“…And Procter & Gamble, no matter how well they say they’re doing because they are the stocks that people sell when things are improving in this country. That’s why they can be so hated. While a company like Fortune Brands can slash its dividends, say it just had the worst quarter ever, and go much higher. When the economy starts to turn, the macro economic picture trumps everything else.” CNBC’s Mad Money 5/1/2009

Well, I guess I am not alone in the fact that more often than not these days, I am left more than a little bit confused when trying to understand this market.  Sometimes it just does not make sense. For example earlier this week, Q GDP came out far worse than expected and the Dow Jones Industrials soared 165 points.  The “green shoots” that everyone has been referencing lately seemed to have been stomped dead by the worsening economic data.  However, the market brushed this aside and found things to be excited about when parsing the data, such as better than expected personal consumption and a reduction in inventories (Investors See Green Shoots in 1Q GQP Manure).

Cramer makes a great point by looking at the recent performance of Fortune Brands (FO) which is up 135% from its March lows and Procter & Gamble  which is down about 20% year to date and only up slightly since the market bottomed.  Never mind the fact that Fortune Brands has seen earnings fall through the floor recently, with two straight quarters of major surprises to the downside.  All the while, PG just does what it is supposed to do, and made consistent profit only down 4% from a year ago.  The problem is that PG is known to be a defensive stock and right now, the market is favoring growth in a big way.

There is no doubt that the market has the ability to overlook some bad news right now.  Nearly 70% of companies that have reported earnings thus far for this quarter have exceeded much lower expectations.  However, I must admit that the gains in stocks like FO have caught me a little off guard, but there is no doubt that is what makes the markets so interesting to study.  At Ockham we have both PG and FO as Undervalued, however, those valuations were done prior to the latest earnings releases.  With the sort of earnings deterioration Fortune Brands has experienced in the last six months falling from $1.11 just six months ago to a paltry 5 cents this quarter, no to mention the major rally in the shares, there is certainly a good possibility of a downgrade in the near future.