As I recently watched an episode of Survivorman -- in which a balding, non-muscular man films himself (ostensibly) alone in far-off lands ruled by wild animals and inclement weather -- I couldn't help thinking out loud, "What if this adventurous bug-eating guy fell into quicksand?" In similar fashion, with a multitude of high-profile companies set to report for the true start of second-quarter earnings season, the market is stepping into small pockets of quicksand as investors extrapolate hope from bad news.
This unreasonably light sentiment is something I outlined Monday and, as a result of it, stocks are not scoring that high-volume pullback that would have gotten me charged with contrarian excitement. I continue to express caution in selecting stocks: The thesis had better be darn strong, and, when you conduct traditional bottom-up analysis, the valuation should be more reflective of general market angst than it is of identifiable winning attributes. But it's quite difficult to isolate one's self from the macro noise, for a change, as one sign after another warrants self-doubt on calls.
In short, I believe sessions in the green represent a bout of investors falling into sneaky quicksand, and following are the current market qualities that have me believe this.
● Sectors with outsized economic sensitivity, in particular retailers, are continuing to act harshly to data. (See: response to June retail sales).
● For the latest Empire State Manufacturing Survey, the market has temporarily sidestepped the negatives -- declining new orders and a dip in negative territory for the first time since last November -- and have focused instead the headline number being above consensus, which is only a borderline positive. In other words, investors are reaching for anything offering even a slight ray of sunshine. The problem is that rallies built on this mindset only last momentarily, because a future piece of negative data will then be linked back to the negatives of an older report.
● A next wave of disappointment stands to come in the form of cash deployment. For the better part of a year, the discussion on corporate cash has centered on why companies are not allocating it aggressively to capital expenditures, share buybacks and acquisitions. But now, despite S&P 500 companies holding 11% of total assets in cash, on average, there could well be a further hesitance to deploy it into year-end. Think about it from this simple angle. Why are tech companies warning? Why are banks notching quarters with strength basically confined to mortgage loans? At play here is a dynamic of corporate-cash deployment, and it goes a long distance toward explaining this "muddling" economy (I hate the term, for the record) that the economist crowd keeps stressing.
Before we get to individual names, I wanted to bring up two things I have stated in the past. First, comments by CEOs are often extremely misleading. Second, I break down earnings season into companies that stand to provide enough clues on a sector, or on the global economy, that they could sway sentiment. It's not that Yahoo!'s (YHOO) earnings don't matter -- it's that, in the hierarchy of my stock-selecting and portfolio management, it's removed from top priority.
So here are the two reports due for release Wednesday, which gives you a day to prepare. Oh, and I am paying greater attention to CEO comments this earnings season, comparing them with those from the first quarter.
American Express (AXP)
Why I Care:
● High-end retail stocks (think Saks (SKS) and Nordstrom (JWN)) have hopped aboard the sell-side downgrade express. Stock-price volatility should begin to hit spending by American Express cardholders.
● It will shed light on spending by international consumers in home markets and on U.S. vacations.
● Since early May, the stock has outperformed high-end retail names -- those same stocks that have been downgraded.
Little Items to Watch:
● Will the company maintain an aggressive share-repurchase plan for 2012 ($4 billion) and 2013 ($1 billion)? If not, would this fit with my comments on cash deployment?
● How severe is the change in tone by CEO Kenneth Chenault? For example, in the first quarter he noted spending remained "strong throughout the quarter" and there was an "uneven recovery in the U.S.," as opposed to flat-out deceleration in growth. Moreover, my sense is that a highlighting of expense growth "well below" top-line growth was meant to imply American Express could still surprise on earnings per share, even if there was mounting downside risk to revenue. #Misleading
Stanley Black & Decker (SWK)
Why I care:
● This will be the first report from a "hardcore" industrial name with a global business.
Little Items to Watch:
● Assuming sequentially worse European sales in the construction and do-it-yourself unit and the security segment, and a possible full-year guidance markdown, how will the stock react? If these numbers are overly negative, that could be an opportunity to pounce on this market-share leader and perpetual productivity driver.