The Day Ahead: Snapshot into My World

 | Jul 17, 2013 | 8:00 AM EDT  | Comments
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A good friend of mine and I chatted on Tuesday morning (at 3 a.m.; nobody non-client related is directly allowed to talk with me from 4 a.m. to 10 a.m.) and she asked: "how do you absorb so much financial gibberish." 

I kindly corrected her, noting that what us strategists do is not analyze "gibberish" but rather tons of numbers and gibberish to hopefully be right on XYZ events, eventually. She still thinks I am insane, but hey, can't sway the opinion of everyone by solely using natural charisma and charm.

That said, she did bring up a valid point: I may be analyzing too many facts and figures. I suspect you all out there are doing the same thing (in fact I know you are, in talking with new clients I immediately get a sense they are overwhelmed from trying to read chart patterns, magazines, newspapers, and dusty out of publication investment books). Sometimes less is more I have learned, although as seen below from my notes it's not a practice I follow seriously just yet (maybe when I am a senior citizen).

Spotted: Mad Hate for the Stock Rally

There continues to be this healthy skepticism on the rally from the June 24 lows. To the many I discuss markets with they remain concerned on the impact of higher rates towards the end of the second quarter (meaning quarters could have come in below plan). Nevertheless, this is no longer a market fueled by fundamentals, but rather un-carefully scripted words from the Federal Reserve to back up their well-documented monthly plans. When a market rally is underpinned by words, it leads to a healthy disbelief on the part of a large population of investors. That disbelief is spotted, I think, in the NYSE short interest ratio.

The NYSE short interest ratio is now back at the April level that came just before the powerful rally in stocks until late May (up until Bernanke's May 22 hawkish comments). I am not hinting that we are poised for a similar move as the backdrop is different (comments from Fed), but if earnings keep on trickling in "okay" there is reason to believe shorts will be forced to cover amid positive news flow and promises of liquidity.

Source: Investor's Business Daily

Source: Investor's Business Daily

LOL Earnings Season Lookin' Stank, Thus Far

Let's holddddddddddddd the enthusiasm regarding the start of second quarter earnings season. That enthusiasm I am sensing has evolved from much better than expected bank earnings (although mortgage business has been an area of weakness on a sequential basis). However, if one wants to have success during earnings season, drilling beneath the surface headlines is a non-negotiable. Here is what I am seeing while doing those a.m. and p.m. exercises.

Coca-Cola

  • "Volume results came in below our expectations, reflecting an ongoing challenging global macroeconomic environment and unusually poor weather conditions in the quarter," noted CEO Muhtar Kent. Stock deservedly got smacked down.

Goldman Sachs

  • Flat investment banking backlog. Still waiting to see a wave of deals that materialize from fear of rising interest rates...

Cintas

  • One-cent earnings miss and below consensus full year earnings range (outlook).

JB Hunt

  • Misses on revenue due to, I think, volume weakness in its truck segment.

Other notes

  • Remember we had negative pre-announcements prior to this week from DuPont, Texas Instruments, Terex, and UPS (surely I missed a few).
  • Some of what we are getting from companies is the management of Street expectations, especially in light of late in the second quarter rate volatility. But, the larger part in my view is slowing global growth (U.S., China) relative to the first quarter, and that continuing in the start of the third quarter.

Three Lifetime Tips on Earnings Season

Earnings season is near and dear for me, it has been the period where I have made my name over the years. So to say I am emotionally connected to constantly learning about its alluring properties is an understatement; I obviously want to share those learnings with you!  Below are three top tips on "The Season" to forever remember:

  • Do re-read the prior quarter earnings call in search of action words, including "accelerating" and "strengthening."
  • Don't arrive to earnings season unprepared, have ready at least 10 macro themes and a realization of the metrics the Street will be studying on a company you own (i.e., same-store sales for a retailer).
  • Do forget the BS that if a company "has strong free cash flow" it's a great stock to hold in the portfolio. A company could print $1 billion in free cash flow for the three-month period and the stock will get hammered 10% on earnings release day due to a one-cent bottom line miss. TRENDS are the major consideration in deciding to invest in a company in the weeks leading up to its earnings release.

 

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