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Follow-Up: Technical Trouble on the S&P 500 (SPY, GS, JPM, AAPL, CSCO, GOOG, F, GE, CAT, GLD, UUP)

December 8, 2009 1 comment

We have posted discussions about this in the past, most recently on November 25th and also on October 30th, where we looked at the charts and decided that the S&P 500 was possibly in for some trouble.  On November 25 the broad market index closed at 1111.18, and today it closed at 1091.94, for a loss of 1.7%.  Basically, the market has gone nowhere in that time.

What has happened, however, is that the chart has given us some more signs that the market is running into trouble.  Here is a 1 yr daily chart of the SPX, similar to the one we showed in our previous posts, except with some updated lines.

As you can see, we still remain unable to break above that 1120 line (yellow horizontal line), which is the long term 50% Fibonacci retracement line from the 2007 high to this years low.  It is likely that we are seeing heavy resistance at this level as traders anticipate this weakness and front run it to exit positions for the year.

Additionally, this chart shows that we have broken the uptrend that was established since the March lows.  Keen observers will note that this also happened in October, but the break is much more definitive this time especially when combined with that price ceiling. However, we will need to take a look at where we close on the weekly chart because that should be much more indicative of future movements.

For good measure, the same analysis applied to the E-Mini futures (/ES) yields similar results:

The /ES is attempting, and thus far failing to break through its own ceiling which has been established at 1112.  As you can see, the E-Mini futures just broke below the upward trendline that has defined this rally since March.

The root cause of this is, in our opinion, fund managers selling off risky assets to lock in the substantial gains some of them have been able to accumulate during this tumultuous year.  Obviously, this situation is not sustainable, as mutual fund managers often have a mandated maximum cash balance, and hedge fund managers generally do not like to have their end-of-year statements to clients say that they are in cash.  But there is a lot of money available to be taken off to the sidelines, so this situation may continue through the end of the year.  It will be important to watch leadership stocks over the next couple weeks such as Goldman Sachs & Co. (GS), JP Morgan Chase (JPM), Apple (AAPL), Cisco, (CSCO), Google, (GOOG), Ford (F), General Electric (GE), Caterpillar (CAT), etc. and of course gold (GLD) and the US Dollar (UUP). We’ll be making a follow up to this over the weekend.

-Lucid Markets Team

Disclosure: Long GS, CSCO, GOOG, GE, GLD, UUP, JPM and the stock market in general through various other positions.

Warren Buffett’s Large Acquisition (BNI, BRK.A, BRK.B)

November 6, 2009 Leave a comment
warren_buffett

Warren Buffet

Warren Buffett has picked up one of the stocks I have championed before on this blog, railroad stock Burlington Northern Santa Fe (BNI).  Berkshire Hathaway (BRK.A, BRK.B) had previously acquired a sizable minority position in BNI, and Mr. Buffett must have liked it a lot because he decided to buy the rest of the company at a price of $100 per share (about a 30% premium from the previous days close).

In addition to the announcement of his largest acquisition ever, Buffet announced a 50-to-1 split of the Baby Berkshire shares, his class B tranche (BRK.B).  This announcement, he said, was so that he could offer the small investors some BRK shares, whereas before they couldn’t afford the high prices (somewhat of a contradiction to what he said a few years ago about how a stock split was stupid and would allow inferior investors to own its’ stock…).

This puts BRKB on the radar of both Mike and myself.  Previously, we both had looked at BRK as a favorable investment, especially during March when it had reached such a low level, however, the price was cos prohibitive. Now, Warren has offered me the chance to either accept $100 in cash for my shares of BNI, or some of his new, cut price, BRK.B shares.  And I am unsure how to act.

On the one hand, BRK is a one stop diversification stop.  It has exposure to banks, insurers, manufacturing, transportation, and a host of others.  It has a proven track record of providing its investors with outsized gains, and excellent capital preservation.  And it is the best way to ride the coattails of the one who is considered the world’s greatest investor.

On the other hand, Mr. Buffett is not a young man anymore.  I am aware that there are several remarkably smart people waiting in the wings at Berkshire, but it is a huge risk to assume that the company can continue its remarkable run without its point man at the helm.  His deal with Goldman Sachs (GS) during the height of the financial crisis was inspired and hugely profitable, but his similar timing with a similar deal with General Electric (GE) was less so, with the warrants he acquired remaining worthless.  Finally, BRK is highly leveraged to the US economy.  With this deal, Warren openly admits that he is taking a huge risk on the future of America, which he is undyingly positive about. Add to this his other positions and you have a company which is leveraged to a country with anemic growth, a declining currency, and a government with a huge debt load.

