The Day Ahead: Trust No One

 | Oct 02, 2012 | 8:35 AM EDT
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Through the years, I have opted to tweak the famous adage "trust no one" by choosing to be a little more trustworthy. When I have tried that, however, it has often led to being mentally smacked around in a business relationship or stock market calls. Put too much faith in a person, and they may grab a yard instead of an inch and seek to spoil your hard work. Rationalize that a CEO is telling the truth after a 10% decline in the stock price related to an earnings bomb that a "profit margin trough has formed" and likely, you will be let down in between earnings reports and when the next quarterly is released.

Today, I want to step back into a personal time machine and provide reasons to place no trust in a Monday, start-of-a-quarter stock rally that lost steam and creepily felt as if it was weakening around noon. It was comparable to last Thursday's action in many instances (defensives still caught bids, such as staples and utilities; perceived safe-haven Treasury debt were en vogue at Fed friendly paltry yields).

The Intense Investor's List for Not Trusting Anything, for Now

  • If we were on the precipice of shaking free from two weeks of a squeamish appetite for risk, rest assured we would be closing at session highs (indicative of a potential positive future transformative event) and the bids under defensives, including a Coca-Cola (KO) and Consolidated Edison (ED), would cool along with the demand for paltry yield toting paper.
  • If you believe that any iota of the global PMI data was the positive transformative catalyst I seek, best rip the CFA books and guide to trading from the closet for a refresher. Was I pleasantly surprised by the month-on-month improvement in ISM new orders? Absolutely, but the action in stocks that should go up with this type of news (for example, FedEx (FDX), which ships the end product to consumers closed off its sessions highs, up $0.09 on the day) left me disappointed and skeptical on the sustainability of the positive surprise.
  • A recoupling of global data in the department of "stronger than expected" doesn't make the grade. For example, while ISM new orders increased from August in the U.S., Europe's PMI new orders were at the worst level since June 2011, and fell month on month. Plus, there is this persistent flow of support for the view that contagion continues to increase within the European Union (EU). But, wait, the recessionary headwinds to multinationals was supposed to have receded with a magic wave of the Draghi word wand, no?
  • Is a Caterpillar (CAT) jacking prices a true indication of pricing power or a maneuver to partially offset downside risk to volumes? I faintly remember that this is the same company that warned on numbers in a spreadsheet for 2015. If this was pricing power, dare I say the stock would not have closed lower on the session.

So you may be wondering the now unforeseen mental trigger that would be getting me encouraged again on stocks. The deal is this: Non-farm payrolls on Friday have to break free from their stretch of disappointment relative to consensus and any downward revisions have to be lower than recent months. Should this happen, it helps to validate the notion of the manufacturing sector rebounding and other sectors following suit (and joining forces with the new consistency in housing). I am not holding my breath, though, given durable goods orders, weak demand for PCs, cautious CEO/CFO comments on 2013, and a desire by executives to protect margins through productivity gains. I guess we should be hoping for China stimulus and the market forcing Bernanke's hand, per the usual.

The Bucketshop Rumor Mill

  • I tried to make a case for Family Dollar (FDO) into earnings, but came up emotionally empty. Too many structural impediments to surprise positively on earnings and justify the belief Street estimates on fiscal year 2013 are conservative.
  • The pullback in Dunkin' Donuts (DNKN) is mildly disturbing; the stock has badly lagged Starbucks (SBUX) since Aug. 2 and keeps falling despite a generally favorable outlook for coffee bean costs in 2013 and strong prior quarter performances. Good stock to measure blue collar employment? America runs on Dunkin, and the stock has basically been dreadful to own for as long as the jobs reports have been subpar (summer). Fair number of insider sales since August, in particular related to a secondary. But even accounting for those items, the decline raises the question: What is occurring fundamentally?

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