The Day Ahead: Life in a Torture Chamber

 | Dec 21, 2012 | 8:38 AM EST
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I recently saw an old episode of "Law & Order" in which a captive was held in a basement torture chamber. I could relate. While certainly not being tortured in the physical sense by whips and chains, I do feel badly bruised mentally by the daily twists and turns in research gathering. I have a high level of anxiety that something with major implications for the portfolio could happen at any moment. Forget attempting to read through a 10-k to uncover possible Bill Ackman truths on a company -- in the back of my  mind, there is a dark cloud that questions all positive findings on future performance.

On top of this, I feel helpless. What if I go to refuel on caffeine and miss a headline, will clients put me on public social media blast for not sending an update immediately that reads in the subject line: "BUY, BUY, BUY!"? That's totally unbridled lunacy, and I refuse to participate, and prefer to maintain a central focus on the fundamentals. But, wait a second, what are the fundamentals? It has become a term tossed around as freely as beer at a frat party.

No, fundamentals are not U.S. data points inside an economic release. If they were, it would be really difficult to argue that the U.S. economy entered the fiscal-cliff quarter with resounding momentum. Mediocrity has been universally accepted; in the grand scheme of things, the December Philly Fed stunk. It doesn't matter if the month-on-month numbers were optically more pleasing (compared to the Empire State). GDP revised higher? Yeah, that was mainly due to government spending and that crutch is about to be yanked away for future quarters. Fundamentals, in my happy world of realism, are corporate sales and earnings.

Look at the overview of items scored this week on the fundamental front:

  • Nike (NKE): The company missed estimates on its overall future orders for Europe, running counter to widely held views that the land mass has stabilized and would be a pal to corporate income statements in the first half of 2013. As for the U.S., numbers were solid, though Nike's gross margin continues to show there is resistance to the price increases assumed on lower-end product lines found at mid-tier retailers (Finish Line (FINL) and Foot Locker (FL) only sell the pricey swag). Plus the China recovery was not in the Nike results. Disclosure: Nike is a top pick of mine for 2013, but I would wait for a better entry point as the quarter lacked the oomph many were hoping for beforehand.
  • "Sad U.S. Consumer" was a headline stamped on the Darden (DRI) earnings release. There was no positive same-store sales from any division, even as marketing adjustments were made to emphasize value is a red flag.
  • Baltic Dry Index, que pasa?

Watch this period of torture from outside the soundproof room. Once that fiscal cliff deal is reached, it will be appropriate to strike as the simple removal of "fiscal cliff headline risk" will bring temporary relief to Mr. Market.

Weekend Deep Thoughts

  • Don't expect a 2013 capital expenditures (capex) boom; there remains excess capacity inside of companies (hence, new mid-2012 restructuring announcements) and that means a mindfulness on capital preservation by executives.
  • Brace for the time running out to enact a place-marker fiscal-cliff deal by adding put options under core holdings in the portfolio. Secure protection now on the cheap (while the market continues to feel optimistic).

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