The Day Ahead: Sneaky Market Positives

 | Apr 29, 2013 | 8:00 AM EDT
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In a week where the earnings reporting calendar will be a wee bit lighter, while the attention zeroes in on the decaying macro state of affairs, it's interesting to illuminate the positives in the market for a change.

Considering I have maintained a disciplined approach throughout April's lateral correction, why not begin with pleasant musings against a backdrop that has become increasingly downbeat. But first, jot down these themes for the week.

The explanation for poor corporate top-line showings in 1Q '13 are pouring in and the sexy opinion is that misses have been concentrated in the energy and basic material sectors. So, the bulls are trying to dismiss the lack of pricing power and absent volume improvement, which will ultimately be required to feed earnings amid a slowing global growth climate where restructuring actions have already run their course (supply chain tweaks won't save a quarter).  What you have to be aware of that if revenues weren't robust in the first quarter compared with the fourth quarter of 2012, in improved global GDP conditions, how will 2Q '13 appear as negative economic reports roll in.  Earnings estimates have to be tapered and that doesn't seem to be priced into the market currently.

I have used charts this month depicting that, oddly, our markets have gone and got correlated to the direction of bond yields in Spain, Italy and Portugal. The sense of calm in EU financial markets has returned and investors are ignoring the risks borne from worsening rates of revenue growth from multinationals towards the end of 1Q '13.

To me, the market resembles a sitting duck waiting to be eaten by a hungry shark. Ponder the aura enveloping the two must watch events of this week:

  1. A Fed statement that likely won't acknowledge anything of importance (problem in that the market has started to incrementally price in a stepped-up pace of bond buying by this fall as a result of waning economic circumstances.
  2. An employment report consensus on the headline is for 150,000, roughly 2x March's disappointment and still below gains notched earlier in the year (how in the world does this month-on-month reacceleration in jobs happen as data is weakening compared to March and sending geeks back to their vaunted models for downward revisions).

Positives? For Real?

Since I am a fair guy, I will massage the ego of the bulls for today.

Retailers had a good majority of the new highs last week in the face of below-consensus GDP. A couple of retailers mentioned on their earnings calls that business trends strengthened in the U.S. at the end of March. The sector was not valued in that manner.

  • Earnings season commentary has been pretty decent on the topic of the domestic economy (theme is stable) and the Russell 2000 outperformed.
  • A rotation out of defensives was posted. Key sectors for this action included soft drinks, food products, healthcare and utilities.
  • Companies with soft quarters and/or subpar guidance, for instance Caterpillar (CAT) and IBM (IBM), were some of the best-performing Dow components. That bid under these stocks is the market voting early on that their 2Q '13 outlooks (and others in the same sphere) are conservative as the macro picture stabilizes instead of falling down farther.
  • All in, I wouldn't be shocked if we land some pre-Fed-statement buying.  But just be ready to lock in short-term gains into a meeting that will miss its typical punch and a jobs report that is a real wildcard.

Side Note

I have calls scheduled this week with Best Buy (BBY) and Chipotle (CMG). If you have any questions you would like me to pose, don't hesitate to send an e-mail.

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