During the course of writing that last paragraph, I have convinced myself that I will take Warren’s offer of cash to the bank.  There are too many variables involved in Berkshire, especially as Mr. Buffett gets older.  I respect him hugely as an investor, I just think I can achieve a superior Sharpe ratio investing elsewhere.

Disclosure: Long GE, GS and BNI (pending the buyout)

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

October 21, 2009 Leave a comment

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)

October 21, 2009 Leave a comment

stocksSo 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.

Earnings Wrap-Up (INTC, JNJ, ABT, JPM, IBM, GOOG, GS, C, BAC, GE)

October 15, 2009 Leave a comment

What a week… We saw saw the Dow break above the 10,000 barrier and some of the biggest and most influential names in the market have reported a mixed bag of earnings that have been interpreted in an equally mixed way.

Intel (INTC) posted great numbers and although they rocketed up on the news, they have since given back all of the gain and then some. Buying on the good news would have hurt and they also set the earnings bar high for other reporting companies.
Earnings: Beat
Revenue: Beat

Johnson & Johnson (JNJ) in my opinion posted ‘Good’ or ‘Very Good earnings’. Unfortunately the street was looking for ‘Great’ and the shares received a 2.5% slap on the wrist. I recently purchased JNJ towards the end of September at $61.38 because I have been trying to take a more defensive posture as we continue at these high levels on the S&P 500. I still stand by these convictions although I wouldn’t pull the trigger to buy more unless it fell into the mid 50’s.
Earnings: Beat
Revenue: Miss

Abbott Labs (ABT) is another diversified healthcare company we own that has a nice healthy dividend of % but has been lagging the market since the bottom in March. Their earnings were well received after the lowered bar from JNJ, who stated that consumer defection to generic drugs were a big contributor to the disappointing sales numbers.
Earnings: Beat
Revenue: Beat

J.P. Morgan & Chase (JPM) posted fantastic earnings across the board, setting the bar high for its competitors as earnings season plays out.  Revenue leaped to $26.62 billion from $14.74 billion, and their Tier 1 capital ratio jumped to 10.2%, up from 8.9% in the year ago quarter. The bank has expressed some misgivings about the future, and has increased its consumer lending loss provisions by over 60%, and non-performing assets have more than doubled since Q3 2008.
Earnings: Beat
Revenue: Beat

International Business Machines (IBM) reported what I felt were good numbers but not enough to justify the bidding up of their shares leading into earnings. IBM still looks very strong fundamentally and I think this bad reaction to their earnings can be used as an opportunity to accumulate (more on this in a later post).
Earnings: Beat
Revenue: Miss

Google (GOOG) reported fantastic earnings, beating the street in both profitability and revenue.  Customer paid “clicks” increased both sequentially and year-over-year, but the average price paid per click by advertisers fell.  CEO Eric Schmidt said the worst of the recession is behind them, and that the company could make one or two “big acquisitions” per year from here on out. Their revenues grew substantially and their Traffic Acquisition Costs (TAC) fell during the quarter.
Earnings: Beat
Revenue: Beat

Goldman Sachs (GS) posted fantastic profitability, but revenue levels were enough to concern the street. Nearly all sector revenues were down sequentially, except for trading and asset management which benefited greatly from the 15% rise in the markets during the quarter.  Going forward, GS will benefit greatly from being the strongest Investment Bank due to greatly diminished competition, but will be hurt in its strongest business if the markets go south again.
Earnings: Beat
Revenue: Beat

Bank of America (BAC) posted poor earnings, slipping to a loss of $.26 per share compared to a profit of $.15 in the year ago quarter.  This highlights the ongoing struggle of consumer banking, as it deals with high unemployment and increasing amounts of non-performing assets.  In this light, the company announced it has increased its loan loss provision account to $11.7 bn, up from $6.45 bn a year ago.
Earnings: Miss
Revenue: Miss

General Electric (GE) reported great profitability, but poor revenues causing traders to drive the stock down 5%.  GE Capital was the main anchor on the company, with its profit declining 87%, but surprisingly NBC Universal was a bright spot with a 13% rise.  Jeff Immelt talked of a tough environment (he noticed!), but that he saw signs of stabilization in GE Cap.
Earnings: Beat
Revenue: Miss

Overall, it looks like the previously strong companies are getting stronger (GS, JPM, GOOG, INTC), while the environment remains troubled for companies who have underlying issues (BAC, GE). IBM dropped after reporting but we view the results positively.

Lucid Markets Team

Disclosure: Long: TSM, JNJ, ABT, IBM, GOOG, GS, BAC, GE, IBKR, JPM