The Day Ahead: Thinking Man's Thursday

 | Mar 29, 2012 | 8:05 AM EDT
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From sunup to sundown I jot down notes on the market and world. It might be a catchy phrase uttered by a corporate bigwig or an interesting fact from a Securities and Exchange Commission (SEC) filing. On days when I have the privilege of appearing on air or in videos, rest assured I have a notepad handy so I can write new thoughts down immediately after the microphone is unhooked.

I am learning that there is an entire compilation of numbers, facts, people, and assorted financial terms that are like a force field around me, acting as a roadblock to the outside world. It's almost as if I live in two separate dimensions (and if you are reading this, I am sure relating is easy). In one, there is interaction with non-market people going about their daily business while the other is filled with investors, financial filings, and CEO commentary. Welcome to "Thinking Man's Thursday." For the second straight week, the market continues to wrestle with hope. The reasons for being bullish three months ago were plausible but incremental pieces of reality are signaling a need to be more cautious.

During this air pocket that stocks have encountered, there has seemed to be a daily clinginess to hope by the Street rather than the embracing of a couple realities. However, the market is embracing the realities, which is indicated by the short-term charts of the industrials (for example, Caterpillar (CAT) sure looking ugly) and retail complexes.

On the prowl for hope:

  • Durable goods orders: These are at a four-month high. Core shortfall to consensus has investors hoping this is not a sign (the prior month was a disappointment when it was announced, if I recall correctly).
  • Stock price movements: Visa (V) and American Express (AXP) are performing well and with job gains back above 200,000, investors are hoping that two weeks plus of pressure on many retail stocks and select restaurants are not a sign.
  • Jamie Dimon: It's a darn shame if a college professor doesn't have his/her students watching this man's television interviews and then holding an open forum on the information gleaned. While Dimon was selling hope on air yesterday, I believe it's vital to expand on two topics he mentioned:
    • China is flying in for a "soft landing." Is that priced into stocks? Not in my determination, so investors continue to hope that there is growth around 8% this year as China slices its reserve requirement ratio again.
    • Shadow housing inventory is lower than it was 12 months ago. OK, that's fair, but should we be caring more on the absolute level of this dead brick-and-mortar area? Estimates vary on the amount of shadow inventory in the market -- I have it seen it from 3 million to 10 million. As long as this inventory is in the system, the reality is that the pace of the housing recovery will be rocky, which is counter to the hopes that seeped into the market (and continue to exist).

So I ask, are investors buying the hope today? Added points to consider include: 1) building hope that China cuts its reserve requirement ratio this weekend, and 2) hope that the two-day European Union (EU) powwow will boost this thing called a firewall and paper over the structural issues that will be like a hemorrhoid to the eurozone in the coming years.

I wouldn't mind drinking a glass of hope, but admit it's hard to pour the stuff in the glass. Why? Look no further than how certain sectors are trading (volume to the downside seems to be picking up), listen to a suit seller in Jos A Bank (JOSB) say its year is off to a lame start (the stock has been pummeled), and watch the selling on the Dow Jones Industrial Average with its 2.5% yield (the 10-year note is at 2.2%).

Thursday Notepad

  • The market is still trading weakly as EU officials are discussing a major firewall bump. Signals it's a China slowdown sell-off primarily, sprinkled with cracks in the domestic recovery thesis.
  • If the consumer is in such great shape, why are we seeing the wildly strong same-store sales readings on top of year-earlier robust gains by dollar stores?
  • Why hasn't there been some appreciation in the market for the inflationary implications in the latest PPI, CPI, and import price releases (consumers are making adjustments, and exposed sectors have begun to price that in)?
  • Neutral ratings by the Street have always upset me. Go with a Buy or a Sell rating already. Company after company I have been reviewing has analysts glued on Neutral/Hold ratings, as the stocks have moved appreciably higher. I am envisioning late-to-the-party upgrades if we see beats to the low-balled first-quarter earnings guidance ranges. This in turn would leave me trying to spot contrarian calls. For example, is a Buy rating on a stock that has surged 50% in the past six months a sign to avoid it because it may be overpriced?



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