Holy cow, what in the name of Sam Hill happened last week? Not to appear too confused à la Foghorn Leghorn, but last week's market action was a reality -- like taking a hammer to the side of the head. Regardless of the Federal Reserve's latest release of free money, the market is demonstrating a willingness to sniff around corporate fundamentals in periods of scarce important macroeconomic or monetary events. Sure, market-goers griped that outcome uncertainty was being triggered by Spain's dance with the European Central Bank. Also, yes, there was an increase in the noise emanating from the fiscal cliff radio station as folks discussed the topic of dividends being taxed as ordinary income -- which partially explains why companies are enacting special dividends. But, when it was all said and done, the earnings warnings from economically sensitive companies reigned supreme, and served to shed light on the lagging nature of the Dow transport index. They also tossed cold water atop the red-hot advance in the Baltic Dry Index. Here is the rundown as to why, despite the probability of window-dressing into quarter-end, I'm beginning the week reiterating a negative bias on stocks.
There are too many bulls for my taste. This is a crowd that's understandably fixated on the perceived beneficial impact of the Fed's third round of quantitative easing, and how that will play into a higher value for the S&P 500 by year-end. The problem is that, in order to get from point A to point B, I think near-term expectations will have to be reset a touch. In that way, third-quarter earnings season would be rendered an under-promise, over-deliver scenario that would somewhat mitigate concerns on the fiscal cliff; it will be said companies are protecting margins well against an "uncertain backdrop" (trust me -- I've been at this game for a while, and that's what will be said). But even that would only cause me to metamorphose into a tactical bull -- not a hard-chargin' one. Why? Well, the message ends up being that it's a tall mental task to buy stocks into downward estimate adjustments on fourth-quarter and 2013 earnings. Why would I want to own XYZ stock at today's valuation when there is risk its earnings will underwhelm? After all, its dividend announcements may constitute only modest increases or stay flat, pending tax and regulatory clarity.