The Day Ahead: Entering the Eye of the Storm

 | Jul 16, 2013 | 8:30 AM EDT
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"In this business, you are only as good as the next stock call," shared a wise elder to a younger me years ago.  I used to think that a track record of stock-picking excellence bought a person time, but the Bill Miller backlash post 2008 rout taught me otherwise (because I never make bad stock recommendations, of course...) 

At the moment, I feel anxious to force trading ideas and jump outside my normally measured approach to helping client's bank loads of money. The markets never seen to go down when signs emerge that Bernanke is out dealing his monetary crack once more. Such an anxious feeling inside troubles me greatly, it's as if I am chasing performance instead of investing the precious minutes into researching a huge longer term call that nobody else presently sees.

Below are a couple of notes I took during Monday's session.

The Rip Zone:

There are loads of stocks with charts that continue to climb not just to 52-week highs, but to all-time highs (examples: Home Depot (HD) and Lowe's (LOW) in spite of no true housing boom on offer).  With his ascent, I am now looking at stocks that trade least five points above the S&P 500's forward price-to-earnings multiple but lack the relative premium type of earnings growth.  Super disturbing to have this blind exuberance going into an earnings season, and it's subsequently causing me to disregard entire patches of stocks (such as semiconductors)  due to overvaluation (pardon me, but valuation benchmarked to a company's future earnings potential should still matter to investors, despite the intentions of the Fed).

Stank dogs:

There is a certain class of companies that I reference as "stank dogs," those that served up horrific first quarter earnings and slashed their FY13 guidance ranges. Currently, many stank dogs have outperformed the S&P 500 in the past month. I have tasked my research team with compiling a list of all these fundamentally flawed companies with the end goal being to suggest a few shorts into their earnings releases.

One name on the list is Textron (TXT). After reviewing Textron top to bottom, I expect the second consecutive full year earnings guidance reduction in a row later this week. Here are the points of worry: pace of sales (weak), sales mix (lower margin products), inability to bring down costs/expenses, and lack of pricing power (due to sluggish global growth).

Stock stalking:

Did you find it weird that homebuilders let off some steam on Monday? I did, and this may have been a tell to abandon ship into Bernanke's testimony. Although the bearded wonder and his cronies have worked hard at restoring investor confidence in the Fed's free money handout to the world, recall that Bernanke was uncharacteristically hawkish on May 22. Should lawmakers push him, Mr. Market may be forced to hear the comments it hates: anything pertaining to reducing the pace of monthly bond buying (I continue to think tapering begins after the December FOMC meeting).

Around the Horn: Retail Sales

  •  You may very well begin to hear gas price rises across the country are impacting consumer demand, and this would be the supporting evidence using June retail sales: department store and food and service sales declined 0.9% and 1.24%, respectively from May.
  • Interest rate sensitive sectors continue to show a weakening sales trend. The two callouts included building materials and electronics stores, which notched a 2.18% sales decline and a flat print, respectively from May. With rate increases being halted due to recent Bernanke comments in July, the downtrend in sales may be perceived as short-lived. But, it's something to keep a very close eye on (stock price action will serve as good tells). 

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volatility is quite low here, and we could see some downsides here in the short term. ...



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