After some self-reflection, which reminded me to adhere to common sense, I have decided to keep it on the light side this morning. On Wednesday, I bared what's left of my investing soul for all to see, stating that the market setup into the end of the week was atrocious. Expectations were on steroids. A fresh round of earnings was as encouraging as having a parent laugh at you after you fall from a bike, wearing a pair of short shorts.
Among those companies that did manage to sneak over the earnings hurdle, there were legitimate questions on earnings quality and sustainability. (I had a great discussion with Jim Cramer's fabulous researcher Nicole Urken on Panera Bread's (PNRA) true outlook into year-end ... how does it maintain its price increases? Come on.)
But today's piece is not about slapping myself on the rear as if to say, "You go, boy." I do enough positive reinforcement drills in the yoga room of the gym. Rather, we really have to comprehend as investors and interested bystanders what the disappointment from Mario Draghi and the European Central Bank means to the stock market as an organism that changes shape daily.
If you are able to "get" what the market is "getting," then it basically forces hours of research on stocks that may tickle your fancy. In a weird way, that forced research fills me with excitement, as it leads to a better chance of sleeping well at night after a rough session for the broader markets. To illustrate the thought, I approached it from the perspective of stocks. I visualized stocks as tiny children sharing cryptic messages to anyone who would knowledge their existence.
How to Hear Stock Price Messages
Children: Multinational retailers Abercrombie & Fitch (ANF), Guess (GES), Ralph Lauren (RL) and Starbucks (SBUX)
- Messages of the last two days: 1) ECB action is unlikely to immediately clarify the return prospects of international stores that cost a ton to open and operate; 2) no action today promotes greater fear, elongating payback periods; 3) no precise date for action, no dart throw on when profits and free cash flow could improve (late 2013, but who knows!).
Children: "Suit stocks" Jos A. Bank (JOSB) and Men's Wearhouse (MW)
- Messages of the last two days: More E.U. uncertainty, more productivity plan announcements by the fourth quarter of 2012 (in addition to plans put into action in the second quarter), less need for suits. Yup.
Children: Financials
- Messages of the last two days: International exposures only accentuate Dodd-Frank mania and the fact that loan issuance and demand don't seem right in a period of absurdly low interest rates.
Child: Stanley Black & Decker (SWK)
- Messages of the last two days: Dust is building on tools that are meant for sale in Southern Europe, so the company has to undertake acquisitions to keep the sales and earnings needles moving. However, the company is forced to pay up to attain this growth (note that I am not indicting Stanley Black & Decker, just issuing a general example in light of recent acquisitions activity).
Children: Steel companies U.S. Steel (X), AK Steel (AKS) and ArcelorMittal (MT)
- Messages of the last two days: Supply-demand imbalances are not correcting anytime soon.
Children: Coach (COH) and Tiffany (TIF)
- Messages: External promotional activity is weighing on sales trends (for Tiffany it weighs on sales, as it doesn't discount).
Children: Defensive stocks Coca-Cola (KO), Kimberly-Clark (KMB) and PepsiCo (PEP)
- Messages: Relative strength in a bad session indicates reluctance to sell, as these are the best games in town (despite stretched valuations).
Investors are running out of hiding places, and the old standbys are not immune to the daily headline insanity. On any given day, a word could cause the market to bake optimism into valuations, only to unwind in ensuing sessions.
Here is the thing: The optimism priced in around a special event has a high probability of not happening or is far into the distance. There is the creepy separation between news flow and reality, and as I said a week or so ago, that reflects horrendous fundamentals of E.U. economies.
On the topic of the July employment report, I expect it to disappoint. Should it be a letdown and if the market continues to sell, start thinking contrarian over the weekend.
