Best Buy Gives Us a Key Test

We've got a true test of sentiment vs. declining business fundamentals today.

We have so many bears out there and we are moderately oversold but the monoline issues and Best Buy are tests that try bulls' souls. The latter is also a reminder of how hard it is to jump the abyss of late cycle to early cycle investing.

Unlike ABK/MBI, Best Buy lies at the heart of the earnings problems. BBY is a company hostage to the domestic economy and it is still mindlessly opening stores in the U.S., including a kitchen and bath business that certainly seems less than prescient, particularly as they are being put up in the Western part of the country.

It is the ultimate discretionary play in an environment where household discretionary items have to be jettisoned in order to pay resetting mortgages. BBY plays in the ethereal world of consumer confidence and is a far better indicator of the desire to spend than any confidence survey like that of Michigan.

The reason BBY is so important, as were the poor reports from Black & Decker and Masco, is that big money has to use these opportunities to buy if they believe the second half is going to be better. In light of the now laughable management of the economy by the Fed and Treasury, where they had their chance but blew it, that assumption is back on the table.

Some will rally to BBY today because the earnings hit isn't all that bad. The stock deserves a 12-14 multiple on the $3 and change number they are putting out as the company's got mid-teens growth.

But the simple fact is true: when seeing through the valley you have to weather the BDK/MAS/BBY disappointment and for the vast majority of investors that will prove to be way too hard.

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At the time of publication, Cramer had no positions in stocks mentioned.

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