The Day Ahead: Reams of Troubles

 | Dec 03, 2012 | 8:28 AM EST  | Comments
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jpm

"The market, like the Lord, helps those who help themselves." -- Warren Buffett

I have learned this much from putting life on hold for 10 years to pray at the stock-market altar: Regardless of whether times are good, there will always be any number of problems we must digest. When stocks are rocking, of course, the reasons to embrace risk-taking are amplified. The likely well-chronicled negatives are either too small to crush the positives, or they are far enough in the distance, with no need to deal with them until an impending day of reckoning.

For the latter part of November, investors -- if they hadn't cashed in their chips entirely -- were forced to reach into a dark hole while wearing a blindfold. As they did this, they were dealing with at least five reasons to be bullish and two to be bearish. In other words, very little respect was being shown to real issues that could undermine equities -- we didn't see much more than a head-nod and a click of the buy button.

I went bearish Thursday, if you'll recall, and I've had a few extra moments to flesh out that call. Read the below list carefully, and let things sink in -- as in, project into the future. Finally, allow yourself to be cognizant that the next couple of weeks may be completely, utterly the opposite of what would be suggested by the graybeard fee-collectors pounding the table on Johnson & Johnson (JNJ). (Having an exciting idea would require actually doing the work.)

Mr. Reality's Stock-Market Problem List

● Consensus opinion on the fiscal cliff is that it will get resolved before January, but unfortunately that opinion was last warranted about two weeks ago, amid friendlier political rhetoric. In my estimation, there have been four consecutive days of an increasingly harsh tone on the fiscal cliff negotiations, with Sunday witnessing a climax as we heard musings from Treasury Secretary Timothy Geithner and House Speaker John Boehner. It's said that the markets are trading on headlines, so if that's the case, stocks are due for another valuation reset. Shares should now appropriately depict increased first-quarter earnings risk from a delay in a fiscal-cliff compromise, or something far removed from a "grand bargain" -- because austerity is not grand.

● I am in the "China economic improvement" camp, though I am cautious that the market may be putting the country on too high a pedestal as a means to counteract U.S. issues. Take note of the China manufacturing data, which actually fell shy of consensus -- though bulls grabbed on the headline that it again accelerated month to month. Also of note is that a retailer such as Guess (GES) recently mentioned disappointment in the economic recovery.  This stuff is the type that initially gets swept under the rug amid rampant bullishness around singular issues -- but when the tide turns, as it so often does, these factoids are what will be used as support for why it is happening.

● Cut right to the core of the gross domestic product report, which is soft as a marshmallow, and it seems to justify the S&P 500 trading down 4.2% in the first 11 sessions in November. That's in addition to anecdotal evidence from retailers that sales patterns have been sluggish outside of the Hurricane Sandy destruction zone, and that the promotional environment is ratcheting up. Given all this, I have concern that underlying economic conditions are slowing right in front of our noses before fiscal cliff "show time."

● The Institute for Supply Management report for Chicago, decoded: Employment is running in line with production, as there is no stickiness in the rate of new orders to boost payrolls. A dreadful pre-holiday read on personal income -- and on savings, for that matter -- adds credence to the potential for surprisingly negative macroeconomic data in the coming months.

● The defensive-utility space was the best-performing of the Dow subsectors last week. That struck me as odd, considering these are dividend-payers whose shareholder base will be whacked by higher capital-gains taxes. Read: This is positioning for a yield grab "just in case" of a broader December pullback.

● Over the course of four weeks, the only Dow components to have received revisions on 2013 earnings estimate have been Home Depot (HD), Cisco (CSCO), and JPMorgan Chase (JPM). The rest have gone unchanged or lower. When I look at the degree of these downward revisions, I don't think they have been sizable enough. So investors are being asked to entertain stocks with a combination of an inflated price-to-earnings multiple and earnings estimates -- an uncool proposition indeed.

● Nothing merry is likely to be gleaned from the November jobs report, and that includes the risk that Sandy has halted the positive trend in previous-month revisions. In the end, the report is looking like another headline risk that the market does not care to admit beforehand, but will be forced to acknowledge quickly.

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