The Day Ahead: Where Are the Tape Bombs?

 | Jun 19, 2012 | 8:30 AM EDT  | Comments
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Until Monday morning, I had never heard of a "tape bomb." Apparently, it's any macro or political event that is hurled onto unsuspecting investors, who then cause a blow-up in stock prices by exiting positions in mass qualities. Stuffing tape bombs into a missile launcher has kept the market in a perpetual state of fear, in turn preventing rallies from gaining steam and the trap door to be left open on the downside.

But I ask you, is anything listed below worthy of tape bomb status? If the answer is no, then there is a modest case to be constructive on stocks -- with the caveat being to be mentally prepared to cut bait at the first sign of renewed trouble.

Rising Italian and Spanish debt yields: We are living with up-to-the-minute reports on the direction of these sovereign debt yields, but their creeping nature indeed is well-known. I'm not saying the fundamental risk of persistent yield creep is priced into the markets, but the more they advance, the more it forces the hands of the European Union (EU) and European Central Bank (ECB). Murmurs around the hood suggest the ECB could lead an LTRO-type plan before the EU Summit on June 28-29.

Domestic data: Similar to the circumstances of elevated periphery EU debt yields, the deterioration in the health of the U.S. economy only supports action by the Fed. In late April, a disappointing economic report was a perceived as a tape bomb, so was a corporate earnings warning, but the broader pullback since has lessened the shock and awe. For example, DSW (DSW) and Body Central (BODY) both issued earnings warnings yesterday, yet stocks that normally trade in sympathy did not materially sell off. A tape bomb, when it blows, takes out bystanders, and the fact that it failed to do so on an individual company basis yesterday interests us valuation fanatics.

One of the few potential tape bombs I foresee this week is the collection of European and manufacturing and services reads (Friday). There is no logical reason to expect anything in line to consensus or having not meaningfully worsened month to month. However, I do have concern that if these reports are uber ugly we setup negatively into the weekend. The premise here is that no matter what EU policymakers do, it may only blunt the impact of contagion, not stabilize the situation, and still it leaves unanswered deep systemic issues that only will be solved through a fiscal union. Nobody said analyzing EU politics was easy.

Caffeinated Morning Thoughts

  • At first, I believed the decline in Abercrombie & Fitch (ANF) shares was reflective of 2012 earnings risk from increasing U.S. store promotions and European exposure. With such earnings risk came the likelihood of a reduction in the company's longer term earnings expectations. There is a fresh thought given the consistent pressure on the stock that the international flagship strategy is very flawed and destined to weigh on returns for years. In either instance, I would be surprised if there is not a change at the top in 2013.
  • Value investors, Guess (GES) should be on your radar screen.
  • I have been casually mentioning Columbia Sportswear (COLM) on Twitter for the past couple of weeks as it continues to power ahead against a weak sector backdrop. Columbia has European exposure and is likely contending with the weak second half 2012 order rates by department stores for cold weather gear. Still, Timberland was taken over by VF Corp. (VFC), and with Columbia's new product introductions offering a strong sense of differentiation -- in addition to the family having an active role in the company (do they wish to exit?) -- one cannot rule out anything.
  • The market is saying deflation will benefit Costco (COST) as it holds prices and continues to turn a stronger number of goods. I did not appreciate the power of this building viewpoint.
  • Less than inspiring initial claims data of late: Shares of ADP (ADP) gaining ground ahead of the June jobs report. Hmm.

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