The Day Ahead: My Little Black Book of Secrets

 | Oct 24, 2012 | 8:00 AM EDT
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fter swooping in for a hardcore backhand, mom offered this bit of advice some 20 years ago: "If you don't have anything nice to say, don't say it all." With all due respect, Mom, I have grown up, and am being walloped by stress and fear and trying to unwind flat out loony investing philosophes on the part of kind-hearted clients.

No longer am I able to contain the emotions, and have to shout this loud and clear from the rooftops: "What in the world are the hotshot investors looking at and in turn, rifling off on client calls placed from a meeting room filled with 32 others on the 'team?' "

From this pure earnings season #RageOut moment, I want to highlight the lessons that should have been learned in prior sessions, as seen from these two eyes.

1. How to Spot Paper Champion Stock Rallies

2. There are Reasons to Be Stock Celibate

Having briefly stabilized from that outburst, it was amazing that I secured 40 or so Facebook "likes" on a new black and white photo I posted of myself. Sure did appreciate the kind words (when you live in a hole, it's good to know people are still there), but it also reinforced that individuals respond to intrigue, interesting points in time that could bring them closer to the action from the confines of a bed or a Starbucks.

I want to share my "Little Black Book of Secrets," notes created to always be on demand should I be asked to chat on the markets.

The reason I want to pull back the curtain so to speak is that two large volume sell-offs in three days is MORE than just a nonchalant comment such as "revenue and earnings are missing consensus, therefore stocks are down." This is serious stuff, and you better be looking at the correct things because if not, there is no way to tell when to be a contrarian and buy the weakness or whether to unload more into the selloffs and stay glued to the sidelines.

My Little Black Book of Secrets

No order of importance, complete randomness ripped from the book.

1.    As a person who has remained negative on the markets for weeks now, watching higher volume sell-offs is not welcome from a backslapping perspective (let's just win and make people money,) but an indication that finally, stock valuations are being reset to reflect true medium-term fundamentals; or, the perception of the true medium-term fundamentals. We are witnessing deserved valuation adjustments that will unlock opportunities hopefully moving beyond the elections.

2.    Why the market does not like earnings reports, for realsies:

  • Lower quality of total performance in light of sharpened sell-side estimates;
  • Those companies beating on earnings as a result of cost cuts, there are questions on the sustainability of the gains with spotty revenue trends;
  • Limited pricing power meets downside risk to volumes; and (3) companies are finding it a better use of shareholder capital to buy back stock -- Coach (COH) and United Parcel Service (UPS) for example -- instead of bumping capex and inventory, quite telling on medium-term fundamentals (as if new rounds of layoffs were not a signal.)

3.    Although the market is spying potential positives in 2013 (tame inflation in certain building materials, for one) the focus is on the present. Earnings season is unfolding in manner that will keep opportunities beaten down like a bad dog.

4.    Sentiment fueled pops in earnings season violators -- example Caterpillar (CAT) -- trade off by more than they gained on earnings day in following sessions. Why? The market never really bought into the initial "life is improving" sentiment and is prepared to sell at the first sign of ongoing sector weakness.

5.    According to an iBank research report I devoured, the negative to positive ratio in guidance is at the worst since the first quarter of 2007. Whether true or not, a scared market reads this as risky assets have rallied too hard given risky outlooks (as was the case in 2007, though nobody cared enough to pay attention until they had to.)

6.    President Obama, so read the consensus, won the final debate. Interpret this how you wish, my gig is to get into the head of the market not play political pundit.

7.    Once again, a reiterated profit outlook is not taken seriously by being priced into comparable companies (UPS is the example applied here.)

The vow of stock celibacy on my part ... continues.

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