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Now that I am longer anchored to a desk praying to the Excel spreadsheet gods, the professional aspects of my life seem to change on a daily basis. I am being exposed to an array of different, interesting people, from traders on the floor to insightful portfolio managers to the average person the street who wants to chat about why he or she continues to be afraid about reentering the market.
As I have pondered these new sets of external experiences amid earnings-season madness, an image of fortune cookies surfaced, for some odd reason. I wish I had a box of fortune cookies to hand out after talking to people -- ones that contain catchy, investment rules-of-thumb from legends in finance or of literature. Here are three wrappers that would work for the category of "reality."
● "October: This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February." --Mark Twain
● "The time of maximum pessimism is the best time to buy and the time of maximum optimism is the best time to sell." --John Templeton
● "Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1." --Warren Buffett
(Note that the Buffett quote is unrelated to buying a stock and holding it for 40 years, and then gifting it to a grandchild.)
Suddenly, what began as a Zen-like experience for yours truly morphed into a hot-under-the-collar episode that produced this very column. I sensed this had been building for a few weeks, but it boiled over Tuesday in view of the following ongoing phenomena.
First, there's the continued blind faith in the market into the end of the year, from every which angle. Newsflash: investors -- those who did not push the withdraw button -- are hanging by pins and needles with this volatile, news-driven market. They have no confidence in their macro-forecasting ability, and they don't know where to look nor whom to trust.
It took this group of fellow normal Joes three-plus years to recoup losses from the March 2009 lows, their savings are being tapped to spend around holiday and seasonal periods and there's a high likelihood they'll have to work longer than previously thought. You may be asking: Where do I see this worrisome amount of blind faith? Good question, and here are the answers.
● Two months of "employment cliff," after riding up the early-spring hill, is being rationalized as a mere blip on the radar screen. I'm constantly reading about new twists on the payrolls trend -- of late it has been historical-comparison overload. End reaction: What we saw toward the end of the first quarter is temporary. Forget cash, and back up the truck on weakness, because the market is headed higher, baby.
● Analysts are clinging to underperforming buy ratings on stocks as tight as a four-year old clings to a stuffed talking monkey from Build-A-Bear (BBW). A buy rating on a company on which one has reduced forward-earnings estimates is not confidence inducing. Frankly, it's a call that should be ignored, and it amounts to a desperation maneuver. Why downgrade now after full-fledged obliteration and miss a 10% oversold bounce? I hear you, dude.
● I have begun to count the number of "buts" in macro strategist's reports. This exercise should be telling in and of itself.
The question I ask myself, therefore, is whether blind faith has validity. On that score, I keep returning to the messages the market often whispers to me at assorted times throughout the day. Using the SPDR S&P 500 ETF (SPY) to hear the heartbeat of the market, the facts are the facts: Stocks are in an adjustment period, trying to appropriately price in unforeseen near-term developments (i.e., Europe) and future developments (i.e., the U.S. election).
For the SPY, Tuesday's intraday low violated the April 10 session low. The ETF did manage to close above that latter low, but the intraday breach suggests risks are not yet fully priced in. Eyeballs should shift to the March 6 session low.
Last year, from May 31 to August 15, the ETF shed 16%. In 2010, meanwhile, it lost 15%. from April 1 to August 2.
But wait, there's more. Blind faith is not only something I see in the broader market, but on an individual-company level as well. There is this "companies always guide conservatively" Street mindset that has become embedded post-Great Recession. Generally, this mindset has held true in the past three years. Perhaps, though, there should be more attention paid to details around guidance ranges when a faraway land -- Europe, that is -- dives off an economic cliff from the fourth quarter of 2011.
In no way do I believe that Fossil's (FOSL) mega disappointment was a surprise, and I have stayed true to my view on Europe and retail on names, including Tiffany (TIF), Polo Ralph Lauren (RL) and even Starbucks (SBUX). I am not trying to be some kind of freakish forecaster. Quite simply, I am paying more respect to actual company performance and commentary regarding impaired European end markets, instead of subscribing to every company standing to be a beat and raise story. Here are a couple of examples.
● On Fossil's fourth-quarter earnings call, management did everything it could to temper concern on Europe. The team basically stated its business exposures were concentrated in Northern Europe and that, therefore, there was no need to fret. That nonchalance should have been a red flag to investors -- it was to me. Common sense and study of macro data should have led one to fiscal problems in the South arriving in the North for Fossil. At the very least, the fourth and first quarter earnings from industrials should have been a wake-up call to downside risk in Fossil and others in the sector.
● Tiffany's constant currency same-store sales in Europe have trended downward -- straight down --since the third quarter of 2010.
Do you buy on sympathy weakness Fossil-type names, say a best-in-breed Polo Ralph Lauren? In my estimation I say: not here. There is a two-part problem on which we must receive clues before we make that call -- first, order trends for fall 2012 and, second, inventory levels in Europe (this was a problem for Fossil, if I read it correctly).
I am unsure if this column signals maximum pessimism on my end, and that I should be thinking a bit more optimistically on equities. What I do know is, I would prefer to adhere to Warren Buffett's fortune-cookie advice above.