The Day Ahead: Join the Reality Club

 | Nov 16, 2012 | 8:30 AM EST
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The hottest word on Planet Financial is oversold. Every which way I turn, that term is being used with reckless abandon to explain stock prices. For those extra fancy technical folks, out comes an array of dots, lines, and shapes to support their oversold musings. On the other side of the spectrum, the fundamentally driven crowd crows about "cheap P/Es" and gobs of corporate cash just waiting to be deployed. Oh, and expectations are that the fiscal cliff situation will be resolved to a satisfactory degree by the second week in December.

While I totally respect the work of fellow market peeps, I don't think all of this really matters. A low P/E multiple? Well, this market doesn't seem to care about that perception -- stock prices continue to adjust lower for a future that is predicted on the present. As for sexy lines overlaid on a Bloomberg chart, why waste the precious minutes to draw them? The market is sharing a tale of justifiable gloom, which requires new lines to be drawn by the close of trading.

The very definition of oversold is misleading, and inspires false hope on the part of investors who grow big eyes for assumed opportunities. Does oversold mean stocks will rise 5% inside of five days? Perhaps 2%? What's the event that gets one of those to transpire? No one really knows, as the term is trading-oriented and designed to take a stab at playing, not investing in, a short-term sentiment shift that participants hope will morphs into better real economy characteristics.

Here are the two main points I would like to make about oversold:

1: Macroeconomic data, assuming months of negative connotations, will bottom. By bottom, I want to see month-on-month improvement in key components and that they are working together to paint a brighter economic future in the next three months.

Is this happening? I would argue that line items are in fact bottoming, and that the Street has increasingly become appropriately bearish. But, and this is big, components of macro reports are being unsupportive of one another. For example, the Empire State report showed new orders rose above zero for the first time since June but employment dropped through a trap door. A similar outcome was evidenced in the Philly Fed, and now the November employment report looks quite shaky. I read the new order to employment dynamic as: orders for businesses are at competitive prices, the order rate is sporadic, visibility into added orders is scant, so why commit to a new hire? Much of this will unwind when we get some clarity on the fiscal cliff, but at the moment, the perception is that things will worsen to an unknown level and that fear must be captured more in stock valuations.

2: A supposedly cheap stock, rendered so as it trades below the market's multiple and at a discount to historical, is thrown a vote of confidence by the market. There are zillions of stocks out there that reflect at least six months of decelerating sales and earnings growth, as well as surprisingly negative guidance. Some of these issues are internally inflicted, though an equal if not larger factor is the macro wreaking havoc on challenged business models. In the oversold zone, it would not be too much to ask for an investor to swoop in and determine that the current valuation finally prices in an absurd amount of macro dread that couldn't possibly come to fruition. I haven't seen any tangible evidence of this game of cat and mouse commencing.

Does this piece's tone leave me wondering if I have gone too bearish? Sure it does, and I am admittedly operating on borrowed time as I expect that when the first pace of fundamentally positive data is received, the market will snap back hard due to the strong underlying compete earnings power. In the meanwhile, I will continue to live dangerously, but with a clear conscience.

Stocks With Friends

On Wal-Mart (WMT) and Target (TGT), be patient. I am hearing talk of trading down, consolidated shopping trips, aggressive holiday pricing and slowing same-store sales growth.

As for Dell (DELL), I don't want exposure to a company removed from growth markets in an ultra-competitive and daily changing industry inside a Nasdaq that led us into this malaise. Want to be involved on Dell? Think about companies it could acquire to spur growth.

Nike's (NKE) dividend is to be expected as despite disappointing one-year operating performance, the outlook for cash remains robust. I am not hot on this stock; I prefer Dick's Sporting Goods (DKS).

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