Sunday, July 11, 2010

July 11, 2009 A finger in the wind


July 11, 2009 A finger in the wind

Last week was a holiday shortened week. But it was positive for no real compelling reason. It could be people are hoping for a positive earnings season which starts next week. Only people driving the market up 5.5% are not people like you and I who are buying 10 shares of AAPL or maybe a big bet like 100 shares of Boeing. These are people moving millions of shares and billions of dollars and have all kinds of info that you and I are not privy to. In order to move the market 5% in a 4 day week, it was more than hopes and dreams at work. Again it could be knowledge of some promising earnings release (more on that later) or just the fact that the market might have been oversold by 2-3 points. Friday's action was only up a half a point and I am pretty sure it was on Cramer and I doing the trading as volume was really really really light. Although we pay good money for the info, Cramer was buying during the up last week. Boeing, Johnson Controls, Nucor, INTC, Accenture, MCD position were all added to during the ride up. He gave one of the most thorough updates of each of his holding in the Street.Com Action Alert Plus portfolios. It is a great read and if you have a few bucks in the market the subscription might be worth it. He rates all of the stocks in his holdings right now as well as his operational prognostications about the future.

We did have a slightly disappointing inventory report on Friday, but the market seem to take it in stride. And if you looked real close, The bank of Korea raised its prime interest rate .25% which makes it about the fifth Asian bank to bump rates. That is a good sign as it means they have confidence in the durability of the recovery.

I had to read my Barron’s on line again, one of the few down sides of being in Utah over the weekends in the summer. Alan Ableson’s opening article was fun and entertaining but not much help from an investment point of view. He talked about the "death cross" when the 50 day moving average cross downwards through the 200 day moving average. Then he goes on to explain it is only a 50% reliant technical tell? Thanks Alan. Then he ranted about Blagojevich of Illinois Governor fame and how his actions over the last tow year we good examples of stimulating the economy. Thanks Alaln. Then he spoke about the Russian US spy swap. Thanks Alan. Then he had some dismal info (accurate but dismal) about the state of real estate mortgages in the US. This was the only investment worthy info he shared. He’ll be back to normal next week.

Then Tom Sullivan had a great article about how and why people who have divested into bonds and bond funds might want to consider that their risk increases as bond yields fall especially if they are in bond based mutual funds. He suggest looking for the safe exits such as moving from bond funds to quality bonds and if you are in bonds consider that actually stocks behind those bonds if they a re throwing a good dividend. Great food for thought.

We have been telling you for weeks now that Monday is the big day. The new earnings season is upon us. For us it’s kinda like a second spring. We got our butts handed to us in the second quarter with most indexes down 10-14% (Would have been worse for not the 5.4% week we had last week. Our guess was 2.5-3%). But now we must batten down the hatches because very indication is that IF and it is a big IF we can see some decent earnings in the next week we will see the continuation of the long term cyclical bull rally that started a year ago March or a mini bull rally in the midst of a cyclical bear market that started in February (19th according to my charts). Either way IF we see some earnings strength, we could see some upward movement for a couple of months as it should drag in more individual investor money as well as big boy money. And the games begin tomorrow.

Monday we have the “Gentlemen start your engines” earnings report with AA Alcoa. Friday we missed what could have been a real tell as to what earnings will bring as AA was up 2% on Friday’s market. Get you butt’s up early and see what it does in pre-market trading. If you visit Edgar Sec Filings for the company you’ll read they have sold off some of their dog operations and focused manufacturing where cost are significantly lower. (It takes Gobs and Gobs of water and electricity to make one roll of aluminum foil.) That should help last quarter earnings. BA Boeing demand has to have had a great impact on revenues and should carry so into the balance of the next 12-18 months. Unfortunately the cost of aluminum is determined by global traders who trade the commodity on the London Metals Exchange and because of energy costs having gone down and new sources of bauxite coming on line the commodity has take a big hit in the last 12 months (Down about 50%). If we are in a global recovery (the verdict is still out), AA is well positioned to benefit from increased demand and commodity costs. The big question is will they hit the consensus figure of 12 cents a share. I am thinking they will. They should hit a 14, but that will probably be enough to get the market excited. We do not own AA and have a real hard time seeing the 11 dollar value. Quite honestly, their fundamental are a bit scary. Income is weak, free cash flow is non existent, the dividend (3 cents a share) is a joke, and long term debt looks like a (ORP) project’s balance sheet. (Obama, Reid, Pelosi). This would be a good buy at 9 a share and expensive at 12. It is too close to 12 for our liking. If you are a gambler, you could buy some long term 10.00 calls (Leaps meaning out to Jan 2012). Otherwise just watch the number and see what happens tomorrow.

