The Daily Dose: Notes for Trading

 | Oct 24, 2013 | 9:00 AM EDT  | Comments
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 I am really obsessed with what I do -- financial services. No, really. At my current young age, I truly think I have a mental disorder. It's worrying me to be honest because I can't stop taking notes!

Wherever I go, there is a notepad nearby, even in Starbucks on a Sunday afternoon. Here are bunch of notes I took Wednesday, all still highly relevant. First, I went to a hedge fund panel event where a prominent financial services lady shared super cool views on 2014. One that stayed fresh in my brain:

"We expect capex to increase nicely in 2014."

Unfortunately I didn't have the opportunity to ask my question, but was prepared with this:

 "What gives you confidence that corporate execs will finally put their own self interests aside in order to unleash a balance sheet for the good of a company's future? I mean their carefully-analyzed investments may be written down in a slow growth U.S. environment, earnings hurt and then woopsie, there goes the yearend bonus that was tied to earnings per share appreciation. Second, is there a baseline expectation that this magical repatriation of foreign-held cash will appear on U.S. shores?"

Sanity check: do this today for each company you own. Go through all three quarterly earnings releases and tally up the amount spent on share buybacks and capital expenditures year-to-date (on the capex, compare its growth rate to this point last year, the year before, etc.).

See if the company has warned on revenue and earnings more times than it has guided up, check the proxy for the executive compensation structure and pull up the year to date stock price performance. This process will give you a taste of where I am coming from, and valuable insight into the DNA of a company you hold in the hopes of it rising in value.

The lady on the panel is smart, but I definitely am not in agreement. Part of that skepticism is derived from what I see each day in the markets and in financial statements. I also listen to company executives in candid phone chats. These men and women atop the corporate structure just do not want to spend shareholder money for items that will drive future earnings. Especially as those earnings will be coming when he/she is retired and on a beach. Be careful upon getting pitched on capital expenditure plays for 2014 from your broker and advisor.

The disaster from Caterpillar (CAT) fits almost squarely with the opinion that executive compensation remains misaligned with this old new normal economy in the U.S. I'm sorry folks, but the company's earnings bomb is not old news; it's still hot, ugly news that will stick with me right on through into 2014.

Look at how I read the quarter from a company that has a lavishly-paid CEO that has been a hopium dealer since last year. And one who signed off on $2 billion in share buybacks this year amidst earnings warnings and stock routs:

  • Business is underperforming the low ends of expectations, not mid-ranges. That is a geek point, but it is important to remember for similar heavy equipment companies similar to CAT;
  • No forecasting from this company has been reliable;
  • Customers are not reinvesting despite production pickups;
  • Full-time and part-time workers are being axed;
  • Company is not realizing strong prices for its products even in areas that are logging solid volume driven revenue growth. Abnormal recoveries.

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