Over the last few weeks investors have been pretty excited about strong earnings reports and some positive economic news. Each time good news comes out we try to express some caution as we view the economy stabilizing but with many risks still present.
Today we had some weak statistics reported where durable goods declined and mortgage applications fell. We aren't that concerned with the durable goods number as it can fluctuate on a monthly basis but we still believe it will be a long time before durable goods orders have a steady positive trend. The other day consumer confidence numbers also showed a decline. These are only a few areas where investors might realize that everything isn't so rosy.
Today the Federal Reserve released its Beige Book which indicates economic conditions in the twelve districts around the country. While the recession seems to be moderating, there are clear signs of weakness everywhere. Banks continue to tighten credit,the job market is soft, retail activity is sluggish, residential real estate is soft, commercial real estate is weakening further, and wages are steady or falling.
Although the Beige Book covers the three month period ending in May, it is unlikely that economic activity has improved dramatically in two months. There is enough weakness in these numbers for investors to question whether stocks have been anticipating a return to sales growth sooner than is likely possible.
Wednesday, July 29, 2009
Tuesday, July 28, 2009
Mixed Signals Create Uncertainty
We continue to see mixed results from earnings reports. Many companies have beat analyst expectations and as we have said before, cost cutting has been the leading factor in those positive earnings reports. However, most industrial companies don't see light at the end of the tunnel yet. 2010 may show improved growth prospects but have stocks run to far too fast? Unemployment will continue to rise as we see Verizon cutting 8000 jobs and B of A cutting 6000 jobs. These trends are countered by improved home sales but it appears that pricing is still weak but clearly improving (Case/Shiller) and the injured consumer is not enthusiastic about aggressively buying a new home.
The markets have run fast and there seems to be a little consolidation in them the last couple of days. Until we see some great economic news or a very positive outlook from an industrial company, the mixed signals will prevent stocks from moving much higher. We are more concerned about the W market than the V market. Time will tell who is right.
The markets have run fast and there seems to be a little consolidation in them the last couple of days. Until we see some great economic news or a very positive outlook from an industrial company, the mixed signals will prevent stocks from moving much higher. We are more concerned about the W market than the V market. Time will tell who is right.
Friday, July 24, 2009
It's Hard To Fight the Tape
Microsoft and Amazon disappointed and we had all the makings of an ugly day but investors seem to be indifferent. As they say, "the tend is your friend". Unfortunately, very few companies have top line growth but aggressive cost cutting has produced much better earnings than forecast. Investor euphoria is back and as long as earnings continue to improve so will stocks.
If the market is right and stocks continue to rise, why are we still concerned? Companies can only cut costs so much before they hurt productivity. As such, investors must be assuming revenues will begin to grow in the not too distant future. Stock prices discount future results and if growth occurs in the first quarter of 2010, then perhaps the bulls are correct.
We still remain concerned that unemployment and a new propensity for consumers to save, will curtail spending and lead to minimal growth, if any. When we focus on the debt piled up by local governments, states, and of course the federal government, we wonder what effect this will have on the economy. Let's not forget the toxic assets on the books of financial institutions will also likely limit the lending engine. If small and middle market companies can't borrow, the heart of this economy is in trouble.
Perhaps China and India will spend enough to pull the United States out of its economic mess but that is a big bet to make. We remain quite cautious as earnings season continues. Disaster seems to have been avoided. Stocks rallied hard to reflect the reduction of fear in the markets but for the rally to continue we need to see corporate revenues show some growth.
If the market is right and stocks continue to rise, why are we still concerned? Companies can only cut costs so much before they hurt productivity. As such, investors must be assuming revenues will begin to grow in the not too distant future. Stock prices discount future results and if growth occurs in the first quarter of 2010, then perhaps the bulls are correct.
We still remain concerned that unemployment and a new propensity for consumers to save, will curtail spending and lead to minimal growth, if any. When we focus on the debt piled up by local governments, states, and of course the federal government, we wonder what effect this will have on the economy. Let's not forget the toxic assets on the books of financial institutions will also likely limit the lending engine. If small and middle market companies can't borrow, the heart of this economy is in trouble.
Perhaps China and India will spend enough to pull the United States out of its economic mess but that is a big bet to make. We remain quite cautious as earnings season continues. Disaster seems to have been avoided. Stocks rallied hard to reflect the reduction of fear in the markets but for the rally to continue we need to see corporate revenues show some growth.
