Markets Await Earnings Season

[Excerpted from Bill Cara's Daily Report]

An unremarkable day saw weakness in the morning and strength for the final 90 minutes, leaving markets almost flat at the close. The S&P 500 (1,057.58 +2.86 +0.27%), DJIA (9,725.58 -5.67 -0.06%), and NASDAQ Composite (2,110.33 +6.76 +0.32%) were unsettled, awaiting the onset of Earnings Season Thursday.

Although the commodity prices were mostly unchanged, traders were focused in that direction, and so the Toronto Exchange Composite (11,349.88 +101.91 +0.91%) and Venture market (1,289.82 +8.42 +0.66%) made solid gains for the third day in three this week.

Since this is a speculative US Dollar based market, let’s start there. Wednesday, the US Dollar ($USD 76.46 +0.15 +0.20%) traded a bit higher against the Euro (146.86 -0.29 -0.20%) and the Canadian Loonie (94.20 -0.13 -0.14%), but down against the Yen (112.87 +0.24 +0.21%) and the Pound (159.57 +0.43 +0.27%). There really was not much happening.

Crude Oil ($WTIC 69.57 -1.31 -1.85%) was lower, but Gold ($GOLD 1,044.00 +2.00 +0.19%) was up a tad. A gain of +$41/oz in three days, and more this morning, has every Goldbug screaming in joy. The emails of linked reports I am getting are over-the-top bullish.

Heading into Earnings Season, which starts today, prices may become more realistic, as I say, but one wouldn’t know it by the looks of Alcoa (AA +2.23%), which has lost a lot of money this year despite massive cost-cutting, divestitures and so forth. Highly beatable analyst estimates were expected to be beaten and that turned out to be true after the close.

Analysts are raising their estimates for AA and for other major S&P 500 companies. Typical of the vigor being exhibited Thursday is this write-up from Credit Suisse on Alcoa (AA):

The Rebound Continues, Raising Estimates and Target Price to $18 (from $15)

• Following Q3 results, we reiterate our Outperform. We are raising our target price from $15 to $18, to reflect our view that the previous remnants of any liquidity concerns should now be alleviated.
• Q3 results - Excluding restructuring and special items, Alcoa reported operating earnings of $0.04, vs Consensus loss of $0.09, and CS estimated loss of $0.10. Adjusted after-tax operating income was $107m, vs. our estimated ATOI of $56m.
• Earnings revisions - We are raising our Q4 estimate from a loss of $0.11 to a loss of $0.02. Our Q4 estimate is based on a $0.78/lb avg price (avg of Sept. actual plus global house est of $0.75 for remainder). Our 2010 EPS estimate of $1.00 is unchanged. (Based on $0.90/lb price assumption).
• Valuation - Our revised 12-month target price of $18 translates into 8.4x our 2010 EBITDA estimate (based on 2010 aluminum price of $0.90/lb).
• Our Thoughts - Better than expected results were largely driven by improved demand in the downstream segments. AA appears to be exceeding the cost initiatives that it set out in Q1, with procurement savings at 107% of budget YTD and overhead savings more than 188% above its 2009 target, but currency headwinds largely offset cost savings. Looking ahead, in our view seasonal weakness and production shutdowns will limit the likelihood of another sequential improvement in Q4 results in our view, assuming aluminum prices remain range bound, before a more sustainable demand recovery materializes in 2010.

For the Cara 100 company stocks, Wednesday there were only 9 losers. The previous day had only 10. Yesterday the weakest were Vimpel-Communications (VIP -2.5%), which had soared +9.8% the previous day, and Whirlpool (WHR -1.7%).

After being down a tad on Tuesday, the US Treasury Bonds ($USB 122.88 +0.84 +0.69%) lifted as yields dropped. The 30-year (3.992 -0.66 -1.63%) is now under 4.0%; the 10-year (3.175 -0.73 -2.25%) is closer to 3%; and 5-year (2.162 -0.75 -3.35%) yielding just over 2%.

The T-bill yield (0.060 -0.10 -14.29%) continues to fall to almost zero as traders understand the capital market risks are so great at this point they will keep cash earning no return. I have never before seen such a situation in America.

Earlier Wednesday in overseas equity markets, there was moderate to strong buying in Asia-Pacific markets, as the Nikkei 225 of Japan (9,832.5 +0.34%), Australia (4,763.3 +1.44%), Hong Kong (21,492.9 +1.18%) and India (16,843.5 +0.22%) were all higher.

[9:35am ET Addendum] At 9:06AM ET, France (3,802.8 +1.23%), Germany (5,710.1 +1.23%) and the FTSE 100 of London (5,142.8 +0.66%) were also much higher.

In futures trading at 9:15am ET, the Euro (1.4779 +0.0111 +0.76%), the DJIA December futures (9739 +66 +0.68%), and Crude Oil futures (70.23 +0.66 +0.95%) were firm.

At 9:22am ET, the precious metals markets were starting to soften after an earlier run up. Spot (cash) trades were as follows: for gold (1047.10 -3.07 -0.29%), silver (17.565 -0.215 -1.21%), palladium (314.5 +3.5 +1.13%), and platinum (1328 -2 -0.15%).

It’s a very bullish opening. But let’s see how the day ends.