Thursday, September 30, 2010

30 Sept 2010 “Mirror mirror on the Wall”


30 Sept 2010 “Mirror mirror on the Wall”

Mirror, mirror on the wall what will the market do this fall?

Sorry about the premature publication earlier today.  I was posting the screen print of the Salve Lucrum portfolio (below) and I must have hit publish instead of save.

Last night I/we provided you with the “Tools of The Trade”. Today, as I followed the market via Bloomberg in the background, there was no clear direction in the market what so ever. During the lunch hour I checked up on the portfolio, YAWN! I was considering taking a night off of posting tonight.

Then I remembered I owed you a reality check about my prognostication from Sunday night. We went out on a limb and suggested: “Personally after looking back a durable goods and the last Beige Book published by the Fed, look for a little bump in Real GDP to 1.7 and I agree with the Price Index staying at 1.9. Neither number will do much for the market. It is a true double edge sword. If GDP goes up too much, then the market will retrench because that would give the Fed motivation to tap the breaks. If GDP goes down, then everyone will be talking about the double dip, which has somehow purged its self from our vernacular over the last couple of weeks. This number is a lose lose. Let’s hope it stays flat, but I see a slight bump.”

Nailed that one baby. I got them both right. Damn I’m good some of the time.

So what will earnings season bring us starting next week. (Remember I have a contest as to what you think AA will hit in earnings next week. The first and closest guess will get either Cramer’s Mad Money or Getting Back to Even so get those guesses in.) I mentioned we belong to AAII (American Association of Individual Investors) and this afternoon they provided me their insight into earnings season upcoming.

Here are the highlights.

They quote S & P, saying the expectations for year over year earnings growth to be 31%. They also cite Reuter’s at a 24% growth rate. That is the good news. The bad news is that top line growth is much less in the single digits implying that earnings improvement are mostly coming from cuts to expenses versus organic growth.

Then they go on to analyze the profit warnings issued over the last three months. AAII watch a ratio, new to me, called the negative/positive preannouncement ratio. It takes the number of negative announcements (companies saying their earnings will be dropping) and compare them to positive announcements. (companies that are saying earnings will improve). The ratio is 2.3 right now. The actual numbers are 77/34. That is a huge jump from the first quarter of 1.2 but closer to the historical average of 2.1.

In breaking out the numbers they looked at revenue factors like market share gain, geographical sources of income, and new pricing strategies. They also scrutinize the income statements to see how they are cutting cost. After that they look are raw material costs and currency fluctuation issues. Then they look at cash flows and use of debt.

They approach this as the things the investor should do and they wrap up by recommending a visit to the website to get the 10Q reports as they are published.

Attached to this piece was the AAII sentiment survey. There are a lot of folk who pay attention to this data point. It is often quoted in Barron’s so I though I would beat them to the punch. For 4 weeks now the AAII survy figure for the bulls, were above its all time historical averge of 39% at a 42.5% level. Now that number has come down in the last couple of week indicating that AAII member might be feeling a little stretched as to recent gains. The bears have been gaining and for the first time in a while have broken above their 30% average indicating that they think people will be taking profits or out and out selling.

This shift in sentiment is normal in a rising market.

So how is the Salve Lucrum Portfolio looking? Here it be as of today.

From The White House Photo Gallery
"Ya know we did find one teeny tiny weapon of mass destruction."

Salve Lucrum


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