Tuesday, July 21, 2009
It's All About Earnings
For the past week we have been getting strong economic numbers from all the government reports. This is very positive for future growth as the economy surely looks like the worst may be over. However, the financial crisis still has risks with commercial real estate being the most obvious future problem. Perhaps there are some real green shoots out there but don't forget unemployment continues to rise and we expect it to move into solid double digit numbers.
Most companies that have reported second quarter numbers have beat Wall Street earnings expectations. It is easy to see why the banks have done very well as their cost of funds are negligible. If you can't reach profitability when your cost is zero, the future should be pretty cloudy for banks. Certainly Citigroup remains a disappointment and other banks will also not do well. The strong will get stronger and Goldman and J.P. Morgan will lead the way.
The markets are soaring as earnings are strong but we still raise the red flag as most companies continue to report weak revenues. Ultimately, sales need to drive profits and cost cutting can only go so far. Investors appear to only care about the bottom line so far as aggressive cost cutting seems to be enough for now. Productivity is likely soaring which is good for future growth and stability. We also expect consumer confidence to rise with stock prices and the stabilization in the economy is also removing the fear in the markets.
Global growth, especially from the China stimulus plan, may be boosting the order flow for many companies but as we have stated in the past, some of the Chinese commodity buying is for storage and not for current production. The bottom line is that even with great earnings most companies find revenue growth to be tepid and business may not be declining but it certainly is not improving much. The bottom was reached in March but happy days may not be here yet. We may have missed last week's stock market run but the downside concerns are still real. We view our hedged stock positions as a way to be safe rather than sorry. We may not have the same upside but if the growing government debt, the real estate defaults, corporate bankruptcies, and the weakened consumer become the focus of investor attention, then stocks could still see a sharp reversal.
Markets usually foreshadow the future but it is not always accurate for short term moves. Investors seem to be willing to expand P/E ratios as cost cutting boosts earnings but if order rates don't begin to improve and revenues don't begin to grow, then stock multiples may contract and the bullish euphoria may disappear. There are many more companies that need to report earnings and we will focus on industrial enterprises to get a true feel for the economy. Financials should do well this quarter, and large technology companies are well positioned to weather the downturn but leverage remains high in our financial system and all risks have not abated.
Most companies that have reported second quarter numbers have beat Wall Street earnings expectations. It is easy to see why the banks have done very well as their cost of funds are negligible. If you can't reach profitability when your cost is zero, the future should be pretty cloudy for banks. Certainly Citigroup remains a disappointment and other banks will also not do well. The strong will get stronger and Goldman and J.P. Morgan will lead the way.
The markets are soaring as earnings are strong but we still raise the red flag as most companies continue to report weak revenues. Ultimately, sales need to drive profits and cost cutting can only go so far. Investors appear to only care about the bottom line so far as aggressive cost cutting seems to be enough for now. Productivity is likely soaring which is good for future growth and stability. We also expect consumer confidence to rise with stock prices and the stabilization in the economy is also removing the fear in the markets.
Global growth, especially from the China stimulus plan, may be boosting the order flow for many companies but as we have stated in the past, some of the Chinese commodity buying is for storage and not for current production. The bottom line is that even with great earnings most companies find revenue growth to be tepid and business may not be declining but it certainly is not improving much. The bottom was reached in March but happy days may not be here yet. We may have missed last week's stock market run but the downside concerns are still real. We view our hedged stock positions as a way to be safe rather than sorry. We may not have the same upside but if the growing government debt, the real estate defaults, corporate bankruptcies, and the weakened consumer become the focus of investor attention, then stocks could still see a sharp reversal.
Markets usually foreshadow the future but it is not always accurate for short term moves. Investors seem to be willing to expand P/E ratios as cost cutting boosts earnings but if order rates don't begin to improve and revenues don't begin to grow, then stock multiples may contract and the bullish euphoria may disappear. There are many more companies that need to report earnings and we will focus on industrial enterprises to get a true feel for the economy. Financials should do well this quarter, and large technology companies are well positioned to weather the downturn but leverage remains high in our financial system and all risks have not abated.
Sunday, July 12, 2009
Earnings Season Will Hit Full Stride
This week will be the true beginning of earnings season as many companies shall report their second quarter results. The economy certainly doesn't look great as oil has moved below $60 and consumer confidence continues to drop. Only a month or so ago investors were bullish on the economy and the stock market. The green shoots seemed to be sprouting up everywhere but they only seemed like weeds to us. Now retail sales remain ugly, housing is still drifting, unemployment is rising, and the consumer is not happy.
Business seems to have stabilized but unless companies report that order rates are improving and the outlook is bright, investors are likely to sell stocks. We haven't been in the optimist's camp and the tidbits from the Allen & Co. conference leave us to believe that earnings season will not bring summer cheer. Let's hope for the best but cash will remain king.
