The Day Ahead: Taking the 'Smile Test'

 | May 08, 2012 | 8:30 AM EDT
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Today is a relatively quiet patch in terms of market-moving news, meaning the overseas election outcomes will be regurgitated, first-quarter earnings will be off in the rear view mirror and investing masters will be pulling all sorts of catchy statistics from their weaponry in order to justify bull or bear positions.

So I'd suggest using today to decouple from the daily grind of the market, characterized by obsessive news and tape-following, and think on a deeper level on where the market is, where it could go -- or where it isn't yet, but believes itself to be. Studies have shown that smiling and laughter, if done more often than not, will lead to a longer and overall joyous life. With that in mind, perhaps you should say to yourself, "Self, can I pass the smile test when reviewing a subset of key near- and long-term factors to investing?"

Sozzi's Smile Test, at a Glance

Understand the economic derivatives of "austerity": Again, today is a day of introspection, and a small portion of that Bill Gates-esque deeper reasoning has to be devoted to the aftershocks of austerity. We have heard the word repeatedly since "Euro debt flare" (dig that one? I know you do) arrived on the scene in 2009, and it has become intertwined in the vocabulary of every person in financial services, except, maybe, for cold-calling broker trainees.

At the very core, austerity is:

1. Anti-developmental, from the perspective of advancement in a country's infrastructure and for the intellectual advancement of a country's citizenry

2. Self-defeating: People work their rear ends off for slashed wages, with yesteryear living standards becoming nothing more than memories. They pay higher taxes to consume what little they can consume, and in the end they live in a perpetual state of personal discontent -- with the need to work endlessly in order to do that

3. The cause of sustained economic instability that makes forecasting global growth, and investing accordingly, absurdly difficult

You mean to tell me that strategists (and the Fed) have worked into their models a long-term suppression to U.S. exports to countries such as the U.K. (4.2% of exports) and France (2.2% of exports) and contagion from sluggish growth in these regions -- all as many of these folks upwardly revise their 2012 targets for the S&P 500? I am not saying this to be the Grim Reaper. I'm saying this to stress that the true impacts from austerity in faraway lands -- and this excludes potential austerity in our country -- can't possibly be fully discounted in markets. Investors are forced to trade around events, because earnings outlooks for companies become less than clear.

Understand an "up day" in the face of fear: Isn't it curious that the market finished in the green Monday as Warren Buffett was on television, with his adage to "buy when others are fearful" etching into our brains? Maybe this is me showing that I have no life -- not sure. But, nonetheless, the market was positive Monday despite having every excuse to trade down by a sizable amount, thus triggering those dreaded discussions on whether stocks are headed towards a repeat of summer 2010 and 2011.

For some, those ever-optimistic bulls, the action was the market's message that the new socialist President in France may cooperate with German Chancellor Merkel (Merkozy replaced with HollMerk) and ditch the campaign rhetoric that spooked the markets. For others, the action was validation that valuations are too cheap, echoing the musings of former Fed chief Alan Greenspan last week, and to a lesser extent Warren Buffett Monday.

All that said, I want you to soak up on this day of thinking about the action, which continues to support the need to be quite selective in picking stocks and sectors:

1. There's been no resounding "vote-of-confidence" buying in stocks. Steadily bleeding charts continue to bleed, and those charts sporting gashes continue to lack signs of healing.

2. Consumer cyclicals were hit in the face of increasing calls that crude oil is poised for a plunge in view of global growth trends, as well as last week's favorable retail pre-earnings releases. There was also no buying on "sell the news chain-store sales Thursday." By the way, have you seen the three-day move to the upside in Dillard's (DDS) on good volume? Barneys takeover news had me searching around the department store sector yesterday.

3. Utilities eked out another green session.

4. Share price of Starbucks (SBUX),a sector leader I obsessively track, says on-the-ground realities in Europe will push a turnaround for this segment of the company into 2013.

5. Dividend yields on the S&P 500 and the Dow are higher than they were a year ago, and attractive to government debt, so where is the nibbling on risk?

This much if anything: Monday did not pass my personal smile test.

Earnings on the Mind: Disney

I don't burn the midnight oil doing discounted-cash-flow analysis on Disney (DIS) but, then again, how many do? That doesn't mean I'm not watching the report for broader economic clues. Out of the entire earnings shebang for Disney, for my analytical purposes I am zeroed in on the components of domestic park-operating income. Random, right? Wrong. I want to see how guest traffic unfolded and the response to higher average ticket prices, specifically as it pertains to international tourists. 

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