The Daily Dose: Living in Taper Land

 | Dec 19, 2013 | 11:00 AM EST  | Comments
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Stock quotes in this article:

gis

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fdx

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ba

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mmm

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cvs

So much for attempting to be a rational strategist! In light of Wednesday's Bernanke Bomb that caused markets to rip, go ahead, buyyyyyyyyyyyyyyy everything. Enjoy paying 18.3x forward earnings for a 12% growing industrial company in a faux 3% GDP growth backdrop.

I wish you all the best in chasing hot social media plays trading on amaze growth projections for 2017. If the outgoing Fed chairman says it's okay to be a reckless investor then, well, golly gee it must be okay!

Since everything is great in a 46.5 million and expanding nation of food stampers, below is my overview for you -- the always right trader. The thoughts below will help you think correctly while overpaying for equities.

Overview

It's here! We are now living in the land of the taper. Bernanke apparently took one for the team, sending out a taper trial balloon to test the market's reaction prior to Janet Yellen's chairmanship. The market obviously took the news in stride, due to:

  • Language that any further tapering will be "measured;"
  • A 6.5% or less unemployment rate still means highly accommodative policy;
  • An acknowledgement that the economy is gaining underlying strength and could handle a pullback in extraordinary accommodation;
  • The Fed is aware of lame inflation, and will continue to pump prime until inflation is over 2%.

The 10-year didn't spike. Stocks did well. I caution you, however, to keep the following in mind.

  • The Fed has set expectations in the market that the next level of monthly employment growth, theoretically more than 250,000 a month, will lead to further reductions in asset buying. If we receive those type of prints, and corporate earnings continue to be mid-single digit growth ranges, the market may view it as reduced liquidity is impacting businesses via higher rates.
  • What if economic growth surprises to the downside, does the Fed then return to full-on QE? And if it does, what's the signal there?
  • A taper has occurred during a holiday season that has been underwhelming in terms of sales and profit margins for those companies participating.
  • Language from this point on, during intra-period Fed speeches to Fed meetings, should be expected to be incrementally more hawkish -- even from noted doves on the FOMC. The market will have to take that in stride, too.

Around the Horn

Following the most profound day in all of our lives, the last Bernanke press conference, there is something else picking at my brain. Look at the litany of mixed messages from corporate American in the last two weeks.

In this corner we have the financial champions of December:

  • CVS (CVS): massive new share repo announcement of $6 billion.
  • Boeing (BA): strong dividend increase of 50%.
  • 3M (MMM): a slightly less crazy dividend increase of 39% but announced a new $22 billion share repo plan.

In the other corner, we have the perennial losers that pump hope and dreams:

  • FedEx (FDX): earnings miss, but decided to lift its FY outlook (due to more share repurchases...)
  • General Mills (GIS): missed on earnings as its two highest margin segments, U.S. Retail and convenience stores, have their margins squeezed. However, it reaffirmed its outlook.

I an not too sure of the economic messages from these December tales, but I hope I  will have something for you soon.

How to Spot Exec Excuses on a Press Release in 5 Seconds

Let this be a free tutorial to retail investors. When a company's earnings hit the wires, and they badly miss consensus, zero in on the first paragraph where the CEO drops a few comments. If you can identify excuses, you could potentially spot fundamental flaws in the business and executive team. Check out this ridiculousness from General Mills on Wednesday.

Chairman and CEO Ken Powell said: "The second quarter was a difficult comparison to strong prior-year sales and earnings results for our businesses. In addition, the period included the highest quarterly input cost inflation we expect to see this fiscal year, and food and beverage industry sales in the U.S. and other developed markets slowed a bit during the quarter. Even so, our bottom-line results through the first half of the year are broadly consistent with our plans."

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