Inside the Madness

Earnings Season: Positioning for Outperformance

From: James Cramer
Sent: Wednesday, October 05, 2011 12:02 PM
To: Nicole Urken
Subject: economic data

Let’s take a closer look at the economic data in the last 48 hours –more bullish signals

From: Nicole Urken
Sent: Wednesday, October 05, 2011 12:36 PM
To: James Cramer
Subject: RE: economic data

Will take a deeper look into these. Today, we got a strong Sep Institute for Supply Management (ISM) Services number of 53 v 52.8 consensus, which follows Monday’s ISM holding ground despite disappointing backlogs. We got the ADP September employment report, with private-sector employment increasing by 91K from Aug to Sep vs 45K consensus. Yesterday, we heard Aug factory orders ex-defense were actually strong. On Mon, we heard Aug construction spending increased 1.4% vs a decline in July… along with positive auto sales.

Cramer: Time to Love Stocks Again?

On Mad Money, we are constantly combing through a range of data points to better inform us of where the economy is going. In addition to commentary from companies themselves (a bottoms-up approach that, while often neglected, is crucial), the economic data we are dished each week is equally important, particularly in an environment that has been driven by macro sentiment.

Why does the latest data specifically matter so much? Because recent months have been dominated by side-by-side comparisons, Venn diagrams and chart relationships comparing 2011 to 2008 to see if our country is headed down the path to recession. The latest economic data highlighted above, along with an improved monthly jobs number last Friday, is one step to taking off the table the possibility that we are indeed falling back into a recession . To be clear, we will need to see more data points—and the commentary from companies this fourth quarter earnings season, kicking off tonight with Alcoa's earnings—will help inform our view, but this positive recent macro data cannot be ignored. While no one is jumping for joy to celebrate a now-booming economy, the incremental data that we’re not in a slump is notable.

(RELATED: What Cramer Expects of Alcoa's Earnings)

With that in mind, the million-dollar question arises: How can I outperform during the fourth quarter?

We know that the “Sell in May” dictum did hold this year, with the Dow hitting its high of the year on the last day of April at 12,810 and falling to a low of 10,655 last Monday. While the “calendarists” and adherents of the Stock Trader’s Almanac that predict summer slow-downs are cheering for victory, it is key to note that the summer months lacked real recessionary red-flags in our country. There is no doubt that key economic data during the summer months, like the ISM index—a key economic measure for the U.S. business sector—did decelerate. But there was not a reversal in trends: The ISM index never fell below 50, which is key because a number above 50 shows growth. The summer sell-off was a result of a U.S. sovereign debt stalemate among our congressional leaders along with escalated conditions in Europe, casting a shadow of what has continued to be solid commentary from companies and domestic macro data.

Given that we may be nearing a real solution in Europe, with German chancellor Angela Merkel and France’s President Nicolas Sarkozy pledging to support a plan for Europe by the end of the month (albeit sans details), we are nearing a place where we may be able to focus again on valuations, earnings and domestic economic growth.

If this plays out, the way to outperform in the remaining three months of the year will be to have some exposure to cyclical stocks—because, you will trail with all defensives if we see an upswing.  Yesterday on Mad Money, we highlighted Deereas a key name levered to cyclical recovery along with a long-term secular trend of more people needing to be fed. Low valuations won’t mean much if Europe stays in charge, but as we continue to get more clarity, it is an opportunity to look at the hardest hit sectors, including energy plays like the Oil Services HOLDRsexchange-traded fund or domestic shale plays including well-positioned EOG Resources .

April showers didn’t bring May flowers. But the recent economic data we’ve been dished undeniably means that we are not in dire straits either. If we can take the worst-case European concerns off the table, we will be able to surge. Right now, we can’t dismiss Europe—we are still beholden until we see a real solution. But you have to be positioned for when this weight is lifted. The “sell in May” reality that we saw this year was not because of deceleration in our country, but was because of what was happening over the Atlantic.

Bottom line: Cyclicals, at these levels, offer more upside vs. defensives and that will be key to outperforming this quarter if we see the overhang of Europe lifted. That said, we all know the market doesn’t go up in a straight line, so hold onto your quality defensive names—including the likes of Proctor & Gamble or General Mills. As always, having some diversification is key.


When this story was published, Cramer's charitable trust owned Aloca.

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