Is Corporate America Goosing Wall Street?

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 |  Includes: IBM, KMB, MCD, WMT
by: Wall St. Cheat Sheet

Everyone who works on Wall Street knows earnings announcements are a game. Analysts set expectations, and corporations aim to meet or beat the targets. Companies which master this game are rewarded with increasing stock prices while shareholders with clueless management get punished.

As a result of The Wall Street Game, corporations need to announce something juicy each quarter. Sometimes it’s a new product, a great business deal, or plain old growth. But during tougher times like these, corporations must get more creative to “surprise” Wall Street.

This quarter many companies fired weapons in the forms of earnings beats and improved guidance. So what ammo will they use in the coming quarters as stagnating consumer spending may pressure recent revenue gains? Jobs.

That’s right. What would cause Wall Street to go crazy and start buying stocks hand-over-fist? A company so strong they are hiring. This hiring would in turn chip away at the biggest drag on the economic outlook: unemployment. Once that starts happening, we could see another wave of enthusiasm for equities (and a little quantitative easing would merely act as kerosene doused onto a growing camp fire).

Adding jobs doesn’t have to start with a reckless addition of payrolls aiming to rapidly draw down the unemployment number. Rather, to improve optimism on Wall Street, at this point all we need is a steady announcement that firms have come full circle from layoffs, to stagnation, to the first seeds of hiring. Such news will lead to public perception that these newly employed persons will start spending again, in turn increasing revenues at other businesses which will then need to hire more employees, etc.

This scenario is far more likely than mainstream pundits and financial professionals have acknowledged. Corporate cash has piled up over the last year, putting many bellwether companies (some with zero debt) in a position to go on the offensive against their competitors.

Moreover, many blue-chip companies such as McDonald’s (NYSE:MCD), International Business Machines (NYSE:IBM), Kimberly-Clark (NYSE:KMB) and Wal-Mart (NYSE:WMT) are taking advantage of historically cheap debt in the corporate bond market. In fact, “The 1% coupon IBM landed Monday was the lowest coupon of any corporate debt issue for any maturity or credit rating in the almost 3,500 issues contained in the Barclays Capital U.S. Corporate Index.“ If the strongest among them takes the field with a plan to attack like Peyton Manning, it won’t be long before the fear mentality of being left behind spreads throughout the herd.

Some people think this lust for near-free debt is a sign corporations fear a double-dip. I think it’s simply as smart as the decision to refinance my mortgage at historically low rates. Moreover, unlike deadbeat subprime borrowers with no logical means to repay their crippling debt burdens (mostly because of inflating ARM payments), earnings season has proven companies are generating cash flow which can easily pay down debts — especially those with record low interest payments.

Clearly, there are many macro economic landmines everywhere we turn (this morning’s initial jobless claims continued the weak trend) and we see a Mixed Bag environment. However, if the business cycle begins to turn the corner and a positive feedback loop ensues, many of those landmines may be slowly dismantled. At the very least, the stock market and select stocks would shine in the short to medium term — and understanding the trade is all that matters if you are investing rather than pontificating about the market.

If you are the CEO or CFO of a well-positioned company, there may be no better way to juice your stock than starting to recruit your first platoon of new soldiers. One thing’s for sure: Wall Street will love the site of your army dispersing across the battlefield.

Disclosure: No positions