Plain and simple: Expect to have no life this week -- and, if this describes your typical week, be prepared to really man the trading station. Maybe I am just sharing what my plans are for the week ahead. Gone will be the extra attention paid to a single macro piece of data. Gone will be my attempts at deciphering why investors dumped JPMorgan Chase (JPM) and Wells Fargo (WFC) following their earnings results last Friday -- which had me wondering if this was solely due to strong whisper expectations, or whether Mr. Market had done its "sniff test" and decided to sell the news rather than revel in bullishness.
The entire setup to this particular earnings season already feels peculiar to me. New information from companies is getting lumped into a month-long stretch of negative macro surprises, along with this view that the first quarter was thanks to the magic of Mother Nature rather than to true animal spirits (imagine Robert Shiller's face here). To steal a line from a 1980s rap tune, "come correct" on Monday with eyes opened and ear to the ground, as I believe this is the week that could set the tone for trading for the rest of April.
How to "Come Correct"
There are a zillion and one things on which I'll be locked and loaded, running the gambit from basic to the most miniscule bits of information -- ones that are not exactly minuscule, in fact, to the wily pro. I would say that my mantra this week is to uncover proof that Alcoa (AA) and positive pre-earnings announcements are likely to be rewarded in the form of higher equities valuations, as opposed to the macro sweeping solid to above plan performance under the rug. There was a detachment last week from the macro picture, if only temporarily.
First, let's begin with the basics:
• Shanghai Composite is at a three-week high. Somewhere there is a disconnect between the reality of slowing growth in China and the opinion of the market -- though the market may be correct if the move in China's yuan is any indication. That may actually be a positive sign that China's downshift from overheated to hot growth has been priced in to stocks, and if anything it does not discount a soft landing accompanied with additional easing.
• The Nasdaq, with a loss of 2.2%, underperformed the S&P 500's 2% slide. Was this consolidation against broader-market weakness, or was it a justified move in the resilient tech sector? We may find out quickly this week with IBM (IBM) and Intel (INTC) announcing.
Zanier Things I Will Be Watching
• Hey, it's all good that PPG (PPG) and Sherwin Williams (SHW) injected a shot of optimism into the earnings season before their actual reports hit the wires. Now each of these companies -- and other pre-announcers -- must support their early disclosures with soothing quarter-to-date commentary. They must show investors a quality overall first-quarter report with more pricing power and volume gains and less share repurchases, which only inflate earnings-per-share figures. I don't want any dog-and-pony acts.
• April finally arrives in the data releases, specifically the Philly Fed and in the housing market index from the National Association of Home Builders. I was not a fan of either of the releases for March, which served as a dent to the market's exuberance -- the S&P 500 traded sideways to lower following the March readings.
First, as it pertains to the Philly Fed, did new orders continue to moderate? If so, look for the bears to be back on the thesis that China's cold, and Europe's flu, are arriving on our shores. On the NAHB release, were March's numbers -- which held "steady" -- revised downward to match February's trim? If so, the bears will say the housing market's spring fling was nothing more than weather releasing pent-up demand and subsequently improving prices. In other words, sustainability would be called into question.
• Real wages have fallen for three straight months, but I don't anticipate that to materialize in the retail sales data, given favorable weather and pre-Easter buying. I continue to believe April is when the realities of gas prices at more than $4 a gallon, and wage levels, hit retail's sales resiliency. So, to get the most from this March report, you should be watching where sales are concentrated: in discretionary or in general merchandise.
Earnings Season Notepad
The cream of the crop will be making appearances on the earnings stage this week. Yes, it's important to run through the mega reports from American Express (AXP), IBM (IBM) and Goldman Sachs (GS). But let the large-cap money managers feast on those carcasses, for I would like for you to join me as I focus on the second-tier reports. What I often do is compile a group of names that tend to fly under the radar, link together the sector combatants and develop a couple of areas of focus. In this way I either lay claim to opinions held by the consensus, or I become an investing immortal -- zigzing while others zag.
Overall earnings focus areas:
• Volume is more important than pricing -- the manufacturing reports say so.
• Should there be any further weakening in EU, will this affect the demand in peripheral countries?
• Low-multiple stocks with attractive dividend yields: Will they be punched in the face on so-so earnings reports, or will they get rewarded?
• Corporate guidance for 2012 was established as low for many companies in the fourth quarter, so we'd better see upside, or else. If so, are fiscal-year ranges revised only to indicate a one-quarter beat, or is there also optimism on the second half of the year?
• Share repurchases: Were they done near the highs of the market in the first quarter?
CSX (CSX) and Union Pacific (UNP): These are both low-multiple stocks that have 2%-plus dividend yields. Both stocks are well off their 52-week highs, which could either be a result of macroeconomic factors or a sign they're overdone on the downside. I am assigning increased weight to volume trends at the railroads than pricing, and am wondering if Union Pacific management still sees the economy's growth as being "slow but steady" in 2012.
• Cheesecake Factory (CAKE) and Yum! Brands (YUM): Yum! Brands surprised the market with its fourth-quarter China sales, and at the stock's current valuation, investors are projecting the momentum to continue unabated. As for Cheesecake Factory, this strikes me as a name on which to take a calculated risk pre-earnings. First, chain-store sales have been very strong, and 90% of the company's restaurant base is located near a mall or retail center. Inflation has subdued, and same-restaurant sales accelerated sequentially in the fourth quarter on solid guest traffic.
• EZCorp (EZPW): This is a pawn business against a backdrop of surging gasoline prices zapping low-income spending, as well as a still-elevated underemployment rate. These are the reasons why I am on this report like white on rice -- that, and the stock was a pick of mine in late February.
More on earnings season: