We got Alcoa’s (AA) earnings (or lack thereof) yesterday.
They were a disappointment at just a penny a share, less than the $0.05 officially expected, and far less than expected by the endless stream of buyers who took AA from $13 in early December all the way to $17.50 yesterday . Alcoa’s earnings were, in part, impacted by higher energy prices and unfavorable exchange rates - things that are likely to affect many of our industrial corporations this quarter.
Which brings us to the Beige Book. The last Beige Book was released on Dec 2nd, and we thought it sucked. The one before that was October 21st, and that one sucked too. As usual, on BBook days, I sent out an afternoon Alert analyzing the report, and it’s about 6 pages long, so I won’t reprint it here, but these are some of the highlights from the my last report:
You have to read into this report as it’s anecdotal and the Fed is very free to spin the report to get what they want. The key words are the couching language like "SOME pickup in activity OR improvement" as well as "GENERALLY improved MODESTLY" - is 'some,' or, 'generally,' 'modestly' a good reason to pay 20% more for stocks than we did at the last BBook? Markets don’t go up 20% in 2 years in the real world, so for 20% in 2 months I expect to hear words like TOTALLY, INCREDIBLY IMPROVED IN ALL DISTRICTS.
Most Districts reported some pickup in home sales, though prices were generally said to be flat or declining modestly; residential construction was characterized as weak, but some Districts did note some pickup in activity. Commercial real estate markets and construction activity were depicted as very weak and, in many cases, deteriorating. - OK, it’s official. Steve Leesman is a moron! (CNBC was touting this as a "very bullish" Beige Book by 2:02 pm, 2 minutes after the release.)
While some Districts reported upward pressure on commodity prices, they saw little or no indication of upward wage pressures or of any significant increase in prices of finished goods. - Rising commodity prices cannot be passed on. That means profits are impacted.
Commercial real estate conditions were widely characterized as weak and, in many cases, deteriorating further. Market conditions were reported to have weakened in virtually all Districts, with rising vacancy rates, downward pressure on rents, and little, if any, new development. Expectations for 2010 were also quite low. Boston characterized the commercial real estate outlook as "bleak," Dallas noted that construction was at "historically low levels," and Kansas City described the sector as "distressed." - Holy crap! Don’t you think that THIS should be the headline of the BBook report. This is the worst I’ve heard CRE described yet…
Labor market conditions remained weak since the last report, with further layoffs, sluggish hiring, and high levels of unemployment in most Districts… Districts generally reported little or no upward wage pressures, while some Districts noted upward pressure in commodity prices, and most Districts reported stable selling prices. Wages were largely reported to be holding steady in the Boston, Cleveland, Richmond, Chicago, Minneapolis, Kansas City, Dallas, and San Francisco Districts. Most Districts reported stable prices overall, although some reported higher input prices, largely for energy and other commodities used in production, with a limited ability to raise selling prices. Prices were reported as moderately lower in the Kansas City District, and downward price pressures were cited for some professional services and intermodal transportation firms in the Dallas District.
Man, Steve Leesman is now officially off my list of people I trust. This is a terrible report and that means I now need to see ALL of the November highs broken before I would even consider going bullsh. Volume is still very weak and I suspect that’s because those who planned to pump up the markets today are now in meetings trying to figure out how to get out of this thing.
As you can see from the chart (click to enlarge), we were right to go bearish off that report on the 2nd, so the question, going into tomorrow afternoon’s release, is: Should we expect another 2.5% correction as we get the state of the economy report from the Fed? We are, of course, already cautious, and Monday’s disaster hedges will be getting a workout this morning just based on AA’s little earnings report. We’re still waiting to hear from GAP (price pressures?), INFY (good exchange rate), KBH (tax gains) and SVU this morning, but the real excitement is on Thursday evening, when we hear from INTC and Friday morning as JPM lets us know how much money it made.
Next week is when it all hits the fan as we come back from a Monday holiday right into 200 reports in 4 days starting with C, COH, FAST, FHN, LMT, EDU, PETS, AMTD and UAUA first thing Tuesday morning. Putting on your fund manager’s cap - how confident are you going to be on Friday heading long into this weekend? Tuesday night is ADTN, CREE, CSX, HBHC, IBM, PNFP and WIT, and the hits (or misses) just keep on coming all week long and, unlike last quarter, we have very high expectations for Q4 earnings, don’t we?
