The Day Ahead: Reading the Grape Leaves

 | Mar 18, 2013 | 8:35 AM EDT  | Comments
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To be frank, I am no Greek policy expert -- and neither are most folks who are blowing smoke about this weekend's news. Most people source any knowledge about Greece, Cyprus or Zeus from Wikipedia or NatGeo.

I tried so very hard to ignore the uproars this past week -- because, in truth, it's not as if the U.S. government will be imposing taxes on FDIC-insured deposits as a blunt instrument to cut ballooning deficits. (The value-added tax will do that; hello, hello, black swan.) But unfortunately I was sucked into the melodrama, and you will be too. It's an event that technically should have little ramifications for global financial stability, but "technically" and market reality are often two different beasts.

The Market's Innermost Thoughts

Many view this snowballing development as a technically small event -- but one that market vultures will pick at it until it becomes an optically larger event in terms of financial market pricing mechanisms. The reason those vultures will swoop in is a vaporized 10-day rally streak, and forces will want to shake out weak sisters so they can buy back shares at cheaper levels. (I am tired, by the way, of that bond-vigilante "vultures" reference; it's too 1980s Charles Bronson.)

The market itself has painted a bright economic future with minimal tail risks from the still-dead European Union periphery end markets and from the U.S. sequester. Forget black swans, says the market.

In the eyes of many, Cyprus represents a risk return on EU stability as the market recognizes the damaging global ramifications of bailout promises (i.e., bank runs could wash onto our shores). With renewed EU risk comes a need to readjust price-to-earnings multiples on U.S. multinationals that have expanded more on hopium than on anything of substance, such as upward estimate revisions. As ridiculous as all this sounds, the market is currently dusting off this line of reasoning that perception becomes reality.

* * *

These are the market's perceptions on the heels of what we have endured since 2008. Investors are quicker at connecting the dots and at returning to old tips such as, "Decoupling is a fat lie; sell first ask questions later." I am never fond of playing into this type of circus, but I've mistakenly stuck to the "ignore, ignore, ignore" approach in years past. So I will acknowledge that, yes, an otherwise silly Cyprus story could rattle the tranquility shining down on the market, even if it has no effect on companies' long-term outlooks.

But, hey, perhaps you are apt to bypass Cyprus and zero in on the fundamentals of the markets and companies that don't do business in Greece. I would applaud that. In a Cyprus-less world, would be it wise to buy Friday's life-altering dip? I offer up these facts:

● The best-performing stocks in the Dow Jones Transportation Average were logistics and railroads, the real domestic-centric names. Relative strength was robust to a degree at which I have to wonder whether this was a short-term peak in exuberance, instead of the typical orderly buying inherent to a sustainable rally.

● The Dow saw a rising number of decliners as the week went on, indicating a tiring in risk appetite.

● I was not digging the weekly performance of the sectors that have been leading so far in 2013. The furnishings group, for instance, was up only fractionally for the week after a 24.3% surge for the year. Paper was down 1.5% last week, personal products lost 2.1%, industrial suppliers was off 1.5%, and electronic components rose just 0.5%; all have had year-to-date climbs of between 10% and 15%. I look at this scoreboard and think "stretched valuations," because the data have certainly been supportive enough to bake in stronger corporate earnings in the second half.

So I'm entering profit-protection mode to begin the week. Clorox (CLX) intrigues me as a short candidate, given recent insider selling and a rich valuation vs. its historical norm. Plus, Clorox's strong year-to-date showing puts it in the category for profit-taking amid a short-term pullback, wherein there will be cheaper ways than this stock for playing defense.

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