The Daily Dose: Fearing the 'DaqAttack'

 | Aug 23, 2013 | 8:00 AM EDT  | Comments
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Stock quotes in this article:

cnw

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fdx

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ksu

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dal

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r

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unp

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jblu

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esrx

I just want to get this swabbed from the desk quickly. Yes, the Flash Freeze, or what I call the "DaqAttack", is a byproduct of greed and must not be written off as a chance occurrence.

This stuff is now commonplace and newsflash and it will get worse in magnitude and in frequency in the future. Given that events otherwise short-term unexplainable are on an uptrend, it's ironic how the profit motive by market people we have never seen will be stunted because:

  1. A new generation of people less well off than the boomers will think twice about putting their precious assets into capital markets;
  2. More regulation is coming, and where there is regulation there usually is a dent to profits of market people, pending the creation of new widgets to circumvent the boring suits.

So although stocks sidestepped a thrashing, ask yourself this basic question: Are you more or less inclined to pay 30x forward earnings for a tech stock today fully aware that your price discovery efforts could be seized with a mere internal systems error? Sure, that company's bottom line outlook continues to look robust. But a component of the stock's multiple is trust that you could bet on shifts in the outlook based on new incoming information each day.

What I am Looking At: Dow Transports

The S&P 500 and Dow are down 3.1% and 4.2% from August 2, respectively (aka the "highs"). If the tight correlation between the 10-year yield and equities persists, we stand to cross the line between "pullback" to "correction" in short order.

Naturally, watching stocks bleed value is no fun (even if underweight/short) as it indicates a future that could be less economically brighter than the present. In an effort to channel my inner contrarian, I went searching for an index that was flashing "look at me, look at me" signs. The one that stood out was the Dow Transports, an index that has led on the downside during the current pullback (-4.66% from August 2 + peaked on August 1). Since August 16, the Dow Transports has outperformed the Russell 2000, Philadelphia Semiconductor Index, and S&P 500. Most importantly, the index held firm on Wednesday as the broader market went woooooshhhhh into the closing bell on a #Tapernado sighting.

Unfortunately, I think the relative outperformance of the Dow Transports is a false positive for this simple reason: There continues to be underlying weakness in the domestic-oriented names in the index, such as Con-Way (CNW), FedEx (FDX), Kansas City Southern (KSU), Ryder (R), and Union Pacific (UNP), which shed 1% to 1.5% on Wednesday.

The strength in the indices was driven by internationally-themed names, particularly airlines Alaska Air (ALK), Delta (DAL), and JetBlue (JBLU), into overseas macro data (EU PMI, for example). My sense is that the broader underlying weakness in the Transports is the bigger takeaway, and one that supports continued cautiousness on the market.

Follow-Up

Received a few inquiries on my "Fast Money: Final Trade" on Wednesday, Express Scripts (ESRX). Other than the stock catching my attention as it has outperformed the indices during the pullback, here are a couple broad strokes on the company to begin your own research that leads to a buy or avoid decision.

A company that is a borderline monopoly is looking at a nice stretch of future earnings beats thanks to:

  1. Medco acquisition (costs will be taken out over time);
  2. Higher generic fill rates (most profitable business for the company);
  3. More people using home delivery for drugs (also a very profitable business for the company);
  4. Massive leverage over suppliers that causes a downtrend on cost.

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