Sozzi's Day Ahead: Market, Prove Me WrongUntil that happens I remain bearish, given all I'm seeing bubbling under the surface. Morning call, stock market, value investing, federal reserveWMTOver the weekend, as I was walking through a park for a Juvenile Diabetes event, I broke into a little reflection on a golf course encounter I had a couple weeks back. An older gentleman, after probing about my line of work, excitedly asked, "Any stock tips, hotshot?" His eyes lit up like a kid in an Apple ( AAPL) store, just waiting for me to pump his head with a bunch of penny stocks that could jump 200% in the course of 12 hours. Inside I thought: I can't believe these types of questions continue to be asked. I feel so used and yet sorry for this kind man; there is a boatload to know when selecting a stock. Seeing as he was persistent -- and I am not one to hand out "stock picks" with ease -- I kindly told him that he should hold Wal-Mart ( WMT) for the next 25 years and gift the profits to his children and grandchildren. The entire ordeal was so very odd, but it was motivating at the same time. Clearly I have a ton of work left in spreading the good word on this investing stuff -- with a twist, naturally. But I did recall becoming perturbed at the thought of being prodded for stock picks during a friendly golf match. Along with my continued short-term bearishness on the markets, enter the "weak ahead" on the stock-pick protest line. Yep, what the market is currently experiencing isn't the small pile of malarkey about which the really-bad-tie-wearers are pontificating. Rather, there are issues bubbling underneath the surface that deserves careful pondering before you buy equity in any company. That goes for "safe haven yielders" and, of course, it also applies to discretionary names that still fetch rich price-to-earnings multiples based on the summer rally's doings and rosy forward estimates. Sorry for the wonky terms; sometimes I have to pander to the big boys and use words that the cool club knows.
Deep Thoughts I Have, and That You Should Have, Too
- The market is saying that, yes, it does care about earnings, and it's choosing to be quite picky in its evaluation process. It's leaning toward reacting to bad components of revenue, and to margins worsening vs. the acceleration in good components. In other words, the market is apt to reset a stock's valuation for fear of downside earnings risk in the next six months, as opposed to pricing in a recovery in weak spots of the income statement and acceleration in the positive spots.
- Have you smelled any whiff of central-bank influence? Outlooks are being slashed, which flies in the face of the bullish argument for stocks that globally coordinated easing should support rejuvenated earnings growth. View it from this perspective: How cheap are stocks, really, if the world is making it easy for companies to borrow, refinance and so on? Dare I say that stocks are expensive in the context of declining estimates, plus easy money?
Examples of Easing Not Appearing
- Wal-Mart is planning for capital expenditures to come in flat year over year. It's not that the company won't be opening stores worldwide -- just that it's doing so at a measured pace, as it is unsure of future expected returns on its investments.
- The tech sector continues to shed workers -- real people -- and that has a ripple effect on many ancillary industries. These pink slips are coming despite -- you guessed it -- cheap money. Don't these ripple effects at least partially explain why investors are dumping the largely interconnected tech sector? Ah, that's right, they must be 100% devoted to the decline in Apple's stock. Shucks.
Earnings-Season Tip: Watch for TricksFor any company you own in the portfolio, I need you to return to the second-quarter 10-Q filing. In there, search for optical tricks that were lost in the shuffle of the late-July enthusiasm for stocks, because these optical tricks could become negative surprise factors this time around.
- A lower level of promotional activity slightly padded profit margins, but led to sharp sales declines in a particular segment. This reads as price resistance, and is a ticket to management restarting promotions to ignite sales -- which hurts margins (while the market is selling news).
- New product introductions inflate sales and profits; the core of the business is experiencing declines. Remember, the market is zeroing in on the negatives. If the heart of the business had struggled in the second quarter, especially in Italy, Spain and France, rest assured that trends have deteriorated further and that the market will vote the stock down.