The Daily Dose: Do and Die

 | Oct 08, 2013 | 11:00 AM EDT
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What have I been saying consistently? Beware of deceptive stock rallies amid the current dysfunctional state of government. That means laugh at every single individual -- whether you are paying them or not -- who advises you to buy stocks on incremental ticks lower.

That means continuing to de-risk your portfolio on days of strength that to the reckless is a perfect buying opportunity. Because here is the skinny, fine folks: there remains too much hope and expectations embedded in the stock market that come Oct. 17, 2013 all will be fine and dandy. Heck, we aren't sure if the ongoing malaise is tossing us into a mild negative growth scenario for the fourth quarter because there is no new data available!

Sure, it appears as if the government will not actually run out of money on the exact October 17 deadline, but it's perception that gets priced into stocks before the reality. Either stay exposed to this "orderly pullback" market nonsense that is a Boehner comment away from eviscerating your Dow ETF instantly. Or rest comfortably at night knowing that hard-earned gains from earlier in the year are protected. It's your call, but I know what I am telling my clients to do, and it's not to buy J.C. Penney (JCP).

Here are things to conceptualize:

  • According to AARP, every $1 paid out by Social Security generates about $2 of total output for the U.S. economy. That's a total of $1.4 trillion. The government is playing with the minds of seniors, who to the best of my knowledge, continue to purchase goods and services.
  • According to Global Port Tracker, retail container ports are projected to grow by 4.9% and 9.1% in September and October, respectively. Retailers, despite a clearly horrible back-to-school season, may be sitting on a ton of excess inventory by the end of December that will have to be marked down. That will be reflected in holiday guidance ranges issued early in November. Consumer credit data stunk, further supporting this over-ordering thesis.
  • The integrity of U.S. data is eroding as we speak. Can we trust that any report frantically issued post the re-opening of the government is of the upmost quality and not at risk of major revisions in future months? I think lack of trust will lead to confusion and cover for executives that are sitting on subpar third quarters.

Picture Fun

Target's (TGT) gross margins are being whittled away from the program pictured below (5% Rewards program). Couple that persistent trend with a market that continues to overvalue the new Canadian business.  I prefer to remain negative on the stock.


Next Big Call: Aeropostale

I am in search of one more huge call for 2013. Aeropostale (ARO) is rated a sell at my firm, so it has been a winner. But I expect further downside due to the likely need to access capital (via credit revolver or outside sources) given a material degradation in the fundamentals of the business under existing management.

These are some of the buzzier stats supporting my stance:

  1. In the last year alone, Aeropostale has lost approximately 1,100 basis points of gross margin. That is J.C. Penneyesque.
  2. Comps in the high margin women's division have been down by double- digit percentages in seven of the past 10 quarters.
  3. Lower prices have failed to reignite traffic and ultimately, comps: average unit retail prices has risen once (1%) in nine of the last 10 quarters.

Risk to the call: newly-arrived activist investor triggers a management overhaul and other actions deemed shareholder friendly -- which for a little while would disguise a business that is no longer relevant to teens.

Columnist Conversations

volatility is quite low here, and we could see some downsides here in the short term. ...



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