Business seems to have stabilized but unless companies report that order rates are improving and the outlook is bright, investors are likely to sell stocks. We haven't been in the optimist's camp and the tidbits from the Allen & Co. conference leave us to believe that earnings season will not bring summer cheer. Let's hope for the best but cash will remain king.
Thursday, July 9, 2009
The Economy Chugs Dowwwn
Jobless claims may have moved down 52,000 to 565,000 but the unemployed still can't find jobs as the continuing claims hit a new high not seen since 1967. The weak employment picture and the decreased appetite for spending by the consumer resulted in very soft retail sales in June, Weather was also likely a big factor but our concern for earnings should be highlighted. Retailers have been aggressively marking down prices which should create a dismal earnings picture.
Alcoa may have beat expectation but the numbers are still ugly. Perhaps lower oil prices and declining interest rates will give the consumer a new lift as gasoline prices should begin to decline and mortgage rates are coming down again. An improved affordability index could lift consumer confidence but unless businesses think they can generate stronger earnings in the second half of 2009, stocks will only make investors miserable.
We remain cautious and anxiously await comments from corporate chiefs' outlooks for the rest of the year.
Alcoa may have beat expectation but the numbers are still ugly. Perhaps lower oil prices and declining interest rates will give the consumer a new lift as gasoline prices should begin to decline and mortgage rates are coming down again. An improved affordability index could lift consumer confidence but unless businesses think they can generate stronger earnings in the second half of 2009, stocks will only make investors miserable.
We remain cautious and anxiously await comments from corporate chiefs' outlooks for the rest of the year.
Tuesday, July 7, 2009
Will Earnings Season Bring Surprises?
The economic news, especially employment numbers, have disappointed investors lately. Stocks have been dropping fast and it might take a big decline or an unexpected catalyst to reverse the downward trend. The next few weeks should tell the true story of the economy. Alcoa will report its earnings tomorrow followed by most other companies. We have low expectations for many positive surprises but hope we are wrong. However, until the green weeds start to look like real green shoots, we will sit on our cash and maintain the puts on the S&P. Be cautious and wait for the tea leaves that say business is improving, housing has bottomed, the consumer is ready to spend, the financial system is once again functioning normally, and lending is on the rise.
Sunday, July 5, 2009
"Rising Job Losses Damp Hopes of Recovery"
The title of today's post was the leading article in this weekend's Wall Street Journal. At the beginning of last week, we scripted an article which referred to last Saturday's New York Times' story titled "U.K.'s Recovery Slows Amid Sluggish Spending". We highlighted the fact that the United Kingdom was foreshadowing what was inevitably going to happen in the U.S. It didn't take a week for the weak economic news to hit and for investors to flee stocks as fast as they could.
Thursday's markets dropped 2.6%, oil cratered 3.7% and the unemployment picture was bleak. It shouldn't be much of a surprise to our readers that the green shoots are more likely weeds. Euphoria has struck the markets as the fear to miss the chance to recoup losses hit individual investors as it did many professionals. Stocks had an amazing ride in the great bear rally of spring 2009 but what will the latter half of 2009 look like?
This week 2nd quarter earnings will start to be reported and unless we are completely surprised, companies are likely to report that they continue to cut costs and jobs to help their earnings but the economy remains bleak and sales will not be growing for the rest of the year. Many economists and investors have been banking on an economic recovery in the second half of 2009 but we just don't know from where it will be coming. The stimulus plan will add some positive momentum but it won't be enough to counteract weak consumer spending, a hampered commercial real estate market, and rising consumer defaults.
In a few months it will be apparent to most investors that China was driving demand for commodities as they took the opportunity to hoard raw materials at low prices. China has put in place their own stimulus plan but its true growth has also tempered. China will remain a big driver of industrial demand in years to come and their consumption for copper, steel and other commodities will be strong but not in this global recession. As prices of these commodities rise, China's buying will be curtailed and speculators of such commodities will be in for a big negative shock.
Unemployment will continue to rise, manufacturing will be tame and when back-to-school sales are disappointing the markets will start to focus on the impending disaster for Christmas sales. If investor psychology hasn't turned completely negative in the next few weeks, reality will set in once school is back in session and retailers brace for the weakest sales they have seen in three decades.
We look forward to earnings season and hope our concerns are proven wrong but until then, we will continue to raise cash and hedge our long positions with S&P puts and selling covered calls.
