Before diving into the gist of this piece, let's expand upon something I flagged earlier in the week: the market's continued bird-flipping to the final round of first-quarter earnings reports. I sensed that, despite the cremation of Men's Wearhouse (MW), Lululemon (LULU) and Tempur-Pedic (TPX) -- in response to earnings-related commentary -- those not invested in these particular names overlooked it. Hey, why give a hoot about warnings from largely domestic stories when the broader market is either going up in flames or ripping due to large doses of "hopium?" (See the bottom of this piece for a definition.)
If you did not jot down the lessons of these three companies in preparation for the second quarter, it's all good. However, I strongly advise you to run through the earnings release and forward-looking commentary from Pall (PLL), which had a quarter that ended April 30 -- and, remember, the market peaked in early April.
What does Pall represent to me and why should we care?
First, 69% of Pall's sales are done outside of the U.S. Drilling deeper, 35% of the company's properties owned or leased are situated in Europe -- almost three times those in Asia.
Second, it's not enough to pay lip service to Pall by calling it a "global industrial" and scurrying along. There has to be a thorough learning exercise here, because we are applying the sad tale to similar companies.
This matters because Pall operates in an auto market that has been hot, but could be cooling right under our noses (it sells filtration devices). Further, the company operates in mining and primary metals, and soft results hints that Asia output is falling more quickly than many expect. That, in turn, could trigger skepticism on the positive nature of the China rate cut. In fact, I found it interesting that numerous companies hitched to the China growth miracle -- Coach (COH), for example -- clocked a day in the red Thursday. Hmm.
Finally, you should care about Pall because this stock declined even though it's priced in a good bit of negativity since the beginning of March -- the stock began to retrench before the broader market did, and has shed 9% or so from March. Pall continues to trade at a premium to its peer group but, once again, the market has shown a preference for punishing high-multiple stocks in a contracting-earnings-outlook environment.
So place this report in the back of your mind, as it's likely to be helpful if the craziness hits the fan on the Greek election day and thereafter. On the other hand, if we do receive some type of closure on the eurozone crisis in the next couple of weeks, the cloud of negativity in industrials should dissipate and the second quarter could become the land of positive reactions to still-decelerating European sales trends. It's just a hunch.
The Spin Is In!
Now, onward to the point of this column: how to recognize when the market is rocking a spin job. The broad reversal Thursday was credited to the Fed being a tough guy on bank capital rules. Eh, I say that was the final straw that broke the rally's back. You see -- and this is what I find disturbing -- positive news has a short shelf life these days (for example, the China rate cut, the Fed actually saying it doesn't have to ease again). As market participants digest happy news and send stocks up, a spin job is done as the session progresses. By the close, good news has become bad news. When I see this, my conclusion is that the path to a sustainable rally will be rocky.
Positive: Ben Bernanke basically reiterates comments on quantitative easing from prior appearances this year.
Spin: The market was unhappy on the prospect of the Fed using language to ease (low interest rates to 2015, anyone?) and the lack of forcefulness regarding monetary policy tools to address the stock rout.
* * *
Positive: China cuts interest rates.
Spin: Interest rates are not the problem; the demand for loans is weak due to an economy slowing more quickly than officials would like.
* * *
Positive: Household net worth for the first quarter has its biggest gain since the last three months of 2004.
Spin: The argument here was that this was primarily driven by higher stock prices. For myself, I was concerned by a mere $96 billion increase in savings, as this points to wage stress in Middle America and risk to second-half consumer spending.
* * *
Finally, "Hopium" Defined
Hopium is a legal drug found only on Wall Street and in other investing circles. Taking it triggers the belief that stocks will rise in value in the face of negative economic developments.