The Day Ahead: Why Hello, Silly Season

 | May 01, 2012 | 8:30 AM EDT
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An emphatic "boo" to the first part of this week as there is this sense of boringness outside of April's ISM manufacturing and China PMI reports.

I like action, preferring to be walloped with earnings report after earnings report and conference calls as they illuminate facts the market may have failed to spot, or fully understand, months earlier. Perhaps I have Apple (AAPL) earnings season hangover. Whatever the case, this much is for sure: silly season has partially reared its head.

In the past, I have referred to silly season as the period right after quarterly earnings and the start of the next round of releases. In between, investors are forced to guess how companies are performing (preannouncements are not on offer) and the most minuscule of news gets pumped with enough air to make it appear to be a giant positive or negative event for equities. Yesterday in "Day Ahead," there was a coy shout out to silly season being upon us as I said this will be a trade the news week due to a soft patch in earnings season and prominence of key macro data. So, why not join me in silly season on the Street as I scour for anything that could derail the enthusiasm that emerged in the second portion of last week's trading session or throw gas on it prior to April nonfarm payrolls.

Silly Season Sightings

Goldman Graces our Presence

If you waited to make adjustments to the portfolio until Goldman reduced its employment projections to 125,000 and asserted itself as being near-term negative, then not enough dot-connecting was done in April. That has to change in May against a backdrop of sell-in-May chants. This month I would like for you to circle the following dates on the calendar, in addition to watching carefully initial claims every Thursday (do we climb above 400,000?).

  • May 15 Empire State Manufacturing. The employment component to the April numbers rose to its highest level in nearly a year. Given the how the Chicago PMI panned out, and the end result of manufacturing employment in Friday's April jobs report, Empire State is the numero uno place to be on the lookout for employment conditions transitioning from the overused economist term "soft patch" to something a bit more concerning.
  • May 17 Philly Fed. There was a large headline miss for April vs. expectations. Like the Empire State, the employment component was a bright spot, reaching an 11-month high. Your thought process should be consistent to what I suggested above.
  • I will leave reports later in the month untouched, just wanted to provide an initial framework for jumping in front of news and various brokerage forecasts.

Earnings Season

Is there such a thing as a second quarter? I ask this as corporate commentary is all about the "back half of the year" rather than "yes, we can sustain a portion of first-quarter volume and pricing momentum." The market is simply not receiving sought-after reads on the current quarter and is becoming resigned to trading on EU debt contagion/China growth scare/U.S. factory news in order to rationalize potential second-quarter financial outcomes. It's critical as first-quarter earnings season matures to keep track of second-quarter commentary, whether it's a line conveyed at an investment-bank-held analyst conference or those discussed by late reporters (including retailers). I will reach a bit by pointing to a couple items gleaned from steakhouse chain Texas Roadhouse (TXRH) and home products seller Masco (MAS).

  • For Texas Roadhouse, its second-quarter to-date same-restaurant sales are trending higher by 4.8%, in line compared to the projected fiscal year range (4% to 5%).  But the growth rate is slower than the first quarter's 6% and year-ago statement at this time of 5.4%. Amid silly season on the Street, pull forward consumer demand in the first quarter and elevated gas prices I have to wonder if the lagging nature of the negative macro headlines in April are beginning to weigh on spending patterns. After all, consumers have shown a desire post-recession to rebuild savings after dipping. A ton of "what ifs" without a doubt, but one has to dissect the information as it's presented to spread it broadly to similar companies and closely-correlated sectors.
  • Masco continues to have difficulty in moving big-ticket purchases, specifically cabinets. Want a great example of Pimco's new normal being on display, well here you go. In a below-historical-trend economic recovery, some, not all, companies capture precious discretionary dollars. Take a gander at RadioShack (RSH) and Supervalu (SVU) in contrast to Amazon (AMZN) and Whole Foods (WFM).

Tuesday Notepad

  • FedEx (FDX) and UPS (UPS) have not fared too well since March 19 or so and earnings from the latter didn't help to bolster sentiment. Leading economic indicator transport stocks struggling while bullishness on first-quarter earnings season permeates minds is not an occurrence that warms the heart. Make sure to read through logistics company CNW's (CNW) earnings today. I think management set expectations low when it announced fourth-quarter results by indicating 2012 is a year of margin focus, but any shift in language from "stable to neutral volumes" would confirm the negatives in a UPS report and the weak stock prices of each top-tier name.
  • Office Depot (ODP) always issues tough-to-read financial reports, with moving parts here and there. I have no real opinion on the stock, so will be zeroed in on sales composition (notably computers which have continued to underperform other categories, badly) and if there is a harsher tone on the European business (Office Depot, in my view, was one of the first companies when it announced fourth quarter to sound increasingly negative on Europe, instead of solely negative).  In the end, this report should have "companies continue to cut costs and drive productivity measures" written all over it, not good for Office Depot by any stretch of the imagination.

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