The Day Ahead: Worst Week Upcoming?

 | Jun 17, 2013 | 8:00 AM EDT
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"In the next few meetings." -Dr. Bernanke

"Federal Open Mouth Committee" –Ed Yardeni, the copyright holder to "bond vigilantes"

Isn't it just a bunch of bull that five words from a human being that puts on two socks on like the rest of us each morning holds so much sway over our wealth?

That is the reality we face this week as Mr. Market stares down the barrel of a loaded gun pointed by a bearded man. You will hear this is the most important Fed meeting in Bernanke's chairmanship. You will hear all sorts of things designed to strike a sense of fear and an emphatic click on the online brokerage account's sell feature.

I fancy it's a bunch of dung drummed up to satisfy the voracious appetites of algorithmic trading programs. To hell with you Ben Graham, machines rule.

How to handicap this extravaganza you ask? Good question! We are learning firsthand that a more open Fed, per the directive set forth by Dr. Ben, isn't necessarily a grand idea. Why not let stocks continue to head higher against the backdrop of Fed quietness and expectations of easy money and subsequent upside to net earnings from that easy money?

I enter the week with a sharp tongue, a byproduct of getting whipped by my dad on the golf course on Father's Day. I have also been tortured in various forums to discuss Fed policy when the questions asked should be centralized on the market's messages. For here is the rub: The market already knows the outcome of Bernanke's holiday week.

Corporate cash holdings: Total a cool $1.78 trillion, yet a DuPont (DD) and Texas Instruments (TXN) are unable to pump their bottom lines enough via buybacks to meet their own earnings estimates set forth only months earlier. Each stock has traded lower since their respective warnings, a major red flag that in my view will go un-respected until the second week in July when suddenly Alcoa (AA) is relevant again.

The outflow of capital is becoming constant: Equity, muni and taxable bond funds have all experienced outflows from mid-May. As I noted weeks ago, cash is a position, and it's a friendly one amidst a market enduring an adjustment phase.

Woopsie: The Eurozone market lagged the European market last week. In fact, the sole three markets to gain were Caracas, Helsinki, Istanbul, and Sydney (yes, for real). When stocks tethered to dead Eurozone countries act poorly, a red flag is tossed onto the playing field by yours truly.

Top Dow performances last week: Pfizer, UnitedHealth, Verizon, Intel, Johnson & Johnson. Average gain: under 1%. There is no visible flight to safety in stock sectors occurring, rather widespread de-risking. When there is no love for dividend payers, another red flag is tossed onto the playing field by yours truly.

A disappearing future: Operating earnings estimates for 2014 have fallen for 13 of 30 Dow components inside the past four weeks (largest revisions: Wal-Mart and Caterpillar). Excuse me kind sir, but is there any reason to push multiples higher during the initial stages of an interest rate driven curtailment in corporate earnings? The answer: nope.

By chance if you are obsessed with the quantitative easing/taper story, here is my two cents:

  • "In the next few meetings" reiterated: A true Fed pullback in monthly bond buying becomes entrenched, and then priced in more explicitly as guestimates on which meeting will become concentrated (October possible).
  • "In the next few meetings" backed off: It will be difficult to spot whether the renewed market volatility has forced Dr. Ben to rein expectations on policy tightening. Watch my Twitter feed for clues because a back off by Dr. Ben will lead to rips in stocks across the board.

Recommendation Update: Starbucks

Initial recommendation (video):

I recently talked with Starbucks (SBUX) for client purposes. The company is one of my favorite to chat with, so many interesting initiatives going on inside. It's as a result of those initiatives, such as a range of higher ticket offerings and ramped up marketing efforts, that I remain a bull on the stock. Price target: $70.00 (raised from low $60s).

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