Short Term Trouble, Long Term Gift? (SPY, SSO, SDS, SH, /ES)

Sorry about the lack of recent posts, I’ve been pretty focused on the markets lately.

Last week the bears broke some technical setups where the bulls had a big upper hand. I started to sell positions at that point and increased my selling this week as the charts got uglier. Thursday was absolutely short covering. Looking at the up/down volume and advance/decline ratio’s from Wednesday to Friday, you can see an almost symmetrical reversal that means the market was overwhelmingly short, covered and put the shorts back on. This current short setup has a target of $1023.90 on the /ES (E-Mini S&P500 Futures). Let’s take a look at some charts:

You can see here that we bounced off of our long term downtrend line and today we closed below our nearer term support uptrend. I’d like to hope that if we close above it things will be fine but I think that is unrealistic. It’s hard to imagine why the market should be much higher than 1200 considering the long term structural issues that the U.S. is still facing. Even if the dollar continues to fall, we are net importers; so while international corporations may get revenues in stronger currencies, they still have to pay to much for input costs. a weaker dollar would be nice if we were still a manufacturing based economy but we aren’t. Next Chart.

You can see on this chart that the most recent surge took place on higher volume. However, the volume faded on the way up and picked up steam on the way down which is not a good sign if you’re a fan of Dow Theory. The good news is we have a long term inverted head and shoulder pattern (I admit I have seen better ones) which could give us support around $970.

I normally wouldn’t have given much weight to the H&S pattern (green line of support) but it also coincides with what should be a strong 50% fib retracement at 985. It is also an area where the shorts will be taking profits at their targets.

I will be in a conservative bear mode (and short through SH or SDS if the market somehow manages to rally back above 1065) until we get down below 990 where I will begin going long again. I will also consider a small long position through SSO around 1018-1020 where there is another decent long set-up.

Get your shopping lists ready everyone!

-MJB

Consumer Credit Card Debt Levels (JPM, BAC, V, MA)

How is the consumer supposed to recover and drive the 70% of GDP s/he accounts for when s/he is buried under a metaphorical mountain of credit card debt?

The Market Ticker blog has a great post about how consumers are struggling under a mountain of credit card debt, and the disastrous effects this will have on the V-shaped recovery the market seems to have already predicted.

While I disagree with the high interest rates on which the author, Karl Denninger, bases his calculations, even if you divide his figures in half you still come up with a problem.  And certainly you would be counting your lucky stars if you were one of those people paying only 10-15% on your credit card.

Banks such as JP Morgan Chase (JPM) and Bank of America (BAC) have been increasing their consumer loan loss provisions as they predict more trouble ahead in that sector.  Credit Card giants Visa (V) and Mastercard (MA) could see trouble if consumer sentiment shifts and people start using their cards less. Perhaps the market should take those warnings into consideration as it ponders which direction to choose after making new 52 week highs.

=AH

Disclosure: Long JPM, no other positions in stocks mentioned

Earnings Preview 10/22/09: (MMM, AXP, T, MCD, MRK, GE, PFE)

Here comes another big day!

Before Market Hours:
3M Company (MMM): 3M Company is a diversified conglomerate like General Electric (GE), but without the added risk of a capital arm that almost fells the company.  3M seems well managed but it is still hard to get a clear picture of the company because of all the different business segments. Wall St. Analysts are looking for Q3 earnings of $1.17 per share on $5.75 billion in revenues and $1.06 EPS on $5.55 billion in revenue for Q4.
YTD: +33% One Month: +3%

AT&T (T): The Telecommunications giant is expected to post EPS of $0.5 on revenues of $30.88 bn, a decrease of about a percent over the year ago quarter. There are a couple things at play here, but traders will be looking closely at the top line as a proxy for consumer and business spending.  Decline in the land-line sector is well-documented, but analysts will be looking for continued signs the company is reducing its exposure, and in the wireless sphere AAPL’s earnings have created high hopes that iPhone revenue will contribute strongly to the bottom line.  The expectations are reasonable for this reporting period, so traders and investors alike will be looking for the company to beat EPS and especially Revenue estimates.
YTD: -9%     One Month:- 3.5%

