Inside the Madness

Marathon From Greece to New York

From: James Cramer
Sent: Sunday, November 06, 2011 8:56 PM
To: Nicole Urken
Subject: Marathon
How did it go?????

From: Nicole Urken
Sent: Sunday, November 06, 2011 10:11 PM
To: James Cramer
Subject: RE: Marathon

It was really so much fun (which is just what I wanted).Was absolutely beautiful day & crowd was incredible. Finished in 4 hrs10mins which I was happy about. Thanks so much for asking & for all your support. Just had some friends and family over my apt to celebrate & feel lucky that I had minimal pain and mostly cheers !

From: James Cramer
Sent: Monday, November 07, 2011 4:35 AM
To: Nicole Urken
Subject: RE: Marathon

This is all terrific. I am so glad you did this. I have never heard anyone say it was anything but a great time and four hours and change is darned good!

While the vast majority of emails with Jim center on the markets, I would be remiss not to include an occasional personal email. Above, Jim’s email asking me about how I did in my first marathon this past Sunday highlights his level of interest and support in topics beyond the S&P and, well, the Phillies and the Eagles. I should also mention that he helped contribute to the cause I was running for — the Liberty Science Center in New Jersey — without skipping a beat.

Nonetheless, while there were no stock tickers in the above exchange, it’s impossible not to draw a market analogy. As I was looking to describe the experience of running through the five boroughs of New York to Jim and others amidst continued headline reports of turmoil and worries of contagion in Europe, I was struck by the contrast between the electrifying ebullience during the marathon in New York and what citizens are experiencing in the original birthplace of the event.

After all, the marathon is said to have been instituted in commemoration of the fabled run of Greek soldier Pheidippides in 490 B.C., who  ran nonstop from the battlefield of Marathon to Athens to announce that the Persians had been defeated, claiming, “We have won,” before collapsing. 

While the marathon has expanded to numerous cities around the world from the original modern Olympic events in 1896, it is impossible not to make note of the discrepancy between the moods of New York and Athens on the day of the NYC event. While over 2 million people came out to cheer in jubilation on the streets of New York, Greece continues to face protests regarding the country’s austerity measures and an economy in shambles, even as Prime Minister Papandreou has now agreed to a government transition.

While we are not in the clear in the United States either, the contrasting moods are reflective in the divergence of what we are seeing in the markets this earnings season.

While fears of a double-dip recession are still swirling, U.S. companies are posting record earnings. As of the beginning of the week, with about 90 percent of U.S. companies having reported this season, earnings are set to total $94.77 on a trailing four-quarter basis, according to Bespoke, which would surpass the old record of $91.47 in the second quarter of 2007.

Not to mention that we have seen a range of very strong earnings reports, notably from many of the industrial names that reflect macroeconomic conditions — including Eaton, Parker Hannifin, Caterpillar, Honeywell and PPG.

Today’s news of the spiking yield of the Italian bonds only further highlights the stresses of the eurozone sparked by Greece, and as long as we have that overhang, it will be difficult to focus on the strong earnings of our domestic companies. 

But we cannot lose sight of many companies posting reports that reflect areas of strength. As Bank of America pointed out in a recent strategy note, while investors may be positioned “risk off,” there is mounting pressure for managers to rotate into risk assets in an effort to improve returns. Hard to fathom on a day like today.

But after all, as BofA points out, two out of every three large cap active managers are currently lagging the market. And in order to improve returns and not miss a year-end rally, investors are likely to put more money to work in the market which will sustain the year-end rally.

Astonishing fact: BofA’s Global Quant Strategist points out that that 78 percent of global equity returns occur in the last 10 weeks of the year. That’s cumulative average data since 1988. In other words, we’re not talking about rigged data. Not to mention that this year is positioned for this phenomenon based on the many laggards that would like to take advantage of a potential upsurge.

The bottom line: On a day when Europe is squarely on the table (even as we are in preparation mode for the Republican presidential debate in Detroit!), we must acknowledge the looming issues in Greece, Italy and other European countries. Once we can get Europe off the table, we can focus on our earnings at home. And that will allow our markets to continue to surge higher. In the meantime, we’ll remain icing our sore muscles and avoiding an end-of-marathon collapse like Pheidippides back in Athens.

A marathon-related stock rec kicker? Nike is well-positioned, particularly ahead of the 2012 Olympic catalyst, an event where Nike has traditionally outperformed, though the company will be exposed to some macro concerns. As Goldman outlined in their recent upgrade of the stock to its Conviction Buy list, the 2011 gross margin headwinds create opportunity next year. While the NBA lockout, along with macro issues, create some risks, this is an interesting long-term story. If you want a higher-growth domestic name, go for Lululemon or Under Armour, though we would like to see some stabilization in the inventories of the latter before getting too bullish. 

Oh, and Europe needs to take a page out of Nike’s play book and “just do it” — get their house in order.

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