A large part of me wanted to believe that earnings season would be the market's sole focus at least until around early August, the next lull in report issuances. Wave after wave of corporate commentary, income statements, balance sheets and guidance are riveting stuff to get one's hands on following months of torture in having to analyze daily headlines from obscure European Union officials. Count this guy as being unimpressed by second-quarter earnings season. Let the dyed-in-the-wool optimists wax poetic about "upside earnings" and "less bad guidance." The pure figures from companies have been full of mini snowballs that stand to metamorphose into avalanches that destroy portfolios as 2012 draws to a conclusion.
That said, the market is now acting similar to a flip-flopping politician. It's been choosing to pay outsized attention to Spanish-debt auctions, Italian prime minster musings and China-growth-slowdown risks instead of staying true to its original position -- that, in July, earnings season is god. It almost feels as if the market has developed a firm opinion on the remainder of the second-quarter reports -- better-than-expected earnings despite worse-than-expected revenues -- and is attempting to get back to deciphering the headline risk that could foster an even worse sequential showing for companies in the third quarter.
I believe this real-time juggling act is dangerous for stocks in the near term. Earnings this week, for example, hit me as having little things on an individual basis that may only add to souring market sentiment. Here is what I mean:
● Domino's Pizza (DPZ): If continued promotions on smaller ticket items continue to steal share from higher-ticket-price pizzas, what does this say about the low-income consumer?
● Buffalo Wild Wings (BWLD), Cheesecake Factory (CAKE), Ruby Tuesday (RT) and Dunkin Brands (DNKN): Subpar earnings from Chipotle (CMG) have cast a black cloud over the quick-service and sit-down restaurant sectors, mirroring the angst felt following Darden's (DRI) comments a few weeks ago. It's hard to warm to Dunkin pre-earnings on its valuation, for example, given concerns on afternoon sales. Can we buy anything like Buffalo Wild Wings, either, knowing that there is sales risk from consistent 2011 menu-price increases? That was was one message from Chipotle as well.
● Under Armour (UA), Crocs (CROX), Skechers (SKX), Columbia Sportswear (COLM) and Deckers Outdoor (DECK): I have this funny feeling that the market's response to VF Corp.'s (VFC) results were an outlier due to its global share-gain story. While I will indeed be analyzing the second quarter reports from the five companies above, there is a hesitance to pull the trigger today on comparable suppliers, given valuation risk from subdued holiday-season-order planning.
At the moment, caution is the name of the game for me in terms of making calls. I don't want to bite on the rotations I saw last week, including moves into more discretionary names and a weakening in the yield-grab defensive trade.
By the way, anyone else feeling as if Amazon's (AMZN) numbers are setup as another Chipotle sell-the-news event?
● Last go-around was a perfect storm of very low Wall Street earnings expectations and overall sentiment. The massive earnings beat has now sharply changed that dynamic on a stock that is very richly valued. This is no good.
● International performance could be a risk to Wall Street estimates due to currency -- which has been killing the sales results of multinational companies this earnings season -- and the general slowdown. Note that this would come as Amazon is still investing aggressively in people and capacity.
● Amazon has been lowering prices to drive more units (aka sales). I am worried that, with a global slowdown in consumer spending, prices were cut more and units failed to increase substantially -- and, for Amazon, they have to rise substantially. This is a bad setup for profit margins.