The Day Ahead: What's Bubbling Underneath

 | Feb 26, 2013 | 8:30 AM EST  | Comments
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After Monday's 200-point Dow drubbing, here's a handy guide to a few tidbits you're likely to hear:

● The selloff was overdone, as it was based solely on an Italian guy who may or may not be an elected leader of a major economy.

● Back the truck up the bull truck and buy hand over fist -- because the Federal Reserve will remain ultra-accommodative in 2013, something to be reaffirmed by Chairman Ben Bernanke.

● Worrying reads on the health of the U.S. consumer are, in fact, not worrying. Every single tax-refund check will be inside of a retail cash register come mid-March.

● Disregard hotly anticipated data that show month-on-month deceleration. As long as the headline figure remains in expansion territory, all is good in the hood.

● Sequestration? It doesn't matter. The government will solve it at the last minute, per usual. (Just as an aside, when this kind of "Pavlov Dog Event," transpires, you'd best believe the real risks are underpriced.)

Below is what you won't hear, except from this stressed-out (but always smiling and energetic) market person. As I said Monday, proceed with extra caution, and question the bull argument that will be shoved down your throats. More is bubbling underneath the market than what the outward charts care to depict; you just need to connect the dots.

The market entered the week in a real funny spot, facing an avalanche of global data with no assurance that these numbers would come in strong enough to justify stocks' expanding price-to-earnings multiples. The Dallas Fed bomb -- that is, a manufacturing survey that missed consensus and showed a sequential decline -- was the first piece of evidence regarding what I referenced Monday. In particular, pay attention to the decline in the average workweek as we land more regional manufacturing data this week; this is the type of little crack in the sidewalk that could lead to a negative debate on the employment recovery before the next jobs number.

In the past couple of weeks, I've stitched together a number of factors that served as support for incremental bearishness -- so here are some updates.

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I'm seeing weak action in shares of the major logistics companies. . . . An underlying story emerges: The domestic economy isn't strong enough to drive the type of top- and bottom-line upside the market has decided to price in.

Update: Hello Dallas Fed.

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We are getting hulking earnings warnings from retailers despite supply-chain costs that are definitely not inflationary.

Update: Lowe's (LOW) issued a full-year earnings warning Monday. This is likely conservative given share-repurchase plans -- a massive and wasteful $1 billion per quarter -- and the housing market recovery. But the earnings call didn't exactly light a fire under the notion that consumers are re-leveraging to fix their homes. My view is that the broader stock market wants consumers to tap their credit cards to a greater extent.

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Upward velocity in the market has moderated. . . . tell[ing] a tale of buying exhaustion.

Update: Case in point -- Monday's close.

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The market has essentially front-run second-quarter economic data and . . . earnings season -- a dangerous maneuver, given the impending sequestration and a too-complacent attitude on Europe.

Update: We are learning firsthand that the market has gotten too complacent on headline and real risks attached to the European Union. Look no further than the selloff in the S&P 500 from the open as the slick-haired former Italian prime minister, Silvio Berlusconi, was rumored to be making a charge. Also keep in mind that reads on the EU economy, specifically in the last two macroeconomic reports, have hinted at more challenges ahead that the market was trying to overlook.

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One last point: The S&P 500 has been trading on a 15x earnings price-to-earnings multiple, vs. the 13x 2012 average. On a standalone basis this amounts to a hill of beans. But, combined with downgraded corporate profit estimates, it's an overbought signal -- the market is too optimistic on future earnings streams. Want a particularly good example of the market front-running reality? Dig up earnings estimates on consumer discretionary/staples -- they have barely budged.

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