Ahead of earnings season, companies have gone quiet a little earlier than the norm (there are regulated quiet periods, you know). At least that has been my experience since mid-September -- of course no names. All sorts of no comments and delayed responses to run of the mill "house-keeping" questions. In analyst land, a "house-keeping" question is simply one designed to get clarification on a reported number or previously articulated comment.
The disappearing dialogue between inquisitive, friendly analyst and corporate teams is either: (1) teams opting to prevent excessive optimism on the Street amid a better-than-expected quarter and holiday guidance as a result of the faster U.S. economic improvement seen during the summer; or (2) teams opting to hide in the shadows amid worse-than-expected quarters and ugly holiday guidance as a result of weak U.S. income growth, sluggish European Union demand, and unique new challenges in product/services markets. I believe the real answer is somewhere in between -- for every Nike (NKE) type earnings report (blowout) there is likely to be a Ford (F), Sony (SNE) and Cree (CREE). Oh, and don't be fooled, the Hewlett-Packard (HPQ) division split news probably means the quarter was subpar. News of this magnitude, which is tantamount to a complete operational transformation, usually only happens before bad news is delivered.
The middle ground of corporate performance, not too hot or cold, ultimately reflects a squishy U.S. economy and trends abroad that investors are choosing to ignore, for whatever reason. While third quarters may be stronger than consensus on the top and bottom lines, it's the outlooks that may go onto hammer share prices (see Ford, Cree, and Sony). I believe this realistic probability is evident in the macro data trends.
Non-Farm Payrolls
Above consensus for September, August revised up. The U.S. economy is on a trajectory to deliver the most robust year for job creation since the late 1990s. But wages are only up a mere 2% this year.
ISM Non-Manufacturing
The highest levels since January 2009 were realized in August. September was strong, but fell one point month on month. New orders and production led the drop. Third-quarter earnings for many manufacturers likely took the form of solid summer demand, but the recent softening in the data may lead to so-so outlooks that the market will punish.
ISM Manufacturing
Mirrored the tone of the Institute for Supply Management (ISM) non-manufacturing survey, though the month-on-month headline decline was greater. New orders were above 60 in July-September, again setting up for decent third-quarter earnings reports.
Consumer Sentiment
Remember that weak quarter from General Mills (GIS) a few weeks back? Consumer sentiment for September (lowest since May) helps to explains what occurred.
The market has victimized those companies offering poor guidance. Although I believe each company, for instance Cree (losing share to General Electric (GE), which I see unfolding in the aisles of Lowe's (LOW) and Home Depot (HD) in the LED category), is a unique case, it's the Ford commentary that should really be viewed as a harbinger of what may be about to transpire.
Now is the time to go back to each open position and reassess why it was put in the portfolio in the first place.
Note: I expect some serious announcements from J.C. Penney (JCP) at its analyst day this week -- specifically an eye-opening amount of store closures planned for the next five years.
