The Day Ahead: Hugs and Kisses for All!

 | Feb 01, 2013 | 8:00 AM EST
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Today is going to be really interesting for you, and here is why. First, the January jobs reports will stink. Completely irrelevant to me if the figure is above the estimates compiled by frequent visitors to Morton's Steakhouse during market hours.

On its face, the #NFP will be lame relative to: (1) the expectations embedded into equity valuations; and (2) the expectations of a Fed clearly unsure if anything they are doing is amounting to a hill beans (being able to charge a can of paint at Sherwin Williams on the cheap doesn't count).

Second, as the melodrama unfolds, there will be service sellers promoting the seemingly tired garbage that lit the fuse of the January "risk on" rally. It is tired garbage as to continue to feed the rally, there must be a sustained flow of positivity. At this juncture, there has to be handoff to more reports in similar fashion to ISM-Chicago and less like GDP. I don't have confidence yet that this is around the bend.

Hence, you the inquisitive investor are poised to be uber confused this coming weekend as countless readings will focus on the slight breaking of euphoria (aka a pending "sentiment shift"). In turn, post Super Bowl you enter the Monday session hung-over and upset for not having followed the friendly advice from this happy fella; temper your appetite for risk, settle the heck down, and run some stock scares to find new opportunities. Oh and as this is being done, be sure to apply critical reasoning to the below earnings scorecard, which I have named the "Bloodbath List."

Long live Joe Montana, go 49ers!

The Bloodbath List

Three weeks ago I jotted down a simple comment: "early innings earnings reports have soft spots, keep this in mind tiger." This morning's batch of earnings misses from non-penny stock companies confirm that I was not losing my mind. Not only is earnings season STILL going on (we have yet to receive likely poor gross margin figures and 1Q13 guidance from retailers), but it has taken a noticeable shift to a land of negativity and few smiles.

The question you should be asking yourself is this: is there something fundamentally wrong with companies to the point that the market is simply too optimistic on 4Q13 17% projected earnings growth (which obviously that optimism underpins appreciation in stock valuations in today's terms)? I say yes, and am quite all right with the mid-week guidance of thieving profits from the table.

Dunkin Donuts (DNKN)

A 420 bps year over year slowdown in same-store sales growth. For you #STAT lovers, drink this down: Dunkin U.S. same-store sales up 3.2% in the holiday quarter/Starbucks up 8%. Many messages on the consumer to take away from the Dunkin report (my view is that they all fit nicely with two dour reads in a row on consumer confidence and call into question the euphoria of a supposed "acceleration" in 4Q12 consumer spending inside the dreary GDP report).

Sherwin Williams (SHW)

A 3 cents a share earnings miss, FY13 guidance offered way below consensus. Overall numbers looked okay, but when drilling down its apparent growth has slowed. There is only so high a company could push product prices without the consumer seeking cheaper alternatives.

Under Armour (UA)

This will unlikely be the quarter that reignites the bullish case on the stock, market's reaction overdone. Why? Two reasons. First, growth appears to have been fueled by new offerings instead of the very core of the business. Two, gross margins continue to be under pressure in spite of an improving inventory position (lower margin footwear styles continue to increase as a percentage of total sales). Moreover, marketing expense had an odd, robust decline; given Under Armour's track record, I can't imagine this being a sustainable thing worthy of baking into an earnings model.


This report reinforces why FedEx (FDX) was one of my two favorite picks from the industrial sector in 2013 (FedEx has massive restructuring efforts working in its favor, UPS no go). Earnings badly missed consensus, guidance was ugly. I don't believe the report was solely a function of a TNT distraction; the operating margin softness was widespread on a segment basis and far removed from strong results from others in the logistics space.

Hershey (HSY)

Earnings miss plus a guidance range below consensus. In the spirit of Sherwin Williams, I think there is only so far that a company can raise prices and expect to deliver great earnings while the consumer boosts savings, as they did in 4Q12.

Memo: Thursday was another day in this earnings season where Europe resembles a dead fish as a component to consolidated results ... it's just floating around. 

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volatility is quite low here, and we could see some downsides here in the short term. ...
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