, intense focus on Amazon the business in the year 2020. In turn, the Street seems willing to overlook investments that are happening now (and which are weighing on profit margins) to make that vision of retail dominance come true.

This is a very dangerous game the market is playing on Amazon. Sooner or later the company will have to begin to show the market it's earning solid returns on years upon years of investments. Amazon is no longer an investment for me, stick with eBay (EBAY).

By the way, the stock's reaction is exactly the same as the October release (red circle = October).



Become One with the Fed

Let's join hands and deeply ponder why Mr. Market sent his group of friends higher on Tuesday, even after being forced to read a creepy bad consumer confidence report and assorted EPS shortfalls from non-penny-stock companies. Could it be that the market became reasonably convinced that the FOMC minute scare of early January was completely blown out of proportion (two words: "fear" and "several" did the trick)? I think it could be. Here are a bunch of prep notes pre-Fed news outbreak.

Economic activity and employment has sure continued at a "moderate pace" since the December meeting. Has that occurred despite a stock rally failing to transmit effectively to the real economy? Yuppers. To signal a move from bond buying, economic activity and employment will need to accelerate while staring down the barrel of fiscal policy related austerity measures. The problem is that given "fiscal headwinds," the Fed will likely sit tight on its position and review more incoming data, meaning the expectation around a mid-year retrenchment in extraordinary accommodation deserves to be stamped false.

Other helpful considerations: (1) the Fed is fearful of destroying the assumed "advance" in household spending and "further" signs of improvement in the housing sector that its actions have engineered (sooner or later the Fed, and investors, will have their days of reckoning for this interventionist policy) and (2) ditto goes for business fixed investment, as now is the not the time to halt bond buys that are artificially keeping interest rates at bay, indirectly weakening capital investment plans from a CFO bunch that would much rather use free cash flow to buy back stock to juice their year-end bonuses.

I do see risk creep in one important regard and that's inflation expectations.  Late last week, long-term inflation expectations as measured by inflation swaps touched a three-month high. This indeed gives live ammunition to hawks inside the FOMC and to stock market bears, which have the December policy minutes glued to their Ikea desktops. This is a risk as nobody is talking about it and could magically appear in the FOMC statement via a slight alteration in inflation related language.

Bottom Line on the Market

You know where I stand, no need to repeat it daily. Any thought changes, I will holla at you.

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