Thursday's markets dropped 2.6%, oil cratered 3.7% and the unemployment picture was bleak. It shouldn't be much of a surprise to our readers that the green shoots are more likely weeds. Euphoria has struck the markets as the fear to miss the chance to recoup losses hit individual investors as it did many professionals. Stocks had an amazing ride in the great bear rally of spring 2009 but what will the latter half of 2009 look like?
This week 2nd quarter earnings will start to be reported and unless we are completely surprised, companies are likely to report that they continue to cut costs and jobs to help their earnings but the economy remains bleak and sales will not be growing for the rest of the year. Many economists and investors have been banking on an economic recovery in the second half of 2009 but we just don't know from where it will be coming. The stimulus plan will add some positive momentum but it won't be enough to counteract weak consumer spending, a hampered commercial real estate market, and rising consumer defaults.
In a few months it will be apparent to most investors that China was driving demand for commodities as they took the opportunity to hoard raw materials at low prices. China has put in place their own stimulus plan but its true growth has also tempered. China will remain a big driver of industrial demand in years to come and their consumption for copper, steel and other commodities will be strong but not in this global recession. As prices of these commodities rise, China's buying will be curtailed and speculators of such commodities will be in for a big negative shock.
Unemployment will continue to rise, manufacturing will be tame and when back-to-school sales are disappointing the markets will start to focus on the impending disaster for Christmas sales. If investor psychology hasn't turned completely negative in the next few weeks, reality will set in once school is back in session and retailers brace for the weakest sales they have seen in three decades.
We look forward to earnings season and hope our concerns are proven wrong but until then, we will continue to raise cash and hedge our long positions with S&P puts and selling covered calls.
Thursday, July 2, 2009
Bad Economics, Bad Markets
Our concerns for the past few weeks are starting to play out. June jobs lost equaled 467,000, a number much worse than expected by the wizard economists. Unemployment rose to 9.5% from 9.4%. Finally, weekly unemployment claims were 614,000. The markets didn't like what they saw and stocks proceeded to drop over 2.5% Thankfully the holiday weekend is here for investors to ponder what economic weakness may lie ahead.
Since March ninth, stocks looked like they were leaping into the next bull market but as we have been saying, it may only be a major bear rally. Unless second quarter earnings reports reflect growth in revenues and sustained earnings, expect stocks to wither on the "green weeds".
Since March ninth, stocks looked like they were leaping into the next bull market but as we have been saying, it may only be a major bear rally. Unless second quarter earnings reports reflect growth in revenues and sustained earnings, expect stocks to wither on the "green weeds".
Wednesday, July 1, 2009
Are The Green Shoots Actually Weeds?
We have been concerned for months that the pick-up in economic activity is a blip in a weak economy. Low oil prices, low inventories, and a rising stock market brought some euphoria to investors as consumer confidence rose and businesses began to spend more. Earnings reports were better than expected but they weren't from growth but aggressive cost cutting. Stocks took each queue as a sign of the economy improving and baked in an expectation of higher GDP in the second half of 2009.
Yesterday, consumer confidence was announced and it was weaker than the previous month. The markets viewed that as a big concern but it doesn't appear to be a huge surprise. The world is not falling off a cliff and the banking system has not collapsed, yet. Business has stabilized and consumers are feeling better. The economy is in no man's land as business is not contracting but it is not growing either. The future trends for consumer spending is definitely a problem as the loss of net worth, higher oil prices, and rising mortgage rates will lead individuals to save more and replenish their net worth. Decreased consumption means weaker GDP growth in the future.
Today the ADP employment report showed that 473,000 jobs were cut in June when most economists expected 393,000. It doesn't look like a green shoot to us and neither does the consumer confidence numbers. It will be interesting to see today's reports on the June Manufacturing Index and the May Pending Home Sales. Will those green shoots also look like weeds?
Yesterday, consumer confidence was announced and it was weaker than the previous month. The markets viewed that as a big concern but it doesn't appear to be a huge surprise. The world is not falling off a cliff and the banking system has not collapsed, yet. Business has stabilized and consumers are feeling better. The economy is in no man's land as business is not contracting but it is not growing either. The future trends for consumer spending is definitely a problem as the loss of net worth, higher oil prices, and rising mortgage rates will lead individuals to save more and replenish their net worth. Decreased consumption means weaker GDP growth in the future.
Today the ADP employment report showed that 473,000 jobs were cut in June when most economists expected 393,000. It doesn't look like a green shoot to us and neither does the consumer confidence numbers. It will be interesting to see today's reports on the June Manufacturing Index and the May Pending Home Sales. Will those green shoots also look like weeds?
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