Tuesday we have INTC, Intel. As you know, between calls and longs it is one of our largest holdings. We took an unintentional buy lucrative profit in INTC the day of the flash crash. We re-establish our position and then some so we are hoping that 43 cents a share will be a no brainer. We are liking the competitive moat around INTC each day it takes market share from AMD (Reporting Thursday). If you do the linkage again, MSFT is saying they are moving quite a few Window 7 programs. How does MSFT sell soft ware? Yeah you might see a few go out the door at Staples and BBY, but the majority of their tonnage comes from on board installation in CPU or boxes as we call them. That means that boxes are selling fairly well or better than they have been in some time. So if boxes are selling box makers (DELL, HPQ, ACER etc) are buying chips and we are not talking Lays. Look for a neat beat of the 43. I am hoping for a blow out 50 cents a share. We will be taking some profit if that occurs. If not we will be buying more on any dip. INTC and ARMH are the two best chip plays going.

Speaking of potato chips and fast food. YUM reports on Tuesday. (See why I love the new earnings season. YUM is a group of fast food companies and a direct competitor to MCD. Think Taco Bell, KFC, and Pizza Hut. (Don’t worry Sharon, reading those names will not increase your BMI.) I do not follow YUM that closely as we are well entrenched in MCD. We thought the 43-44 it hit in April was real rich/ The current value of 40 is a fair value but not a bargain, unless they have a blow out quarter and some strong forward looking statements. They need to hit 54 cent a share. My guess is, keeping in mind we don’t follow the stock, 52 cents, a small disappointment. Now watch this close because if we are right, you will see a dip in YUM which will bring down the sector including MCD which reports on the 23rd. MCD should not have a problem hitting their 1.12 a share UNLESS the Whacko Jacko Euro currency adjustments are bigger than most analysts expect.

Wednesday we have Marriot MAR reporting. This is overpriced because of its global brand name. Business travel is just starting to come back, they have not adjusted some of the real estate values on their balance sheets, and that brand is getting a little long in the tooth. At 31 its ten time book value and as we just said a questionable book value. MAR will come in at 20 cents a share versus the needed 28 and look for a one point correction.

Thursday JPM reports. The banking finance sector is all over the board right now. They are looking for 72 cents a share. We followed this in 09 as we had some preferred. We are focused on BAC, (Which reports on Friday), C, and WFC. The stock closed up a point and half on Friday which could be a tell of earnings. The stock has some 60 dollar values out there, but because of the Washington DC witch hunt for big bad banker the stock is selling at 38 a share. We think that 72 is possible and maybe a bit low. Look for 75 and a nice bump in the Financials.

AMD reports on Thursday and I mentioned INTC has been taking potato chips out of their lunch back (versus eating their lunch, cool vernacular for taking market share) so I think the miss of 4 versus seven is probably going to sting the stock.

