The Day Ahead: Are You Acting Like an Elephant?

 | Nov 14, 2012 | 8:00 AM EST  | Comments
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"The animal which surpasses all others in wit and mind," -- Aristotle on elephants.

I put this question out into the universe: are you investing as an elephant? Are you utilizing every ounce of grey matter to make an informed decision?

The question is pretty darn valid as the calls to get long the market are increasing in frequency and  sporting a thunderous tone. I am wearing a Superman cape and plucking the intelligent from the train before railcars head off the tracks. Am I a doom predictor outlining black swan events and a 30% correction in the markets? Heck, no. I just prefer to err on the side of caution given that most key indicators, either market based, fundamentally based (corporate), or macro based (Econ 101 data) continue to chip away at valuations (and shortly, estimates once again).

Quick, how was that market close on Tuesday?  Exactly.

Should you be itching to scoop up stocks on the notion it's Screaming Buy Central out in the giant pool of liquidity, at the very least take my "Elephant Investor Test." These are a host of negative tells I continue to observe daily.  Come up with strong counterpoints to my punches and perhaps stocks are in fact worthy of investment now. Have trouble creating those counterclaims, well then, best find religion and wade into the rivers known as the sidelines.

Q: The 10-year note yield is at a two-month low and the yield curve implies slowing economic growth off an already subpar base. If we were turning the corner, shouldn't this flight to safety (though what is the real safety as we stare down the barrel of a credit downgrade) unwind a touch?

Q: The Dow Transports are up about 0.8% year to date, lagging the Dow Jones Industrial Average by 400 bps or so. Why isn't this spread narrowing if the land of milk and honey was approaching? Bare minimum, I would like to see modest narrowing to suggest there is the potential for stabilization in Europe in the next six months and the U.S. stands to avert the direr fiscal base jump outcomes.

Q: The homebuilder on trade has gone cool, whereas homebuilder derivatives such as Home Depot (HD) and Lumber Liquidators (LL) remain relatively intact. I think this dynamic shows derivative names in housing continuing to benefit from previous six-month gains in backlog (new homes) and contracts signed (existing homes), but the actual builders are becoming susceptible to slowing order growth amid economic uncertainty. Ideally, you want both sectors trading higher in tandem as was the case earlier in 2012.

Q: The gains in the post-election market are modest AND unable to be sustained to any degree. It wouldn't be asking too much for this scenario when piecing together a short-term bullish call. A decent pop in stocks in the early going that extends into the afternoon, gains pared a little into the close.

Q: Pricing pressure on merchandise spotted at the beginning of the fourth quarter basically representing no change from the third-quarter storyline.  Home Depot is enacting sharper price points on items priced below $50 to drive customer traffic, Saks (SKS) is willing to jump beyond its promotional comfort zone to move merchandise and the headline on Cisco (CSCO) following its earnings was "Cisco Beats Due to Price Cuts." I read all of these clues as a setup for another quarter of revenue and earnings shortfalls (remember this is priced in today and by fourth quarter earnings season estimates may have found terra firma.)

New Trend Found: Department Store Lovin'

The women's apparel business at traditional department stores is experiencing a resurgence. Polo Ralph Lauren (RL) offered a clue on this a couple weeks ago, but it has since been confirmed by comments from Nordstrom (JWN) and Saks. Suits seem to be a solid category, though the strength is broad-based across the store. This gives me pause on playing missy specialty apparel retailers Ann Taylor (ANN) and Chico's (CHS) from the long side of the ledger into earnings. As for the driver of the renaissance, the only hypothesis I have is that significant product newness (color, print, fit), plus reinvestment of cotton/supply chain cost savings into pricing, is spurring a wardrobe upgrade cycle.

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