Seriously, guys and gals -- no joking -- what in the world is happening in the markets right under our very noses? In the past couple weeks, I have gotten the drift on a range of topics.
- Go forth and buy tech, kind sir or madam. It will be a relative earnings outperformer for the third quarter and, boom, right into year-end. These are companies that generally offer a high rate of earnings growth and have cash positions to fund research in the next gadget that will drive future profits in 2015 (Caterpillar (CAT) meets tech, I suppose).
- For companies sporting attractive dividend payouts, give a wink, nod, and a great big smash on the iMac mouse pad. As these names are sitting on mounds and mounds and mounds of cash, moreover, these dividends could hiked yet further. Of course, if you peak into the 10-Q SEC filings, you'll see most of that cash is tied up in overseas accounts or is earmarked for international investment.
- There is this imaginary, magic pile of sideline money just itching to juice stock valuations on decelerating profit margin expansion. When I hear comments like these, after I finish cringing I immediately switch gears to the voice of Alec Baldwin in this epic Glengarry Glen Ross moment.
- Early-inning earnings warnings -- yeah, those are irrelevant as earnings estimates. The real stars of the season are so low that even the slightest beat will lure in the aforementioned imaginary pile of money into the mix.
- The recipe for an earnings miss is a surprise revenue shortfall that's not matched by compensating adjustments to costs and expenses -- and the Street falling asleep on this. We have witnessed not only earnings warnings from the majority thus far, but massive misses compared to "low hurdle rate" earnings estimates. (As for Alcoa (AA), production was cut, and I will be bold and say it's a revenue warning.) Could this continue? Umm, why not? You mean to tell me that we are unable to extrapolate anything from FedEx (FDX) and Norfolk Southern (NSC) and apply it to next week's scheduled report from McDonald's (MCD - Get Report), on which I'm still negative? We could say the same thing about an industrial of our choice -- though not General Electric (GE - Get Report), as it may have pricing power. Let's take a further step into the madness. Do we have full, unyielding trust in 2013 estimates, given growth concerns for the first half of the year? Note that earnings targets for next year have been trimmed by an average of $0.05 for S&P 500-tracked companies from the beginning of the year, or so noted a research note that I snagged.
- Profit margins staying at high levels is not the same as profit margins expanding to a new level. If profit margins hover around a certain level, it's usually because a company has no other place to cut expenses on weak volume, or because it's yearning for some semblance of pricing power in total revenue. Are you willing to assign a richer multiple to that scenario? The market is asking you to do just that.
- The market has pummeled companies that have warned. Why not wait to be proven wrong on the idea that this trend has a shot of reversing?
Bucket Shop Rumor Mill
- Activision Blizzard (ATVI - Get Report) stock price says: Call of Duty is competing for holiday season eyeballs more so than the norm. Also, I am not enamored with the subscriber trends at World of Warcraft. Avoid this name.
- ADP (ADP) has given back its gains post-September employment report (watch G&K Services (GKSR)).
- Starbucks (SBUX - Get Report) is below its 50-day moving average, so stay clear of this one for now as well. In going back to the second-quarter earnings call, now, I am not so sure the turn in the European business accelerated sequentially. Also, I was burnt on the last earnings report, and will not be fooled again.
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