The Day Ahead: Getting Eerie Out There

 | Feb 21, 2013 | 8:00 AM EST
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A few years ago, during a typical earnings-season cram-fest at the office, midnight came along and my brain could take no more spreadsheets -- so I made a pot of coffee, did some pushups began to read Jim Cramer's Confessions of a Street Addict. The book reinforced that, yes, I was definitely in the right profession, and it shared very valuable insights into the necessary ingredients to get ahead in both good and bad markets. I've since woven them into my life, and here are a few:

1. One must have a legal edge on the trade. For example, you must consume so much research and network contacts that the outcome on the stock seems almost certain -- or certain enough for you to make a large wager.

2. You really, really, want to have investing success for reasons beyond just building profits. Call it the thrill of the chase, or a never-ending pursuit to prove something to someone, but there has to be substance behind your actions.

3. Organic research is the best kind. Keep that in mind as you ingest analyst comments on projected future sales of an Apple (AAPL) iWatch that the non-Cupertino ecosystem hasn't seen yet.

4. If the market is sending you strong signals, don't ignore them. Have trust, and wait for the inventible directional break to occur.

This book is in my one of my top three, bar none. I return to it frequently for guidance on a range of topics, from career advice to general inspiration to a kick in the butt to maintain conviction should a specific call go against me. After some additional reading Wednesday, and also in light of my normal market-stalking, I am OK with saying that equities seem overbought.

I don't particularly like how stocks have run through expansion in their price-to-earnings multiples, instead of seeing both this and rising estimates. I'm not real fond of these earnings warnings from retailers, or the market's negative reaction to them, as the 10-year U.S. Treasury bond yield flirts with 2%. Further, we're seeing traction in the notion that the Federal Reserve will slow its monthly bond buys sometime this year -- so it's straight creepy the market is poised to sell off with greater velocity.

The message, as has become the norm in the past two years, is that gains in stocks are being fueled by liquidity injections, rather than by good old-fashioned organic measures by companies and naturally healing global macroeconomic conditions. Suddenly those long the market, or those inclined to finally jump in, find themselves rooting for a sluggish domestic economy in order for the Fed to stay firm in its liquidity commitment.

Things are getting odd out there. I reiterate that it would be reasonable for you to hike your cash percentage and think twice before buying dips, regardless of what Joe the Shark begs you to do.

Quick and Dirty: Stay Away from Dead-Money Wal-Mart

Basically, I don't care about Wal-Mart's (WMT) earnings report. If you're treating this dog like a long-term play, keep the following in mind:

โ— Wal-Mart continues to reinvest its hard-fought-for profits as it reduces product prices for customers (with a $6 billion goal by fiscal 2016). It's a strategy that could only work long-term if expenses were consistently whittled down and if costs remained at bay. I fancy that investors have been beaten into believing Wal-Mart will always be able to lower its expenses and costs. Good luck with that when you source 70% of your goods from inflationary China, when fuel made from dinosaurs begins to disappear, and as consumer-product companies merge to take the fight back to Wal-Mart. This company is unable to command any semblance of consistent pricing power due to its own initiatives, and that's a major red flag.

โ— Wal-Mart management comprises an arrogant bunch, from their pre-recorded earnings calls to their interaction with the press after important events. What I care about, though, is its arrogance with respect to intense new square footage while it drops prices. Why? Simple: It hurts your returns! Pricing pressure will only increase as Amazon (AMZN) gets closer to homes and dollar stores surround Wal-Mart's rural shopping shrines.

โ— Contrary to its assertions, Wal-Mart is failing abroad. It's as if the company is gung-ho with opening new stores without even studying local customer preferences -- another sign of the company's arrogance.



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