The Day Ahead: No Sign of 'Dumb Money' Just Yet

 | Feb 04, 2013 | 9:00 AM EST
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Based on some anecdotal observations of mine over the weekend, it seems apparent that the "dumb money" has yet to find its way back into the stock market. (Note: I hate that term, as it talks down to folks who truly need help with the market -- but it helps for brevity's sake.)

First off, out of the three Super Bowl parties I attended, there was no talk about the Dow at 14,000 -- and nobody bragged about hot stock picks from the country club card room. Ditto for the five people I polled at a particularly robust food section at Target (TGT). (In fact, one lost soul didn't know what the Dow was. I gave him my business card.) Finally, in response to my Men's Health column, a reader who had "never bought a stock before" asked if they should do so now that the market is rising.

This seeming lack of "dumb money" is an important consideration as gruff-looking men continue to predict an impending correction. As I see it, the past month's sharp rise in buying has come from people who had previously jumped ship before the year-end "fiscal cliff" deadline. Such a pool of loot is not dumb money -- it likely comes from sophisticated investors who followed an advisor's guidance on how to avoid a raft of possible tax hikes. Realistically, of course, the dumb money is still poised to reenter the market as the "smarter" money sends stock prices higher due to a perception that the world is infinitely less risky.

To that point, here are a few messages the market is now chewing on:

1. A dismal first estimate on the gross domestic product has been revised higher. Also, the first-quarter GDP is somehow not a negative print.

2. "Ample" savings from consumers will sufficiently offset the government's wallet-grab; small-caps and the like win here.

3. The average price-to-earnings ratio of S&P 500 stocks is at 14.9x -- 490 basis points below the average since 1990. In a macroeconomic environment with "increasing momentum" and super cheap money, that means a heightened probability for both multiple expansion and upward earnings revisions. Sexy.

4. In the U.S., value stocks have underperformed growth stocks by 23% since the start of 1997. Perhaps value stocks (easier sells to "dumb money") will turn into reignited growth stocks amid the confident outlook that Mr. Market is forecasting.

As for the advice I have offered of late: For the purpose of simplicity, I have suggested booking some profits. This means you should not completely exit the market on the nonsense spread by those trying to make a splash in social media. With your profits, maintain exposure to the names that remain attractive longer-term holds as you seek fresh opportunities elsewhere. If this were a "get the heck out" call, I'd have suggested transitioning out of risky stocks into more defensive assets.

Sector Spotlight: Restaurant Stocks

The interesting thing I have found in this group is that the primary names have underperformed the major indices for the past four weeks. Sure, one component here leveraged to the fact that consumers now have less money being in their paychecks -- but equally important is the fact that food costs still have a very inflationary outlook. The market, having cooled on restaurant stocks, is articulating the future scenario of weak same-restaurant sales: Namely, a hurting consumer will likely balk at attempted price hikes to offset food-cost climbs. That's a recipe for earnings misses and readjustments of Street estimates.

Out of the group mentioned below, I am most short-term negative on Chipotle (CMG) into its earnings report. The company warned Jan. 18, and I believe the ensuing stock run-up has come amid a lack of reality among an uber-bullish analysts, as it regards reaccelerating sales and receding costs. As you'll se below, those that offer the most protein seem to have been rightly singled out by the market for some pain.

Restaurant Stocks -- Four-Week Performance

Finally, here are some fun statistics to take to the office -- the culprit for all of which is The Drought.

● The U.S. cattle herd is at its lowest level since 1952.

● Hay prices are 60% higher than their 10-year average (as in, hay for horses).

● Wheat prices increased in January for the first time since September.

● Corn prices remain near all-time highs per bushel.

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