The Day Ahead: Respite From the Madness

 | Apr 30, 2012 | 8:30 AM EDT
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Last week caused spinning heads up and down Wall Street. There was Apple (AAPL) and its ballyhooed, all-but-certain earnings miss. The Federal Reserve made a group appearance behind closed doors and sent their bearded boy to face the nation (or those in the nation who are aware of the Fed) and hungry reporters. Couple macro reports here, a French election there and, badda-bing, the market ends the week feeling starkly cheerier than many had thought it could Monday morning.

The ballgame is the complete opposite this week. We're seeing a bout of investor enthusiasm -- earnings-driven, if I have read it correctly -- and a break in the first-quarter earnings season storm, with no major companies slated to announce.

This essentially sets us up for two things. First is a trading-the-news environment, which will be combo action of March and April domestic data and a debt auction in Spain. Second, even though it may have been related to broader sentiment, good earnings reports were finally rewarded to a certain degree in the latter stages of last week. That suggests it's OK to go after perceived mispricings in the market, with an understanding the names in question are long-term holdings.

How to Navigate the Market

Part of what I enjoy doing is breaking down the week into sections, and then picking the most important events to analyze. This makes the market easier to understand and much more manageable. Call me crazy, but I plan on basically tuning out the March macro releases on personal income and spending, as well as those on construction spending. After all, we know from the first-quarter gross domestic product report that consumers dipped into their savings to support spending, given that income growth just wasn't there. As far as construction spending goes, earnings reports from homebuilders hold greater weight anyway, in my view.

I will go as far as to say that the Institute for Supply Management services report for April should be relegated to the back burner -- though that doesn't mean you shouldn't read it. In crafting my plan of attack, this is where I am led:

Chicago Purchasing Managers Index for April: Believe it or not, industrial-sector earnings have come in strong, guidance on the fiscal year has been raised or reiterated and production is still being ramped up to manufacture products all over the globe (though less so for Europe). However, there has been this sense of caution in the views by corporations on the second quarter in the face of the next leg down in demand from periphery European Union nations and growth moderation in China. Chicago PMI, at least to me, is an initial fresh clue as to the potential that second-quarter earnings guidance had been conservative (deemed so by consistent capacity utilization, pricing power, and stable costs).

April chain-store sales: I am bracing for a more moderate average growth rate from companies announcing April sales, given the weather and the Easter seasonal shift. Still, I'm also looking for upward first-quarter earnings guidance revisions. Retailers established very low bars for their first-quarter earnings and must now deliver to the upside in order to match the stronger-than-planned spring sales. If there are scant guidance revisions, it will really make me wonder about whether discounts are the factor truly driving sales. It will also cause me to question the second-half outlook for profit margins, even when considering sharply lower cotton costs.

April employment report: Sticking with the retail theme, the sector magically slashed 32,000 jobs in March against a backdrop of pull-forward consumer demand. At the time, I chalked it up to second-half 2011 investments in technology bearing fruit and continued store closures. But two months in a row would lend credence to a potential change for the worse in the daily sales figures analyzed by retailers, or to a lack of sufficient strength to support the extra payroll. This would fuel the bear debate on consumer spending in the first half being unsustainable, given the drop the in the savings rate.

Food for Thought

● Personal spending, Chicago PMI, ISM-manufacturing and the ADP labor report all sport consensus forecasts that project headline numbers below those of the prior month. Late March data quietly reset expectations, so it's vital that these reports beat in order to support the bulls that jumped aboard last week.

● I am quite interested in whether strategists will raise their 2012 S&P 500 targets, seeing as the index is above 1400, where most prior targets had been placed.

● The theme of the Michigan Consumer Sentiment survey was that jobs expectations remain well-anchored. If Friday's employment report underwhelms again, it'll be fair to engage in harder questioning of the sustainability of first-quarter consumer spending.

● Want two under-the-radar stats to gauge whether the housing market is on firmer footing? Extract the metrics for average occupancy and rent per occupied square foot from Public Storage's (PSA) earnings release this week. For the last four quarters, occupancy has trended down from a 1.7% increase in the first quarter of 2011 to 1.3% in the fourth quarter, with price increases cushioning the moderation. A continued downtrend in occupancy would strike me as a positive for housing, as it would seem to indicate people moving their things out of rental units.

In Search of "Calculated Risks"

Earlier this month, I tossed out this notion of engaging in "calculated risks" in a choppy market. This was a cooler way of saying "be a stock-picker," and the name I viewed favorably was Cheesecake Factory (CAKE). The setup was simple: I liked the company's same-restaurant sales trends and was aware that inflation was not at a runaway rate -- plus, retail sales surprised and the restaurants are attached or near malls, and the market didn't care. That made for fertile ground for surprising news to be embraced.

Another calculated risk play I have in mind is uniform rental company G&K Services (GKSR), which is inexplicably not getting a ton of love by the market. That's despite nice end to 2011 -- with the company's new accounts and operating margin expansion -- as well as and clear positives on 2012, such as management announcing a special dividend and reiterating upbeat commentary on the press release.

If you recall, Cintas (CTAS) announced good numbers back on March 20. The best part of its business was -- you guessed it -- uniform rentals.

Sidebar on G&K: Earnings have beaten by increasing strength, and it appears probable that this will be sustained, in light of low market expectations and robust sales in the auto and industrial sectors to start the year.


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