Speaking of high expectations: Hedge fund and other investors have made record bets on higher crude and fuel prices as freezing weather boosts consumption. The total net number of long positions held by so-called large speculators in NY crude, heating oil and gasoline futures is at an all-time high. "The CFTC data is showing large speculators are behind the current oil rally from $70 a barrel," said Olivier Jakob, managing director of Petromatrix GmbH in Zug, Switzerland. "Large speculators are now holding all time record net length in WTI, record net length in gasoline, record net length in heating oil."
We shorted USO and OIH last week and yesterday we took XOM long, but hedged, just in case they did manage to keep this nonsense going (and XOM makes money on low oil prices with refining and chemical operations so it is better balanced than most). Our hopes were the oil bubble would pop hard, but now we’ll be happy to just see sanity regained at around the low $70s - otherwise I have very grave concerns about our economy’s ability to sustain a recovery.
China took steps today to rein in inflation as the Central Bank sold bills at a higher yield for the second time in a week, increasing the likelihood that policy makers will raise the benchmark interest rate in the first half of the year. In China, today’s yield increase of 8 basis points was the first since August for the one-year securities and exceeded the 4 basis point median forecast of 15 traders and analysts surveyed by Bloomberg News. On Jan. 7, the central bank allowed the yield on its three-month bills to climb 4 basis points to 1.3684 percent, the first increase in 19 weeks.
“Monetary policy is being gradually tightened as China faces very significant inflationary pressure and credit growth that is too fast,” said Isaac Meng, senior economist at BNP Paribas in Beijing. “By hiking this bill rate, the central bank is sending a clear tightening signal to the banks.” He said the central bank may initially raise interest rates by 27 basis points. The central bank had kept the one-year bill rate steady since Aug. 11 in line with its “appropriately loose” monetary policy to help revive the economy but it got out of control last week as banks lent an average of $14.6B a day. So, unlike our Fed, China’s PBOC immediately put a stop to the nonsense. China also ordered banks to raise their reserve requirements as of Jan 18th.
That last bit of news came out after the markets were closed, so, despite the Shanghai Composite finishing up 1.9% this morning, the FXI will gap down (we are in FXP, which is ultra-short China). The Hang Seng already dove 150 points in their final hour of trading on the news of the note sale, finishing down 84 points at 22,326, with 22,000 being the bullish line in the sand for the Hang Seng. The Nikkei, on the other hand, finished way up at 10,900, up 80 on the day and up 18.5% since December 1st. So that’s not too much at all, is it?
We’re trying to be bullish, really we are, but if the market isn’t going to hold our technicals (and it was the Nasdaq that failed yesterday), then we will just have to wait. We alternated short and long day-trades yesterday into the chop, getting a very nice trade on the QQQQ’s ahead of Mr. Stick in the afternoon. But, wisely, out at the top as we didn’t trust that low-volume BS to hold. Oil was clearly out of control at $84 as it was unlikely to stay cold forever (global warming and all that), and our Treasury needs to sell $76B in notes today, and we’ll see how well that goes. But with South America facing multiple currency crises, there may be a pretty strong demand for anything based in dollars (also bad for oil).
Speaking of currency crises: Beware of Greeks bearing bonds, which are collapsing after the EU said there have been “severe irregularities” in the nation’s statistical data, leaving the accuracy of the European Union’s largest budget deficit in doubt. The declines drove the yield on Greece’s two-year note 16 basis points higher, the most in almost a month, after the commission said in a report today “the lack of reliability and the shortage of evidence supporting the deficit figure reported” in two revisions by the government in April and October left the data “in question.” “Unless the institutional weaknesses identified in this report are addressed and proper checks and balances introduced, the reliability of Greek deficit and debt data will remain in question,” the EU said in its report today.
Along those lines, Pstas posted a great link from Stratfor Global Intelligence on the unreliability of Chinese data, which is no surprise to PSW Members, as we’ve been discussing it for years. But it’s nice to see an official study letting you know that your suspicions are well-founded. It’s a very important study for all to read!
Europe is down more than a point ahead of the U.S. open, and don’t believe CNBC when they tell you it’s because AA had poor earnings - investors aren’t that silly. Any catalyst would have spawned some profit taking after the crazy run we had. We continue to watch our breakout levels of Dow 10,549, S&P 1,135, Nasdaq 2,314, NYSE 7,389 and Russell 638 to see what holds, but we need ALL of them to hold in order to get motivated to make long-term bullish bets - and 3 out of 5 below will be a signal for us to get bearish once again.
Let’s be careful out there, we’re going to have a wild couple of days into tomorrow afternoon's BBook!