The Daily Dose: Coherent Market Views

 | Oct 21, 2013 | 11:00 AM EDT
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According to a recent scientific study, brain cells shrink 60% during sleep. The apparent reason for the shrinkage is that the body is flushing out toxins that could inhibit how the brain functions.

If there is a modicum of truth to this, then my brain cells shrank 0% on Saturday into Sunday. I wanted to be throwback reckless, partying hard and doing things I shouldn't be doing. This outburst tends to randomly happen once or twice a year and boy, is it comparable to a rebirth. For me it is flushing out all of the bad thoughts on the market and individual stocks that have been building. With a clear head and a best idea in hand, I offer these coherent thoughts on the week ahead:

Why the market may do squat to have a downward bias: S&P 500, Nasdaq, and Russell 2000 all finished in euphoric states of minds last week. I suppose nobody told the book-pumping bulls that corporate earnings are truly disappointing at the core (yeah, I know you don't read earnings calls, it's 100% about red and green chart lines). When I peer into the heart of third quarter 2013 earnings reports I see and feel the following:

  1. Decelerating year-over-year sales growth and another quarter of sequential margin compression;
  2. A misguided view by managers that cutting expenses further should not be done yet;
  3. First half 2014 expunctions by companies are being suppressed, and it's not due to the government shutdown or the upcoming debt ceiling brawl round two. It's a function of companies lacking the goods and services to drive margin expansion in weakening domestic and emerging markets;
  4. There is this persistent inability to exit underperforming European assets -- unlike the U.S., in Europe you can't issue a mass layoff at two manufacturing facilities at a drop of a hat.

With this next wave of earnings, it's my humble opinion that the market will begin to appreciate corporate fundamentals for what they are as 2013 draws to an epic conclusion. Wildcards in my thinking: weakening corporate fundamentals are enough to shut the Fed up for well into 2014 and naturally, at the approaching October 29-30 meeting.

Rubbish data: We are going to be subjected to a self-inflicted late release of a backwards-gazing September employment report that I think will miss consensus (which is around 180,000). The problem: the market has already priced in no Fed taper But once again it has failed to reflect in stock valuations what a below consensus domestic macro means for decelerating corporate income statement line items. Dig that tie in?

Six Storylines I am Watching -- outside of the Netflix (NFLX), Amazon (AMZN) and Microsoft (MSFT).

  1. Texas Instruments (TXN): inflated by Fed liquidity Nasdaq best be met with awesomeness (financials and outlook) from TI. If positivity does materialize, and the stock declines, it may be an indication of an overvalued tech sector.
  2. McDonald's (MCD): Chipotle (CMG) notched a sequential comp-restaurant acceleration. Yum (YUM) earnings stank, globally. McDonald's will present a letdown to shareholders.
  3. VF Corp. (VFC): Seasonal orders have been placed cautiously by retailers, for example Dick's Sporting Goods (DKS) and Macy's (M) (they got burnt by no major snowstorms a year ago). Curious if that dynamic has shifted a bit since VF Corp. (VFC) chatted with us a couple months earlier.
  4. Coach (COH): My team and I went on a crazy mall/outlet run over the weekend; send me an email at  for some things we found. I can tell you this much: Coach's quarter will be subpar, for the second consecutive time. The merchandise is being noticeably discounted at outlets, full price stores, and in department stores. I also see Coach losing counter space to peers plus a disturbing focus on putting lower quality merchandise on the floor (not even sure if some of the newer offerings are made out of leather...think of those fake leather seats in the early 2000s Mercedes Benz C-Class).
  5. Whirlpool (WHR): Watch sales trends in Brazil (likely pressured) and U.S. T7 shipment guidance in light of the housing market's slowdown (something confirmed by Stanley Black & Decker's (SWK) dreadful quarter last week).
  6. UPS (UPS): Dow Transports has been rocking, therefore UPS better be fundamentally rocking. Results from railroads leave me concerned UPS is not rocking.

Best Idea: Generac (GNRC)

 I talked to the company last month. No hurricane season I think led to excess inventories in the channel that will require production downturn to normalize (hurts margins/guidance). Weak generator sales were also mentioned by competitor Briggs & Stratton (BGG). Do what you wish with this wisdom.

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we like this chart here, it appears ready to move higher. BOUGHT BZUN OCT 35 CALL AT 3.40
Large-cap, high-quality McKesson (MCK) is too cheap now, at $147.51 or so. The stock hit $243.60 more than 2.5...



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