McDonalds (MCD): The world biggest fast food chain is expected to post earnings of $1.11 EPS on $6.1 billion of  revenue according to consensus estimates by Thompson Reuters. Q4 estimates are pegged at $.99 EPS on $5.89 billion. Key items for investors to watch will be 1.) same store sales growth which slightly dissapointed last quarter, 2.) Growth trends for McCafe and 3.) currency impacts. Effective corporate tax rate could also be interesting to watch. McDonalds has so far lagged the market over much of the year along with other defensive stocks but I think investors may begin to warm to them as the market continues its high-wire balancing act.
YTD: -6%     One Month: +4%

Merck (MRK): Merck is the last big pharma/drug stock to report. I don’t feel that the bar has been set particularly low or high in this sector by previous reports so this should be good to watch, especially after the cautious tone that Pfizer (PFE) was echoing in their report. Thompson Reuters estimates for Q3 are currently for $0.82 EPS on $6 billion in revenues with Q4 estimates coming in at $0.84 EPS on $6.16 billion in revenues. Fiscal 2009 ending in December is expected to be $3.23 EPS and $23.44 billion in revenues.
YTD: +8.5% One Month: +3.5%

After Market Hours
American Express (AXP): The banking giant is expected to produce EPS of $0.37 on Revenue of $5.91 bn, a $17.5% decline from a year ago. Probably the most important earnings of the day, at least for the overall market, traders will be looking for, and hoping that, AXP blows out its earnings. Enough at least to justify the strong recovery the stock has put on so far this year. Recent rumblings have suggested that the company will post strong numbers on the back of a recovery in spending from higher-net-worth individuals, but the street will look at the numbers across American Express’ clientele to try to gauge the mood of the average shopper before this important holiday season. Management’s discussion of the new CARD law, and its effects on industry profitability, will be interesting although my guess is that it is already priced in to the stock.
YTD: 93.5%     One Month: 6.5%

-Lucid Markets Team

Disclosure: Collectively long T, MCD, GE, ABT and JNJ

The Half-Way Point: Earnings Season Observations (SPY, QQQQ, DIA)

So far this earnings season, 77% of companies have posted EPS numbers in excess of their estimates.  This is extremely high from a historical perspective, and shows just how much the street analysts have underestimated the recovery in the market.

As we have said before, however, this earnings season is all about revenue.  It is much easier for a company to post good EPS numbers as they slash costs by cutting staff and capital expenditure.  Much harder to manufacture is revenue numbers, and this earnings season is separating the former from the latter. This helps explain why, despite the high percentage of EPS beats, the average stock has actually declined 0.72% on its reporting day (Source: The Bespoke Investment Group, found here).

I noticed this trend during last quarters reporting season.  The companies that reported first all benefited from EPS expectations that had not been adjusted up enough to match the cost cutting that was being implemented.  During first few weeks, the majority of companies beat expectations, and their stocks took large leaps on those days that they posted.  The euphoria spread to their respective industry peers, and by the midway point the market was feeling pretty good.  However, while formal expectations didn’t increase drastically, whisper numbers for the later-reporting companies did until finally they were too high.  So when those companies actually reported, they fell short and the stock dropped.

I have no insight as to whether this will happen this earnings season, but I would say it is a definite possibility, especially in industries like health care and technology where the vast majority of companies have seen large jumps in share price as they handily beat expectations.

-AH

Disclosure: Long T and MSFT.

Why Warren Buffett Doesn’t Like Gold, and Why I Do (GLD, GDX)

Warren Buffett

Warren Buffett is a strictly a long-term investor with a holding period of “forever”. The fact that he is an investor prevents him from investing in gold. Gold will never earn any money, nor will it ever pay out dividends to its holders.

The only thing gold can do is precisely why I have been buying; it works extremely well as a store of value. An average automobile in 1950 would have cost the equivalent of approximately 30-40 ounces of gold. The same holds true today at the recent spot gold prices above $1000. Had you instead decided to hold cash, you would not even have enough money to pay for the down payment.

The most common reason cited by people bullish on gold is inflation and although it is certainly a contributing factor, I do not feel that this is the most important issue affecting gold prices. Instead, I believe that there are three other overarching trends taking place right now that are exerting much more upward pressure on the price of gold.

