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Brown is the New Black By: Charles Payne

|Includes: C, CREE, CSX, IBM, Tapestry, Inc. (TPR), WMT

"Back in the back
Of a Cadillac
Number one with a bullet, I'm a power pack
Yes, I'm in a bang
With a gang
They've got to catch me if they want me to hang"


"Back in Black" by AC-DC

Back in black is a theme that many people are using today, Republicans, Libertarians, business people, and investors, too. (I fell in love with the song the first time I heard hit and use it to open my radio show "The Charles Payne Show", but I initially thought the lyrics were "back and black.") The market is going to need more than hope, but this is a step in the right direction. Some investors think that it means gridlock in Washington, DC and others think it means a return to free market principles. On the latter I'm not so sure there will be an adjustment in the game plan or thinking as the President has a vision so ingrained in his soul he simply believes people need to take this medicine and they will feel better at some point. Still, at some point the President will have to contemplate moving toward the center, and even compromising from time to time. For investors, the similarities to 1994 are eerie (in a good way).
 

  • Flash back to 1992 when Bill Clinton wins the White House and begins an ambitious agenda.
  • In 1993, Republicans win mayoral races in New York and Los Angeles, and the gubernatorial race in New Jersey.
  • In January 1993, Lloyd Bentsen is picked to be Secretary of Treasury by Bill Clinton and that leaves his seat open to a special election. In a free for all, 24 candidates vie for the seat which is ultimately won by Kay Bailey Hutchinson.


I understand that a Republican winning in Texas isn't man bites dog stuff but it was a Democrat's seat and it was lost. Yesterday, the ultimate Democratic seat was snatched by an upstart whose biggest claim to fame may have been winning the title of "Sexiest Man Alive" by Cosmopolitan back in 1982.

By the time 1994 came around the Republicans were ready and had a leader and a game plan, something they are charged with not possessing at the moment. I actually asked Michael Steele about this on Monday when I hosted the "Strategy Room" on www.foxnews.com.  The RNC chairman laid out several ideas and initiatives that go toward what could be considered a game plan, but needs to be refined and articulated beyond sound bites. I also saw Mr. Steele Monday night at the annual CORE MLK Dinner. He was basking in the glow and feeling more confident. Nonetheless, the political scene is all about Tea Party and Town Hall protestors and their desire to get the nation back to basics.

The 1994 Republican Revolution saw 54 house seats change hands and 8 Senate seats. Moreover, and in another odd parallel, after the election Richard Shelby of Alabama switched parties. On December 22, 2009 Congressman Parker Griffin, an oncologist, switched parties over the direction of the healthcare bill.

Party like it's 1994

Newt Gingrich led the charge with the Contract with America and in the process provided a spark for the market to take off. The real champion of that period, however, was President Clinton, who swallowed his pride and in the process became a better steward of our economy.
 

  • November 1994: the S&P 500 was at 468.42 and rallied to 1,469 by January 2000.
  • November 1994: the Dow Jones Industrial Average was trading at 3,863 and rallied to 11,487 by October 2000.

Stock Market 1994 -2000

A Little Different Backdrop
N.Y. State Budget

The economic backdrop is different now than it was back in 1994 but part of the solution could be the impetus for an extended stock market rally. A stock market rally not based on a weak dollar and unsustainable productivity gains is preferred at this point. I don't think that those "animal spirits" will kick in without real tax cuts for people with jobs. In addition, while it's too late, a real attempt to address the $1.0 trillion in shovel ready jobs would have sparked more than the redirecting of funds to unions and food stamps. Unfortunately, the federal government refuses to slow spending. Even state governments have gotten the message. The latest example is New York, which suffers from a $7.4 billion deficit. The state is responding by closing four prisons, cutting school aid by $1.0 billion, and the state emergency operations by $1.0 billion, as well as increasing taxes and fees to raise another $1.0 billion.

An additional cigarette tax means another buck a pack, making this one of the most expensive sins known to man. But check this out; there will even be a levy on soda. Yet, the state is adding $7.0 billion over two years for its bridge and highway fund.

What I'm really worried about is a slow air seeping out of the faint balloon of hope. It has been witnessed by the exodus out of the job market, in official sentiment surveys, and now among homebuilders who say they simply cannot compete with the avalanche of foreclosures. According to the Home Market Index survey conducted by the NAHB and Wells Fargo (NYSE:WFC), enthusiasm in the industry is holding but down to the reading from last August, and traffic has rolled all the way back to its lowest level since last April.
 

The only thing that has been constant is the stock market and it remains challenged despite yesterday's triple-digit point session for the Dow Jones Industrial Average.

Earnings Scoreboard

It continues to look like "less bad" isn't going to cut it this time around and yet the Street isn't crushing share prices of those companies whose earnings results have come up short thus far. Now that I think about it we shouldn't have been using the term "green shoots" because key earnings or components of the economy/businesses are still underground seeking to sprout. Yesterday, for instance Citigroup (NYSE:C) allotted fewer funds for loan losses but it was still a ton of money. After the bell that kind of stuff continued.

CSX: Posted earnings of $0.77 per share on $2.30 billion in revenue against the consensus of $0.76 per share and $2.39 billion in revenue. Revenues were down 13% year over year as coal and merchandise volumes slipped. But, the silver lining was the overall decline in volume decreased less year over year. The last three quarters have seen y/y declines in volume of 7%, 15%, and 21%.

IBM: Posted earnings of $4.8 billion, or $3.59 per share, on $27.2 billion in revenue. The Street was looking for $3.47 per share on revenue of $27.0 billion. The company did everything right, even upping its guidance, but this is a company that has reacquired the image it had under Thomas Watson Jr. and the Street was looking for a little more. For the current quarter, IBM 's management sees revenue in a range of $22.8 billion to $23.0 billion versus the consensus of $22.3 billion. For FY10, earnings will be $11.00 per share…right now the Street is at $10.88 per share.

CREE: The company continues to amaze. I know one day this company is going to be acquired so Philips or someone else should make a move now. With that being said, the company keeps chugging along, posting earnings of $0.38 per share on $199.5 million, blowing away the consensus estimates of $0.30 per share and $186.8 million, respectively. Company revenue was up 35% year over, and now the company has announced it will deploy its lamps in 650 Wal-Mart (NYSE:WMT) stores.

It's not a Rex Ryan Type Quarter, but the Positives are Evident
By: Brian Sozzi, Research Analyst

This morning, Coach Inc. (COH) announced its 2Q10 financial results. The figures put forth by the accessible luxury handbag and accessory maker did not capture the spirit of NY Jets head coach Rex Ryan (loud and overly positive) but rather reflect the spirits of former Indianapolis Colts coach Tony Dungy (confident, calm, and positive). Whisper numbers for earnings were slightly high going into the report, and while we were confident Coach would beat, we reasoned the drivers of the upside (gross margin predominantly) would be viewed as a disappointment. Thus far, the market's reaction to the performance has been of displeasure, resulting from (1) N.A. comps, though +3.2%, were well short of most sell-side estimates, (2) no detailed guidance was issued despite apparent trend normalization in the business, and (3) inventories were scaled back by close to 30% y/y, which is not what one would expect in a business returning to supposed sustainable comp growth.

Please visit www.wstreet.com to read remainder of preliminary analysis.



Disclosure: None