The Day Ahead: Talk Trash to Mr. Market

 | Nov 09, 2012 | 8:30 AM EST
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Weekend Thought: "Price is truth." -- Jeff Macke, co-host of Yahoo Finance's "Breakout."

Strange world I live in nowadays. As a #newbie financial services stud, the maintenance of the vaunted model was seen as do-or-die stuff by those boasting seniority. Visit a store, observe a sold-out table of clothes, chat with a couple suppliers and hike quarterly profit margin assumptions. Get rubbed the wrong way by an executive at a midday cocktail party, maybe the quarter is shaping up stinky-poo, hurry back to the office and adjust the discount rate on the model. Lame-A-Zoid, I know, but hey, it was a gig.

If your very soul has been handed to the market, the pursuit of investment themes is the norm, not the pursuit of model add-ons (if it's the exception, e-mail me, I want to help you). Every day another opportunity to predict the future exists in the hopes that the hypothesized future is valued today. For instance, on Thursday, I offered a bunch of far-reaching notes that the potential to unwrap in steps in December (Fed meeting) and then in January (kicking in of fiscal dread). By the time those events come to fruition, if they do at all, the market will have moved onto other themes and reacted accordingly.  This is why being actionable with your investment portfolio is critical, sitting on two hands while watching a down-300-point Dow session is no longer practical, or acceptable, given access to abundant amounts of information.

This episode of real life enlightenment brings me to the first of November's Investing 911 lessons. It's appropriate to go through this as, despite the election still being top of mind, there is a temporary pause in developments of the type that would trigger an update of my market view (short-term bearish).  What this 911 lesson is designed for is to support a bear case on stocks, one of the planks to that being a perpetual state of dreadful corporate news flow.  Someetimes, with a quick downdraft, you are told by book-hypers that the "underlying fundamentals remain solid."  Yeah, sure.

The post-election action in the market screams anything but the idea that not enough risk was priced in, complacency reigned supreme, and we need to just look at the VIX pre-election.

McDonald's (MCD) will be the whipping boy for the lesson as its October sales were perfect in that they demonstrated what could be in store for the fourth quarter, and what stands to weigh on multiples (aside from the fiscal component) in the near term. Take special notice of the language and dump the notion of CEOs always underpromising to overdeliver.

School is in Session

On the overall business:

"Strategies and the adjustments we are making in response to current business headwinds."

  • Growth is so painfully slow globally that a value food player has to promote more and adjust the menu to make it friendlier to the cash-strapped.  You should read this as no margin bottom yet in many multinationals, risk to forward consensus estimates.

On the U.S. business:

"Modest consumer demand and heightened competitive activity."

  • Low income consumers squeezed (hearing it from dollar stores) in a 2% GDP growth environment and hence, opt to eat at home...with items bought on paycheck day at Wal-Mart (WMT).  Restaurants of any kind, a discretionary trip in my view, are essentially chasing a shrinking pie. #MarginPressure

On the European business:

Notched sales declines in "many markets."

  • Yeah, when Draghi talks about contagion (which confirms what companies told you in the third quarter), the sad tale of McDonald's is a prime real-world example.
  • The company is pricing its menu more competitively to maintain the business it has, while praying it scoops up added warm bodies.  #MarginRisk

On the Asia business:

Focus on "locally relevant" menu choices.

  • Only lessons here are Yum Brands (YUM) getting it in China through tailored offerings and multinationals have to realize, finally, they can't just fill the Chinese market with U.S. products and expect to win. The customer has to be fully understood.

In the end, McDonald's stock reacted bad to bad news. #NegativeTell

Notes on What I am Seeing

  • Stocks of supposedly leading companies (double-digit earnings growth a good starting point) beginning to toss in the towel (Lululemon (LULU), Urban Outfitters (URBN), Michael Kors (KORS).
  • Modest favoritism being shown to consumer staples (Kimberly-Clark (KMB), PepsiCo (PEP)), emphasis on modest. Underscores touch-and-go backdrop.
  • The EU financial markets have stabilized (Spain/Italy bonds), but that is nowhere to be found in corporate income statements.  #MajorProblem

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