The Day Ahead: Beware of Paper Champions
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Paper-champion rallies are built on far-reaching dot-connecting exercises, rather than on appreciation for the litany of real, in-your-face negatives. The core problem is that these rallies have minimal staying power, as the fundamentals will eventually shine through and triumph the suspect logic. What I am dealing with right now is dot-connecting that leads down avenues ending with brick walls. I just can't seem to find that one factor -- or factors -- that triggers a "heck yeah" moment, showing stocks to be a buy as everyone else blatantly sleeps at the wheel.
Honest Abe's Sad-Face List
- Earnings beats are panned upon further inspection -- for instance, in Citigroup (C). In a true bullish environment, negatives housed inside a company's performance are swept aside amid enthusiasm to jump aboard an apparent fundamentally accelerating-sales-and-earnings story. I sense that, thus far, earnings beats are not causing pops in the shares to the extent they should be, assuming the market is presently oversold.
- Assuming the bulls are so correct in their macroeconomic assessments, as far as retail is concerned, certain sectors should be vigorously increasing in value -- yet they've fail to do so. If the macro is so incredibly sexy, why not pay a higher multiple on projected future earnings that are indeed misrepresented by current forecasts?
- We're seeing harsh reactions to harsh earnings revisions, for instance in WD-40 (WDFC). Note that similar companies are tending to trade down in sympathy, but not by enough, in my view. The market is confused as to whether the incident is isolated, and on whether Federal Reserve stimulus will render the future brighter than what appears to be today. Ultimately, this leads to a shock factor when reports or outlooks cross the wires.
- Bulls are using the month-on-month in September jobs data as support for their opinions. However, it would be wise to pay attention to the ongoing weakness in manufacturing employment, plus workweeks and incomes, as inhibitors to the growth outbreak they so badly desire.
- The areas of focus for me on Coca-Cola (KO) are sequential volume trends in Europe and whether price increases have continued to stick. Problems in either of these fundamental departments will make me wonder if the search for yield is misguided within consumer staples, and there has to be more respect paid to the deteriorating earnings story, which is pressuring the stock price.
- Use W. W. Grainger (GWW) as an early guide to industrial earnings season, zeroing in on comments on manufacturing and monthly sales trends. If the bulls are to be believed, Grainger's sales trend will have picked up or remained steady in the last month of the quarter.
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