The Day Ahead: Back to Normal

 | Jul 23, 2013 | 8:00 AM EDT
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It was nice to have an old-fashioned, normal earnings season day on Monday. No chatter of bond tapering by loose-lipped Fed officials. No talk about China's economic slowdown crippling the world.

That said, I continue to not get it at this point in the re-rally from the June lows. Has the operating backdrop for companies improved much compared to the first quarter of 2013? Not as far as I can tell as company after company references operating conditions as having improved "slightly" from the end of the first quarter.

Is that a new trend that only stands to strengthen as 2013 approaches a conclusion? Uber confused. Or, is this all a giant mirage with respect to stocks trading on the valuations offered in the eye-friendly charts below.


To make that contrarian call on stocks, one has to find robust evidence, or a significant fresh development, that questions present valuations. Microsoft (MSFT), Google (GOOG, and McDonalds (MCD) earnings did not fit the bill, so Mr. Market told the interested masses.

Earnings season is proving to be borderline irrelevant with the reports only fueling Fed induced bullishness. There I said it! The reality is that if Bernanke came out today and stated tapering was poised to commence the day following the December FOMC meeting, stocks would crumble mightily. Unfortunately, that material type of event is unlikely, though an act of Mother Nature is always a summer risk to stocks.

Until then, suspend your investing principles, ride the donkey and try not to gain exposure to a too overvalued a stock relative to the S&P 500, for example Netflix (NFLX).

Four Earnings Season Stats to Know

  1. Fifty percent of companies have beaten consensus sales estimates, below the 58% four-year average. Your thought: Are the earnings beats realized in the second quarter sustainable?
  2. The average surprises score on earnings (compared to consensus) is at 2.8%, lower than the averages of the past year and four years of 4.3% and 7%, respectively.
  3. Fourteen companies have issued negative earnings guidance for the third quarter 2013 compared to three issuing positive guidance.
  4. Stocks beating on sales/earnings per share have risen 1.6% post earnings compared with a 4.6% decline for those missing on both lines. We old-timers used to call that an "unfavorable risk reward ratio".

 Around the Horn

  • Long Cheesecake Factory (CAKE) for clients into its earnings report on Wednesday. I think the quarter will be better than expected due to pricing, traffic and cost deflation.
  • Add existing home sales to housing starts/permits that have disappointed following the increase in interest rates. Everybody has swept these data releases under rug, but don't be dumb and do the same.
  • Largest red flag on Netflix earnings: it had a minimal take rate on a new $11.99 family package. The read on that is price resistance. That is troubling as I believe in 2014 the company will be forced to raise prices in order to fund content and international expansion initiatives. Higher prices equal a higher churn rate (as what has happened since a 2011 price increase)?

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