The Day Ahead: This Is Serious

 | Oct 25, 2012 | 8:30 AM EDT  | Comments
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Stock quotes in this article:

aapl

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yhoo

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eat

Inspirational Daily Investing Motto: "Do it right, do it intense, or don't do it at all."

The Fed

This is serious stuff -- no doubt about it. The Fed meeting was supposed to be a grand throwaway event stuffed between the Yahoo! (YHOO) and Apple (AAPL) earnings calls. After the Fed event, the news went where "old" news is sent, to the punishment cell at the bottom of a homepage, resigned to be a seemingly boring occurrence in a reeling market. Lost in the sauce, however, may be 20 or so branches that lead to two conclusions: (1) the Fed's efforts have attained diminishing returns, and (2) the global economy continues to be structurally messed up for action upon action has led to a perpetual state of subpar.

Here is the craziness I brought to the office whiteboard on the Fed:

Root: Continue to expand at a moderate pace (economy).

  • Branches: Good to have growth in recent months but it may be so miniscule beneath the surface, and so at risk of a falling off the Apple iPhone 5 map, that stocks today are adjusting for that probability.

Root: Growth in employment has been slow.

  • Branches: Even as massive liquidity has been pumped into the system, in turn aiding the housing market and year to date stock prices, it has not caused a virtuous circle to adjacent sectors. If companies are curtailing capex and seeking new areas to trim operating fat, shouldn't this downshift slow employment growth to slowing employment growth? Big difference.

Root: Household spending has advanced a bit more recently.

  • Branches: Consumers needed the lag impact of stronger first half employment growth, plus higher stock prices, plus rising home values to feel confident to spend a "bit more recently." Pretty sad right there. In this market backdrop that reads as at risk of disappearing should murky fiscal clarity bring economic uprooting post-election.

Root: Inflation recently picked up somewhat, reflecting higher energy prices.

  • Branches: Thus far in earnings season, I have not heard that much chatter on inflationary pressures except at Brinker's International (EAT) and Buffalo Wild Wings (BWLD). Core inflation is weak, and I see that in the form of unfavorable sales mix and promotional merchandise. It would be a welcome sign to score a touch of inflation to suggest re-emerging pricing power and then a trigger pull on high quality stocks that are likely oversold.

Moving along, the bullets below support my continued stock celibacy. There are uncorked grenades underneath the deep, treacherous waters of this market. The risk of destroying winning calls by forcing the issue for the sake of doing so is too high. I normally have no problem picking a stock: There is a gut component and a factual component. The gut is confused and cautious, and any good factors being shown by companies are getting ignored by the spreading of fear.

The Devour List

  • Optimistic me says that dollar store stocks trading below key moving averages, which has been anything but the case in the last two years, is a tell of an acceleration in discretionary spending at places not named Ethan Allen (ETH), Williams-Sonoma (WSM), Hermes, and the North Face section at an A-rated Macy's (M). The realist in me says these cheap merchandise destinations are turning into ever cheaper stocks as low income patrons ignore higher margin categories; hence, this is weighing on operating profits. Other factors weighing on profits include store renovations, system upgrades, and new openings.
  • Gloss over these two words describing the European Union's (EU) sequential demand conditions at your own peril: "deepening" and "accelerating"
  • When a solid earnings report from a company such as Boeing (BA) can't hold gains into the close, that's a red flag.
  • Add Brinker's to the list of companies feeling consumer blowback from attempts to raise prices.
  • Banks are impotent off strong housing numbers (and generally weak post earnings reports). This is also a red flag.

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