The Day Ahead: Emotionally Connecting to Earnings

 | Apr 23, 2013 | 8:18 AM EDT  | Comments
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Stock quotes in this article:

coh

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kmb

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cat

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mcd

A great book that I typically carry around in the manbag (look for men's sales inside Coach's (COH) earnings today to be strong, the category is hot) is Deepak Chopra's The Seven Spiritual Laws of Success. If you are unfamiliar with it, the seven laws are:

  1. Pure Potentiality
  2. Giving
  3. Karma
  4. Least Effort (not what you think)
  5. Intention and Desire
  6. Detachment (impossible for me)
  7. Dharma or purpose in life

Contained in each law is a litany of thought-provoking strategies, the purpose being to achieve success well into the future. The more people that I chat with on investing these days, the more it's apparent that they are not set up for success. In fact, what they believe to be expert analysis wouldn't keep them in an interview room for two minutes with an I-bank managing director.

I don't expect the huddled masses to have professional knowledge; heck, despite my positive self-assertions, I am always searching for answers. So, months ago, I developed "12 Laws of Investing Success" to distribute to clients that consist of cool tips and tricks that make a lot of sense. Here is one I want to share today: "Emotionally Connect with an Earnings Call."

This is how I am emotionally connecting to earnings calls this season:

  • Kimberly-Clark's (KMB) diaper sales in China rose 50% in the first quarter of 2013, but Caterpillar's (CAT) dealers are having trouble pushing excess inventory to end users. Why is this of interest? The divergence between the two companies' performance suggests the Chinese consumer is not completely in the doldrums, as reports on slowing luxury goods sales depict. You would therefore want to think about investing in a growing Chinese middle class -- the people getting paid more to manufacturer products and who are exploring new offerings (diapers) from the West. Remember, there are other ways to invest in China besides commodities and industrials.
  • Whether it's Kimberly-Clark or McDonald's (MCD), modest first-quarter 2013 financial expectations on Europe are being missed. I am left with an uneasy feeling regarding the next two months of European Union (EU) PMIs and how they may impact sovereign debt yields – as well as the broader financial markets that have been correlated to changes in EU debt yields. It appears that the EU has entered the second quarter of 2013 with slowing economic momentum, and nobody truly has that factored into their geeky financial models.
  • Battles for market share in the consumer products sector is a theme that continues to surface. Why bothersome? Assuming the global economy was in full acceleration mode, as it was from the fourth quarter of 2012 to the first quarter of 13, the market for goods and services would be expanding. Now, it's as if companies are either raising prices to offset sluggish volumes or dropping prices to grow volume. That's unhealthy from both angles!

Earnings season is underwhelming expectations that weren't particularly enthusiastic beforehand. Companies are under earning because their top lines stink. In addition, three-plus years of productivity gains run their course (this was on display in Caterpillar's weak fixed-cost absorption rate on its reduced manufacturing levels). As I ponder the evidence on corporate America, I definitely believe the market is correct in reassessing risk across the spectrum. There is no soul in these earnings reports, unfortunately, and that means success will be more difficult to attain for investors.

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