The Day Ahead: Market Dreams, Reality

 | Apr 11, 2013 | 8:30 AM EDT  | Comments
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Stock quotes in this article:

tol

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wmt

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ebay

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fdo

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fast

We are a mere 28.3% away from reaching Dow 19,000! That is correct. If the present is a good guide of the future (where anything bad is immediately struck down by the not so invisible hands of the Fed) this milestone is in sight for the fourth quarter of 2013.

By the time Dow 19,000 is achieved, buyouts will have resurfaced, corporate profit margins re-accelerated, consumer staples and utilities are absent bids, Apple (AAPL) is likely to confirm Tim Cook as the leader in 2014, and U.S. GDP growth is north of 3%. Then, we all woke up and had a mighty laugh, realizing that activity in the market is being fueled by uncharted Fed policy waters that will have a nasty payback.

You should realize that I am on the cautious side heading into this earnings season. I am opting to burst through the gate with a super-tailored set of calls for my new company, such as a short on Family Dollar (FDO), into earnings after loose-lipped management shared too much on the phone with me.

These are a couple thoughts I use to develop this new portfolio that is slowly controlling my existence:

A target company had to have uttered positive comments toward the latter stages of the first quarter regarding business trends, a few stats to back the claims preferred. This is why when the Toll Brothers (TOL) CEO shared that spring orders were higher by 50% it was of interest as it provided certainty to go along with areas of intrigue, including a dip in 10-year yields and a pullback in homebuilders. I chatted with a ranked homebuilder sector analyst for more insight on the weak action in this space recently. The feel is that the mortgage interest deduction is in play with the White House (an issue that has gone forgotten for months).

Fastenal (FAST) had an earnings report that the market only seemed to care about (and me). An important observation was that the company's sales decelerated from February to March, confirming in my opinion a decent amount of the negative surprises that surfaced in late March macro numbers. I will stay clear of the industrial complex at the moment. Surely, there are worthwhile pre-earnings gambles, but for my purposes there isn't enough margin for error priced in overall (Fastenal's stock got nailed on its reporting day).

I am on the prowl for big, bold ideas that are driving the type of operating momentum that could withstand a modest mid-year growth slowdown. EBay's (EBAY) robust efforts in web personalization had me sold as soon as concluding a phone chat with a key point person.

Perhaps you wonder why I am hesitant to join the public stock orgy. Stocks are ripping, and theoretically that hints at favorable surprises in the corporate sector in the months ahead.

A few thoughts from a Family Dollar earnings call:

  1. Sales trends "improved" as tax refunds arrived. Notice "improved" lacked the action word, although this mention by Family Dollar implies guidance upside for Wal-Mart (WMT). Be careful, discretionary areas of the store are challenged.
  2. Food sales were so hearty that I wondered if tax refunds were spent so that people could eat another week.
  3. This dollar store plans to further reduce prices to offer customers greater value. A dollar store that is lowering prices in the face of runaway price/earnings multiple expansions for the broader market? Disturbing!

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