Bad News

The news gets worse on a daily basis yet the stock market has barely blinked. Earnings and economic numbers continue to come in weaker than expected. Texas Instruments missed expectations and lowered their outlook last night while the German PMI came in lower than estimates this morning and the futures are flattish.

In recent days I have gone over numerous reasons why the market is strong despite terrible news. To summarize:

  • Market participants with modest levels of equity exposure

  • Market participants who have been punished for panicking the past two summers

  • Reasonable valuations

  • Lean corporations

  • Strong corporate bond markets

While I respect these positives and would not be shocked if the market managed to climb higher I do not like the risk/reward. With earnings estimates coming down the upside seems limited. The economic slowdown will not turn on a dime and can potentially gather momentum. If the slowdown worsens the downside could be significant. I see the market not responding to bad news and I respect it but I don't want to join the party.


frank r said...

I see you mentioned $RSH as a cigar-butt trade. It could actually be a lot more. Best Buy is being killed by being used as Amazon's showroom. People suggest the solution is for Best Buy to embrace the showroom concept: demand subsidies from the manufacturers to be used as their showroom (as opposed to setting up their own stores  like apple), then use these subsidies to lower prices to the amazon level. Wouldn't you rather test out electronics in person before buying rather than order sight unseen? They could also offer free sign-up classes to small groups demonstrating the latest gadgets (subsidized by the manufacturers whose gadgets will be demonstrated, naturally). Problem is, Best Buy stores are quite large and have lots of overhead. Whereas Radio Shack stores are just about the size of an apple store. So the idea would work better for RSH than best buy. RSH could also steal the Best Buy "geek squad" idea. Lots of possibilities. Small store format is definitely a big plus.

Tsachy Mishal said...

I was thinking more along the lines of a cell phone store but your idea is interesting as well. The problem with cell phone stores is that the wireless companies are forcing customers to stay in contracts longer before customers can upgrade. Whereas one used to be able to upgrade after 12 months the carriers are making customers wait 22 months.I believe this will hurt cell phone stores and I believe that is what hurt Apple iPhone sales.
Radioshack might be too small for a showroom?