Sunday, July 8, 2012

Previewing 1st wk of earnings

Welcome all from rainy and cool Oxford, England where I will spend the next 5 weeks taking a couple core classes for college (Biology and Shakespeare studies), whenever able I will update, but the wifi here is spotty, and time is precious.

Lets review from the last 2 weeks..

End of the month/quarter for June was a big one, upside volume came in the strongest I have seen it in months, but I was cautious. Big up and down moves like this, especially on that day signaled fund managers wanted in, something big was happening. I look at unemployment and manufacturing indexes and the data we have seen these past few weeks has been more than disappointing. The European summit showed once again signs of hope, which was bought into, but fizzled out quickly.

On Thursday, we saw more central bank action by the BoE, ECB and PBC. More rate cutting for all 3, negative deposit rates for the ECB (!!) and 70B pounds of QEasing for the BoE. In my opinion, people are tired of this. We have been cutting; lowering rates for the past 4 years and it has synthetically driven up equities, while weakening the US dollar. This was a chance to sell off on the news, we know these are all temporary solutions, and someone needs to step forward with a real solution. Until that time, I remain skeptical on this so called “recovery” we have witnessed since March ’09. The growth is there in SOME places (cons. Staples, biotech, healthcare). Those three sectors are going to be the most important going forward in the coming years. As less people are needed to do jobs and more machines; robots can take over we will see a large shift. Still, people need to eat, new drugs will continue to come out on the market, along with people getting older, healthcare and basic medicines will be needed.  Some of the biggest and most important sectors who have lost thousands, if not hundreds of thousands of jobs are yet nowhere close to a recovery (infrastructure, manufacturing, construction, and finance). As I previously mentioned, it is likely in the near future, people will not be needed for these kinds of jobs, machines are more accurate, efficient, and you don’t have to pay them!

There was bullish sentiment surrounding the unemployment number which was released this past Friday, jobless claims were holding steady, with a sharp decline on Thursday and a better than expected ADP number. Some banks, like Goldman Sachs, even increased their estimate almost 50% on this news. The ADP can be an indicator, but it does not ALWAYS tell the NFP (majority of the time ADP higher than NFP). The report showed a growth of only 80,000 jobs in June, 20% less than consensus of 100,000. The largest job gains coming from healthcare fields and least from fabricated metals and autos (notice as I mentioned above). The headline unemployment rate was unchanged at 8.2%, but the actual unemployment (U-6 rate which counts discouraged workers) tick up 0.1% from 14.8% to 14.9%. 15% is a key level, and if above there, things will start to unravel and become very unstable. The birth/death added +124,000 which gives us a net -44,000 jobs for the month of June, very disappointing, indeed.

Equities had a strong downward reaction, as expected, but what was much more noted was the Euro/dollar. This past week the US dollar had its best week in at least 4 years against the Euro going from 1.27 on Friday (6/29) to Friday (7/7), most of the gain off of the cutting of rates I previously mentioned and worse than expected data. The NFP # was the cherry on top. Euro was in total disconnect with equities this week, but long-term, I am still a believer in how tightly correlated these are.

Above is a comparison chart of the EUR/USD and the ES, the correlation is still somewhat there, not as tight as it has been in the past few months, but notice this past week the drop-off, and the ES basically muted on  this. I am eyeing 1,300 as 1.24 in the EUR, meaning if we see a big drop off next week, say 70 handles, don’t be surprised. I may be positioned for this, not sure yet.

Since last week we saw the granddaddy of macro data, this upcoming week will be relatively quiet:

-3:00PM EST Consumer Credit prev $6.5B Consensus $8.5B (range $5B to $15.6B)
This will let us know how he individual consumer is controlling their finances and spending. The chart below shows it has been pretty much flat this year.

No big events

-8:30 AM EST International Trade prev ($50.1B) Consensus ($48.7B) range ($51.5B) to ($42.5B)
International Trade is another important indicator to look at, to see how imports/exports are faring. The last report was clearly not good, exports falling to ’09 lows along with Imports, meaning demand is going down. From the picture below, you can see the peak was reached in May of ’10.

-10:00 AM EST Wholesale Trade inv. prev 0.6% Consensus 0.3% (range -0.2% to 0.5%)
This will give us a read on wholesale, places like Costco, Sam’s Club who tend to do well with cheaper prices as American consumers love big things, especially bulk.