1.) Overall Depreciation of Currency
Normally if one government prints a lot of money, the currency will drop relative to other currencies. However, in situations like we have today when many governments are printing money (and some are managing their currencies to subsidize exports like the Chinese), you get a situation where fiat currencies as a whole become worth less relative to other stores of value such as gold and other commodities. There is only so much gold on this planet and it is usually pretty hard to get to which helps fundamental elements of supply and demand.

2.) Excess Liquidity and a Truly Damaged ‘Real Economy’
Despite the recent stock market rally, the real economy is still hurting badly and even though unemployment has been improving, we are still a long long long… pause… long way from adding jobs. Governments are also intervening in the markets in very unprecedented ways in the form of legislative overhauls, a massive stimulus bill that served mostly pork-barrel interests and the new role of the Government/Federal Reserve as the biggest lending facility in the world.

The poor state of the economy, along with the extreme uncertainty regarding the future business landscape and poor availability of lending facilities, it is not surprising that investors and entrepreneurs aren’t rushing into the real economy. They are instead putting their money into stocks, bonds, gold and commodities hoping to make at least modest return while also preserving the value of their money as central banks around the world flood the markets with liquidity.

3.) There is no Price Ceiling on Gold Prices
People in general don’t buy gold as an investment. They buy it because they feel they need to in order to avoid losing something; in this case, it is to protect investors and central banks from depreciating global currencies, inflation and political instability. The price they pay for this protection is simply whatever they can buy it for.

David Goldman (ironic last name) pointed out in a piece from a few weeks ago that Central banks alone own about 4.8 million tons of gold. The world produces about 2,200 tons. If central banks were to increase their gold holdings by just one percent, it would require approximately 48,000 tons which is more than 20 times annual mining production.

If the planet is about to be hit by a meteor and there is only enough room for 100 people in an underground bunker; the people who have the most cash (or the biggest guns unfortunately) are going to end up in the bunker.

I don’t think gold will begin to fall again until we have incontrovertible evidence that the situation in the real economy is on the mend. Until then, I will try to have at three to eight percent of my portfolio in gold through the actual commodity (GLD, purchased @$99.65 on 10/5) and gold miners (GDX, purchased @$48.64 on 10/8). I hold a small legacy position in Barrick Gold Corp. (ABX) that I see no reason to sell, but I also see few reasons to buy it. I will be doing further research into gold mining stocks in the future.

Gold is very volatile and I recommend gradually easing into positions on dips if you are going to play in this area.

-MJB

Disclosure: Long: GLD, GDX and ABX

Coal Exports Surge (KOL, ACI, BTU, MEE, AEP, NSC, BNI)

The Business Insider has posted an article here that reflects what I think is the first signs of the positive effect the weakening dollar is having on the economy.

Dollar Futures (/DX) have fallen by over 20% since it reached a local maximum at the end of last year, and a lot has been said about the negative ripple effects that that is having.  Certainly, import prices are increasing, countries that have their currency pegged to the dollar are having to weaken their monetary policy to follow the fed, and the Republicans in Washington are harping on the White House for failing to live up to its strong dollar policy.

However, behind closed doors, these same politicians are actually supportive of a weak dollar, at least in the short term.  One reason for this, as shown by this report, is that it will increase exports since America’s products become favorably priced on the open market as the dollar declines.  Certainly coal (ETF: KOL) is a beneficiary of this, but other American exports such as steel, chemicals, and medical supplies will be helped. There isn’t much good to be said about domestic demand, and the hope is that foreign consumers will step up first and because of the weak dollar, American products will look relatively cheap.

To be specific, this development should benefit coal miners such as Peabody Energy Corporation (BTU), Arch Coat (ACI) and Massey Energy Company (MEE), but will hurt coal-centric utilities such as American Electric Power (AEP) as they compete for supplies with hungry overseas users such as China.

Shipping companies should also benefit, as water remains the only way to ship bulk goods between the US and other continents.  Additionally, domestic transporters like Norfolk Southern (NSC) and Burlington Northern Santa Fe (BNI) will benefit as coal is transported from the mines in the Mid West to the ports at the coast.

-AH

Disclosure: Long BNI