How You Can Win This Ugly Earnings "Baseball" Game

Editor's Note: We're likely to see the sixth straight quarter of bad news in this intractable "earnings recession." It may or may not be bottoming out this quarter, but that doesn't matter. Bill has a simple plan for getting your money through safely. He wants to make sure everyone gets a chance to use this tested earnings season strategy for keeping calm and staying invested - one of the most important decisions you can make. You'll even be able to add on quality shares at a good price, too. Here's Bill...

If you're a big baseball fan - as I am - then you know that a team's leadoff hitter plays a determinative role in the club's success or failure.

Great leadoff hitters - guys like Rickey Henderson, Richie Ashburn, and Ichiro Suzuki - are terrific "table-setters." As the first hitter to the plate, their job is to "get something started" by getting on base in any way possible - and to serve as an emotional catalyst for the rest of the team... and for the fans in the stadium.

Some of baseball's all-time best leadoff guys were masters at igniting momentum - my favorite old-timer was Eddie Stanky, an infielder and leadoff hitter whose nickname - "The Brat" - reflected his penchant for momentum-swinging plays.

Branch Rickey, the baseball executive who broke the color barrier by signing Jackie Robinson, once took note of Stanky's "spark plug" qualities by observing: "He can't run, he can't hit, and he can't throw. But if there's a way to beat the other team, he'll find it."

In 1951, in a World Series game between the New York Giants and New York Yankees, Stanky (who was then a Giant) tried to steal second base and realized Bronx Bombers shortstop Phil Rizzuto was already waiting to apply the tag. But instead of accepting the out, Stanky (a former soccer player) kicked out with his right foot as he slid and punted the ball out of Rizzuto's mitt and into centerfield.

The Brat popped up and skittered to third. The error led to five unearned runs and a Giants victory that day.

Rizzuto never forgave Stanky for the play.

So while a walk, hit, or even an occasional homer by the leadoff hitter can ignite a team and even fire up the fans in the stands, the opposite is also true.

And of course a poor showing - like a three-pitch strikeout - by the leadoff hitter can hang over a game like a depressingly thick fog. It has a deleterious effect on the other hitters - and can take the fans right of the game.

And when that happens, things can get downright ugly - as I'll show you right now.

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A S-W-I-N-G... and a Miss

I'm talking to you about baseball history and leadoff hitters because there's a very close parallel in the stock market, where corporate earnings season is like a ball game.

earningsThere are "fans" in the stands - the investors who cheer (buy stocks) or jeer (sell stocks) based on the players' on-field performance.

There's a physical "lineup" - an array of companies that are scheduled to report their sales and revenue for each of the reporting periods that encompass a full fiscal year.

Indeed, because there are four quarters - four reporting periods - in every 12-month stretch, we get to watch four of these earnings "ball games" each fiscal year.

Each of those four games in our imaginary "Corporate Earnings Baseball League" (CEBL) has a "leadoff hitter" - a company whose quarterly financial report "sets the stage" for the firms that follow.

In fact, in each of these four "ball games," it's the same leadoff hitter: Alcoa Inc. (NYSE: AA), the aluminum producer that's the first big company to report each quarter.

Alcoa played that leadoff role again the current game last week, when it released its third-quarter earnings.

Unfortunately, the New York-based company did the one thing leadoff hitters do their very best to avoid...

It struck out. And it struck out ugly - the corporate equivalent of taking a called third strike.

Alcoa's shares plunged more than 11% on the day, igniting a sell-off that threatened to break big-cap stocks down and out of a two-month consolidation pattern.

Here's why I'm keeping a detailed scorecard on this ball game: The Alcoa earnings "whiff" - and the pall it has cast over earnings season - is the latest bit of uncertainty to permeate the investment markets.

And that makes this an opportune moment to take certain steps - some that will give you some protection... and others that will position you for the opportunities that always arise from stretches of uncertainty.

Let's take a quick look at those areas of concern - and then talk about a few of the moves you should start looking at now.

The Four Fearsome Factors

Most of the causes of concern are pretty clear. I could list several dozen. But four are key - especially because each touches on so many of the other threats I could list.

Those four "focus points of worry" consist of...