-8:30 AM EST Jobless Claims prev. 374K Consensus 375K (range 355K to 395K)
We saw a slight tick down in jobless claims last Thursday which got some hopes up for a better than expected NFP#, but the pattern is showing an upward bias, at least since the end of March ’12 when we began to see growth slowing in the US.

-8:30 AM EST Import & Export Prices
- Export Prices prev -0.4 % consensus -0.2 % (range -0.7 % to 0.2 %)
- Import Prices prev -1.0 % consensus -1.9 % (range   -2.8 % to -0.1 %)
We are expecting a big drop in import prices, which could bring us to the lowest level in 2.5 yrs. With the dollar continuing to strengthen, look for this to keep declining.

-2:00 PM EST Treasury Budget prev. ($124.6B) Consensus ($75.0B) range ($80.0B) to ($75.0B)
Monthly account of surplus and deficit, a deficit of 75 Billion would be the best read since this January.

-8:30 AM EST Producer Price Index
Prev -1.0 % Consensus -0.4 % (range -1.2 % to 0.2 %)
Less food & energy prev 0.2 % Consensus 0.2 % (range -0.2 % to 0.3 %)
Average prices of domestic products and goods. This year we have seen the PPI lost a lot of its momentum, heading toward -0.4%, levels not seen in 3 years.

-9:55 AM EST University of Michigan Consumer Sentiment
-prev. 73.2 Consensus 73.5 (range 70.0 to 76.5)
Measure of peoples financial conditions and attitudes about the economy, 500 households, done by U of Mich. A good indicator, but Consumer confidence better with a wider range of people surveyed. We are expecting little change, but watch for levels to continue to be subdued for the time being.

This week kicks off the start of Q2 ’12 earnings reporting, we get to see how companies faired through the slow growth from the end of March, so it will be important, in looking at who cuts estimates.

Monday: Alcoa, WD-40, YUM! Brands
Tuesday: Shaw Industries
Wednesday: Marriot, Texas Industries
Thursday: Bank of the Ozarks, Fastanel
Fri: JP Morgan, Wells Fargo

Looking at Alcoa, they have been one to disappoint. Currently trading at 8.73 a share as of close Friday, do not get in the mindset that this is a cheap stock because it is under $10. Forward P/E is close to 20, so in my opinion it is fairly priced to a bit expensive. As I have been harping on before, Alcoa’s earnings are all about demand and price of Aluminum. Since the PMI and ISM numbers in the coming months have been disappointments and prices of commodities have lagged substantially since May, I would not be surprised for a disappointing report out of Alcoa Monday after the close. Even though we have seen Alcoa drop 9.3% in the last 3 months, relative to the overall market only down 3%, there are better places to put your money where there is more aggressive growth.

Fundamentally, their profit margin has gone from positive to negative in a matter of two quarters, so you can see how volatile they are and how they definitely rely on a strong economy to make their profits.

Next, I want to look at Fastanel; this is an industrial and construction supplies store sold in a wholesale and retail fashion. There are approximately 2,600 stores in North America. Seeing that basically all of their profits come from the US, long term this looks like a buy (5-10 yr investment). There was a death cross technical breakdown back on May 22nd which in turn signaled the drop below 40 on June 5th. They are pretty much flatline y/y as far as earnings and are down 6% relative to its closest competitor W.W. Grainger which is flat on year. I would be more of a buyer of Grainger on cheaper fundamentals and higher growth potential, but both long term look good. Mind you that this could be a bleak report we could quickly shoot down 10%+ to the mid 30’s. This is more of a stock to own for home/maintenance repairs.

Last, I’m looking at both Wells Fargo and JP Morgan. We should all know by now the JP Morgan IG9 account scandal which was found out about 2 months ago. Since then, their stock has taken quite the beating. We are not sure how much money has been lost, but estimates have been all the way up in the neighborhood of 8-10 Billion. JPM has lost about 18 Billion in shareholders’ equity since the announcement, could be a bit overdone, but investors want out because they are expecting the worst to happen with this IG9 position. I have been weary of banks for a very long time now and never want to put my money there (expect savings acct) when I know gov’t regulation (re. BASEL requirements) is keeping them from making large profits.

Banks were known back before ’08 as the “safe haven” solid profits and solid dividends. I believe that has now been reallocated to the consumer staples and dividends. The new safety trade is being long XLU and XLP

Above a 1yr chart of JPM and WFC, clearly WFC the outperformer for ’12, but going forward, I don’t see any more growth than there already is (which is slow) happening for the big banks.

Catch me @peter_eller10 for daily updates.

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