PPG has never been mentioned in this blog and would not be except it is a bit of a bell whether fro the industrial sector. They started out as Pennsylvania Pittsburgh Glass and has since grown to be come one of the world leaders in industrial coatings (Think autos, appliances) and commodity chemicals like chlorine and caustic sodas.) They do have a wide competitive moat because they make such special coatings that customer find it difficult to switch. They are looking for 1,40 a share profit. We do not do enough homework on the stock for a sound guess, but there have been no changes in forward looking statement from the company which were relative strong last quarter and the economic turn around has not been as robust as one might have hoped so I think they will miss and come in at 1.32, a big miss.

Thursday will also see a sleeper with GWW, Grainger. They will easily beat the 1.50 a share number. They are best of breed in this category compared to Westco and Fasental. They have a great supply chain and tremendous control of their costs. Their margins have eroded lately, but that is because they are expanding their product line. If the market did not get whacked to badly, the 1.50 should be a cake walk. Look for 1.60 and a nice bump in the price. Take some profit on this when it happens because 105 is a fair value on the stock. 110 is running a bit rich.

GOOG is the last big boys reporting Thursday. 8 Billion in Cash, No Debt, a true money machine. A P/E of 15. A 29% margin. A return On Equity of 20%. Why don’t I own this stock? I do not have a good answer. It is fairly value at 469 a share as some very credible analysts have 1000-1200 as their target prices. Will they hit the 6.54 a share they are looking for in profit. Heck yeah. Look for a number near 7.00 and the stock will get back to its true fair value of $550. Wish I had a bit more cash.

And Friday, we have one of our holding C CitiGroup hoping to hit a nickel a share profit. It’s happen unless we see some funky adjustments in the accounting footnotes. Again if they hit five cents, it will be good news for the sector so WFC and BAC (which also reports on Friday) should bounce nicely. Mattel reports Friday and should hit the 15 cents a share unless if WMT Wal-Mart had pressure on the toy maker’s margin. We don’t follow MAY so we have little insight to the chances of exceeding the 15 cents a share. Let’s go with that.

BAC, Bank of America will hit the 20 cents a share number on the street. Look for a very strong quarter and some cautionary comments about bank reform. They may also follow Wells and announce a trimming of jobs as a result of the new banking reform. So they will hit their number and even exceed, (we are thinking 24) but the stock will come down on negative comments from management.

Lastly we have GE In march of 09 we loved this stock because we thought it was a 20 dollar stock at 7 a share. We made some money with it and then began to understand the importance of free cash flow and shareholders yield. They have no free cash flow and gobs of debt. This is a 7 dollar stock selling for 15. But that has nothing to do with earnings. They need 27 cents a share to meet expectations. The need about 40 cents a share to make this a 15.00 stock. They will come in short at 13 a share and the market will not like it.

If all goes according to plan we will see more positive earnings than negatives and the market will like and be up 2% again next week. The other wild card in that prognostication will be economic data. Tommorow, Monday is very quiet. Tuesday we have the Int’l trade gap report which is supposed to continue its drop as in last months fashion down about 39 billion. As usual, oil plays a big part in our trade imbalance. Because the dollar got stronger and oil came down over the last month. We are thinking the number might come down more like 40.5 billion. Tuesday we get a peak at the Treasuries undies or should I say fundies. The 10 year average June figure is a surplus of 16 Billion, but last year 09 we had a June deficit of 94 billion. Look for a deficit of about 80 billion. The expectations are 70 billion, but we are not that optimistic. Wednesday we have a new retails sales number. Last month they fell 1.2%. we had some mixed but positive next last week in a couple of retail related reports. Look for a nice surprise. They are expecting a drop of .2%. We are thinking a positive .1% and the market will like it. PPI reports on Thursday and expect little change. No one is talking about inflation at the moment. Industrial production reports on Thursday and the forecasts are not pretty. Both the production number and the utilization rate are expected to be down (-.02% and 74%). We are a bit more optimistic on the production umber but not the utilization number. (our guess is 0% and 74%). Friday is CPI and again it is a non number. Once Wal-Mart starts raising prices, and they will because they have squeezed the life out of china then we will see the PPI and CPI increase and get some long needed inflation.

Salve Lucrum


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