The Day Ahead: Chants From an Unhinged Market

Unfortunately, only Eaton managed encouraging action -- and due to company-specific factors, in my humble view. These included such metrics as new orders booked in October (watch for this from other heavy industrials). As a result, I assigned greater weight to the market's muted response to a potential trough earnings scenario from BorgWarner, which proffered an eek-type guidance revision. With U.S. Steel, as well, the market ignored favorable comments on the fact that trough spot pricing had been reached and that prices on new orders late in the quarter.

The read: Valuations are still in adjustment mode to as-yet-unforeseen risk factors in the remaining third-quarter earnings releases and in the fourth quarter. In total, the market continues to be short-term-minded.

Executives continue to highlight "absolute" operating profit margins, not "absolute" operating profit margins plus their direction -- which, we would hope, is higher. This is a small trick that I utilize to gauge confidence in forward outlooks, when I want to feel that sense of "selling the story." I remain disappointed in the stories being told. If CEOs, CFOs or division presidents aren't playing convincing cheerleaders, why should the market throw a bit of enthusiasm in the way of the underlying stock as the company deals with horrid financials?

The market is not enamored with product price increases from companies, hypothesizing that these are unsustainable in the front half of 2013 if volume continues to be suppressed. We have to keep inventory turning in order to drive operating cash flow, so revenue shortfalls could force the hands of management in the form of price discounts.

Where I Stand

It's hard to get long into the jobs report, as there is a ridiculous set of what-ifs. For instance, I fancy the October job headline could print below 100,000, thus theoretically giving a boost to the chances of Republican presidential nominee Mitt Romney. However, this would also point to an economy in increasingly dire straits, and would support the negative tone of earnings season.

The market may also determine that the impending "fiscal cliff" is a major threat to growth that is already surprising negatively, and that it would take considerable time for a Romney administration to chart a path to reversing those fortunes. The best course of action is to be reactionary -- and, overall, I reiterate my bearish stance. We should be prepared to enact long and short positions based on the final jobs report prior to the election. It stinks that the analysis has gotten to such a granular level, but it has, and we have to adapt in order to overcome.

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