  • Election 2016: The Greatest Show on Earth? - This tagline has been the slogan for the Ringling Bros. and Barnum & Bailey Circus for years. But right now it better fits the looming presidential election: A Pew Research Service study this summer found that voter interest in the November contest was the highest in a generation, and we're seeing consistent reports of record registration activity. The intense interest in the election is being blamed for everything from the fall in National Football League (NFL) ratings to the surprising lack of focus on the ongoing earnings recession. After Nov. 8, the focus on these other issues will intensify - as will the fallout.
  • China's Economy: Blowing Bubbles - Thanks to cheap money, China is experiencing another home-buying frenzy - one that's got folks worried about a repeat eased by easy credit. It is stoking fears of a debt-fueled investment bubble similar to the one that inflated the country's stock market before its crash last summer. With debt levels in China already high in other areas, this trend has spooked a lot of folks. It will take deft handling by Beijing to keep this from becoming problematic in the next year or so. (However, we also believe China's long-term destiny to be a major economic heavyweight hasn't changed, as you'll see from one of our recommendations.)
  • Fed Watch: If Two Central Bank Officials Walked into a Bar... - We all know that the U.S. Federal Reserve is going to raise rates. What isn't known, of course, is when that will happen, how much rates will rise, and what the fallout will be. And it doesn't help that there's clearly a growing dissension in the ranks. Fed policymakers didn't raise rates back in September. But three Fed presidents voted the opposite way - an unusual display of opposition and the most in several years, CNNMoney Markets hate uncertainty, and the fact that Fed officials are going around the country making speeches that seem to contradict one another is whipsawing investor expectations in a way that's going to have the same impact on stock prices.
  • Global Growth Fears: Will the Issues We're Worried About Come Home to Roost? - Global finance ministers and central bankers were in Washington in recent days for meetings of the International Monetary Fund (IMF) and the World Bank. And it quickly became clear that record levels of debt, rising protectionism, and weak financial institutions are major worry points. But here's the IMF's biggest fear: With growth already weak, the push for protectionism could escalate, igniting an even bigger backlash against trade that will act as an additional drag on growth, according to a new Wall Street Journal

Make These Moves Now, and You'll Do Fine

We're not saying that the global economy - and with it, the stock market - is doomed. And we're definitely not saying to cash in all your chips, invest all your money in a log cabin and MREs, and head for the hills.

earnings seasonWhat we are saying, though, is that this would be a pretty good time to reassess your goals, to examine the general state of your finances, to take a close look at both your investment holdings and your general strategy, and to see where some adjustments might be made - either now or if things worsen.

The goal, of course, is to be prepared. Because with every market turndown, new opportunities emerge.

Here are six moves you should make right now:

  • Reassess Your Plan: You need a financial plan - one that delineates how much you want to have, when you want to have it, and what you're willing to do to get there. Take a look to see where you are now - to see if you're on target or not. Make any adjustments. And be realistic.
  • Look at Your Finances: The single-best thing you can do right now is raise cash. That will give you a "cushion" to navigate a tough economy and rocky markets, and will also allow you to take bigger stakes should bargains emerge in a sell-off - as they will. Cut back on superfluous expenses and sock the savings away.
  • Continue with Your "Accumulate" Strategy: Being opportunistic is good, as long as it's part of your plan. We've been advocating this approach for more than a year, telling folks to take starting stakes in the stocks they'd like to own - and to add to those stakes with sell-offs. That's worked exceptionally well with Alibaba Group Holding Ltd. (NYSE: BABA) and Microsoft Corp. (Nasdaq: MSFT). And it will continue to work with stocks we've identified here.
  • Create a "Shopping List": As part of this review, start a list of companies whose shares you'd like to own at the "right" price. One company we believe has a big upside - which we've talked about here in some depth - is Facebook Inc. (Nasdaq: FB). The stock's now at about $129 - we believe it will hit $250 a share in five years.
  • Look for Innovation: Big inventions feeding into big trends will lead to big profits. One great example is General Electric Co. (NYSE: GE), whose "digital industrial" strategy will mesh superbly with its conventional businesses in power generation, aircraft engines, and medical diagnostics, to name a few.
  • Keep Your Wits: Eventually, tough times cycle around. The folks who have a plan, maintain that plan, and don't panic usually navigate those stretches pretty well. And they often end up coming out way ahead. There's no reason you can't be one of those "winners."

We'll be with you every step of the way.

Next: This Unusual "Theory" Made a Regular Investor into the World's Greatest Stock Picker

A little-known business analyst from Pittsburgh has recorded 217 double- and triple-peak-gain winners since 2011. A record that's 100% genuine and documented... and flat out the best stock record we've ever seen.  What's even more amazing is how he does it. Today, he reveals his secret. Go here.

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About the Author

Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning at Money Map Press.

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