US Markets

Companies gaming the system: Strategist

'Companies gaming earnings season?'

Companies are setting the bar so low this earnings season that they are managing to come out looking pretty decent, strategist and best-selling author Larry McDonald said Thursday.

"If you look at the companies coming into the quarter that have taken guidance down versus taking the guidance up, that's the highest in six years," said McDonald, head of U.S. macro strategy at Societe Generale.

Furthermore, he added, the markets have responded so far by rising an average 1 percent to 1.1 percent.

"In other words, companies have lowered the bar so far down that they are jumping over it," he said in an interview with "Closing Bell."

McDonald, whose book on the collapse of Lehman Brothers chronicled his experience as vice president at the firm, also sees a problem with the fact that corporate cash as a percentage of debt on the balance sheet is the lowest since 2007.

"Companies are issuing debt to buy back stock. It's a game, they're gaming the system," he said.

Things looking up?

Closing Bell Exchange: Tracking growth

However, while corporate America has had to deal with softness in the first quarter, the second and third quarters will be stronger, market strategist Hank Smith told "Closing Bell."

"The economy is going to rebound just like it did last year because the soft patch in the first quarter is really the transitory issues of bad weather in the Northeast and the West Coast port strike. They'll go away," said Smith, chief investment officer at Haverford Trust, which has $8.2 billion in assets under management.

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Smith said he believes the effects of the higher U.S. dollar will be mitigated "a little bit," with currency not ascending at the same rate.

On top of that, corporate buybacks have been halted until earnings season is completed, he noted.

"Once that's over in another couple weeks, we're going to have the tailwinds of share buybacks," he said. "We're quite constructive here."

Where to invest?

As for where investors should look in the marketplace now, strategist Stephen Parker likes pro-growth stocks in the U.S. such as technology, consumer discretionary and banks.

"These are the parts of the market that we think are exposed to the rebound coming in the U.S. economy and where you're going to see the earnings growth delivered," said Parker, U.S. head of multi-asset strategies at JPMorgan Private Bank, which manages about $1.7 trillion in assets.

He would also look for opportunities internationally.

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