First things first: Do you have a market fairy? If not, ask yourself why.
Since sharing is caring, and I am a caring guy, the inside scoop is that at least three market fairies circle around me at any given. One fairy offers consistent reminders to be suspect of the bulls in the market overall and within specific stocks. Another is always screaming that stocks are a buy no matter what is unfolding in the world at large. The third is the quintessential voice of reason. She wears white and has a calming tone, offering words of wisdom such as, "be critical, but not blind to opportunity" and "go with your gut instinct -- a stock is moving up or down for reasons that will present themselves in the future."
I am sort of on non-speaking terms with these three usually-helpful imaginary friends, as they have collectively continued to articulate conflicting advice. After a couple seconds of self-reflection, I can't say I blame them for having wandering minds.
For instance, homebuilder stocks remain hot, hot, hot (including my forgotten pick Hovnanian (HOV)).
Conflicting thoughts: The market has certainly priced in some amount of quantitative easing from the Federal Reserve this week -- which, if implemented, should boost general stocks prices, if the past is any guide. Assuming we do see another round of QE, U.S. Treasury yields could rise as paper is dumped for a higher growth assets in stocks, thus choking off the housing recovery in 2013 -- a recovery in which Fed chief Bernanke doesn't seem to be a big believer. This sure sounds like a Fed policy that's counterproductive, as opposed to overly stimulative.
We could also see a backup in credit-card interest rates. If so, large-ticket home furnishings purchases from companies La-Z-Boy (LZB) and Bed, Bath & Beyond (BBBY), which both have nice bids under their respective stocks, would become sooo 2012 (kindly imagine a valley girl voice).
Elsewhere, Alcoa (AA) has suddenly broken out, seemingly out of the blue, with little fanfare -- because it's only relevant four times a year (I say this tongue-in-cheek). The move is a classic Fed-plus-China-asset-reflation trade.
Conflicting thoughts: Beware of the Fed potentially failing to ease in line with market expectations -- whether in language, amount, or at all -- and of China possibly failing to prime its economic pump to a stronger degree. In this scenario, Alcoa's so-so fundamental story -- despite the CEO selling it hard on the second-quarter call -- would be exposed amid the unwinding asset-reflation premium. Hmm.
Separately, McDonald's (MCD) August sales were cheered. That didn't take much, considering the company's weakening fundamental trends of the past two quarters.
Conflicting thoughts: Overlooked in this glorious news was the fact that U.S. sales were roughly in line to consensus and that Europe missed, in spite of increased investments in value and marketing. In fact, I'm wondering about profit margins in this type of month. With these investments set to spur same-restaurant sales into a slowing global growth environment that should favor trade-down, shouldn't McDonald's' numbers have packed punch? Hmm.
Things You Are Missing in the AM
● As far as I am concerned, Texas Instruments' (TXN) mid-quarter update supported early-inning warnings from companies, and shouts, "the global economy is in limbo and at risk of downside surprises." Specific areas of concern included, first, "timely actions" to reduce costs. This implies weaker-than-expected demand will be around for a bit, and that management does not want to miss on another quarter. The second worry is that most orders are tracking below mid-range of expectations. A single part of the business, wireless, is holding the company afloat, instead of broader strength.
● The Fed is likely to cut its economic forecasts Thursday to justify fresh easing. How does that play in the election? President Obama has been surging in the polls of late, but reduced targets from the Fed once again -- led by a person the president reappointed -- could be a benefit to Republican nominee Mitt Romney. Watch oil-related stocks for a bid. By the way, do you even remember what the Fed did with its growth targets months ago? Here's a reminder. (PDF)
● Be mindful of the architecture of easing: If the Fed just buys Treasuries , leaving out mortgage-backed securities, there will be disappointment.
● Reiteration: Retail stocks are looking too toppy for my tastes, especially into the slow months after the back-to-school season and before the holidays. I have no bones to pick here in putting on a short in Decker's Outdoor (DECK).
This is a weird environment to be investing. It has a strange feel -- no attention is on corporate sales and earnings, and new incoming information is painting a worrying picture. I continue to lean more bearish, but I do acknowledge the backdrop presents opportunities on the long side. After all, negative company-specific news and the "Fed easing priced in" manta are not sparking mass sector selloffs, nor defensive behavior in trading.
