The Day Ahead: Zoom! Ka-Pow!

 | Apr 19, 2013 | 8:00 AM EDT
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Loved watching those vintage Adam West "Batman" episodes as a kid only after reading the WSJ stock tables, naturally. Those graphics that popped on the screen whenever Batman or Robin punched an evil doer in the face were awesome, truly made for a captivating viewing experience.

Let me be quite clear: the market is getting punched old school Batman style. Anyone that begs at knees to sway you otherwise is lying. Technical support points are being violated, most notably in countless pockets of the consumer discretionary sector (Nasdaq and Apple (AAPL) receive the most attention, be the other person finding new topics). I have a growing list of non-penny stock companies falling woefully short on revenue and for good measure, lacing earnings transcripts with comments that feed the bear cause.

Oh, and in the latter part of the week, we have transitioned to multinationals -- Microsoft (MSFT), IBM (IBM) -- that are exposed to CFO budgets completely whiffing on profits. Hard to trust these now backend loaded "reaffirmed" FY guidance ranges.  

Who cares, I mean for real, about the usual stat floating that "X" number of companies are surpassing on earnings estimates. I have never been hot to trot on the usefulness of that stat and as of today, think it's worthless following deep dives into income statements, balance sheets, earnings calls and exec interviews on live TV for body language cues (yeah, I do that creepy stuff.)

Okay, calm. These are two issues I want to address today, both deserving of your attention this coming weekend. Thanks to my buds at Bloomberg for hooking it up with the colorful charts!

Economic Surprises

The market did not jump aboard the risk train in January on the assumption some three months later, key economic reports would be disappointing. I think this is the first round of Debbie Downer readings, you know those small misses that wake the bullish masses from their complacent state of minds. Latest example of ugliness was the Philly Fed that confirmed the Empire State, in turn forging the pathway to soft ISMs and a below consensus April employment report (current consensus for headline: above 190,000). Below is the Bloomberg Economic Surprise Index, which should be self-explanatory. If it's not, send me an email, I have no life and would be happy to share insight.

Where are the Income Taxes??!!

Very, very low tax rates on the part of major companies is a major deal that nobody is discussing! Geeky stuff? Sure. Crazy important? You bet, even more so than the consistent streams of companies missing on revenues. Just take a look at the tax rates on offer here:

  • Google (GOOG): 8.0%
  • Intel (INTC): 16.0%
  • Pepsi (PEP): 24.5%
  • IBM: 15.9%

From IBM:

"The lower tax rate is primarily due to benefits recorded to reflect changes in tax laws enacted during the quarter, including the reinstatement of the U.S. Research and Development Tax Credit."

From Pepsi:

"The company's core effective tax rate was 24.5%, below the prior year quarter primarily due to income mix shift and the reversal of international tax reserves."

From Sozz, on Google:

"All sorts of things going on here, too much to cut and paste."

I suspect General Electric's (GE) tax rate will be uber low in its recently finished quarter. Overall the theme is that tax rates are benefiting from a renewed tax credit, but my sense is that companies continue to get creative. Why does this all matter?  Essentially companies producing lower quality warnings that are unlikely sustainable two, three, four, five years into the future. With the type of P/E multiple expansions we have experiences year to date, reduced earnings quality is not in keeping with what the market demands.

Here is a historical view on Pepsi's tax rate, steady as she goes. However, I live in the world of trying to predict the future based on information handed to me today. Pepsi's tax games at least warrant an exercise in boosting forward earnings expectations for the rest of 2013 to higher than consensus; but do I want to pay a beefier multiple on those earnings as tax games don't strike me as sustainable into 2015.

Columnist Conversations

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