A Trick Question on Fed's Tapering Effect

 | Jun 26, 2013 | 10:00 AM EDT
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Let's start with a trick question: What stocks will perform the worst depending on how fast the Fed tapers, what happens with Chinese liquidity, how Abenomics plays out and how the European debt crisis is resolved? The answer: The ones with the worst earnings performance!

The macro is all interesting, and gives us pundits something to talk about between quarterly earnings reports. But now that the end of the quarter is nigh, all of us must focus on what really matters. Stock prices are discounted streams of earnings and while we can discern the proper discount rate during the lulls, our attention must now turn to earnings -- the "E" in the price-to-earnings ratio.

We also are entering "preannouncement season", when those companies that couldn't live up to expectations must 'fess" up and face the wrath of Wall Street. Obviously, names that miss earnings are names you do not want to own, since the stocks are likely to get punished, in both the near- and longer-terms.

I use the change in earnings per share estimates as a distant early warning of potential earnings misses. While no system is foolproof, the fact that analysts are cutting estimates for these companies means their business conditions are weakening relative to previous expectations. Momentum carries in both directions, and if the numbers are being cut, a miss is a distinct possibility.

The table below shows large cap names (over $5 billion market cap) whose second quarter earnings estimate has been cut at least 10% since the start of the quarter.

 The ones that stand out the most to me include:

 Producer Manufacturing and Process Industries -- They all look terrible. Numbers for Caterpillar (CAT), Joy Global (JOY) and General Electric (GE) are all coming down significantly. Earnings still appear to bite at Apple (AAPL), so continue to avoid it. Dell (DELL) looks horrific as well, good luck to Michael Dell if he takes control of his namesake. Conditions look weak across the refiners, with all of the majors seeing big estimate cuts. Industrial services, which are basically oilfield services names, are soft as well. Look at Amazon (AMZN)! The second quarter is never strong for them, but this one is shaping up to be especially lousy. My gut says they report a loss for the quarter.



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