Shadow Recruit: Markets Still Await Their Reboot

In Jack Ryan: Shadow Recruit, the box office has its first reboot of 2014. The film, which inserts Chris Pine into the title role once played by Alec Baldwin, Harrison Ford and Ben Affleck, centers on an evil Russian intent on destroying America, financially and otherwise. Whether this reboot is more successful than the Sum of All Fears, which made $31 million in its opening weekend but failed to rekindle the franchise, remains to be seen: It’s expected to make just $22.4 million over the long weekend.

Anatoliy Vorobev

Investors are also hoping for a successful reboot, but it’s a reboot of the bull market that made 2013 so wildly successful. So far, however, the markets have produced some big swings but haven’t really gone anywhere. The Dow Jones Industrial Average rose 0.1% this week to 16,458.56, but is still off 0.7% in January. The S&P 500 dropped 0.2% this week to 1,838.70, but remains down 0.5% so far this year.

The muted returns in the major indexes belie the big moves in some individual stocks, which were flying around like, well, Jack Ryan chasing down a Russian terrorist who had–spoiler alert–kidnapped his wife. On the downside, Nu Skin (NUS) plunged 42% this week on reports that the Chinese government would investigate it for being a pyramid scheme. Best Buy (BBY), meanwhile, plunged 35% after it unwrapped holiday sales that were explosively bad. But it was also the week that saw Alcoa (AA) jumped 12% after closing it announced that it would shutter two potlines at its Massena East smelter, while Beam (BEAM) jumped 24% after the bourbon distiller agreed to be purchased by Japan’s Suntory. Tesla Motors (TSLA) gained 17% after saying it would deliver more cars in December than it had forecast.

Corporate earnings could be the factor that determines whether the market does pull off a successful reboot or the current stagnation is a prelude to something more ominous. JPMorgan’s Thomas Lee, for one, believes it will be the former. In a note released today, he writes:

We believe investors will get a much needed "confidence boost" from the upcoming 4Q13 earnings season. Among the overall takeaways, we see: (i) profit margins that are still expanding, with bottom-line profits expected to grow 650bp faster than top-line (ex-Financials top-line growth is 1.6%); (ii) overall beat is anticipated to be at least 2%, leading to 4Q13E/FY13E EPS of $28.50/$110; (iii) profit growth continues to accelerate gradually (up 6%) and supportive of 9% overall growth in 2014.

Societ Generale’s Andrew Lapthorne and team aren’t nearly as optimistic. They not that while pro-forma earnings growth rose as much as 7% last year, reported earnings, which include fewer manipulations, barely grew at all. Capital spending as a percentage of revenue is also elevated, even if capital spending is not, while net debt, that is, not accounting for corporate cash, is 15% higher than it was in 2008-2009. In case his point wasn’t obvious, Lapthorne sums it all up:

…2013 was a year of weakening cash flow growth, lower profit growth, deteriorating earnings quality, and corporates piling on the debt – again! Well at least equities were up strongly last year, otherwise you might be feeling rather bearish.

Beauty, as they say, is in the eye of the beholder.