HOG missed earnings estimates earlier this week. It reported EPS of $.11 vs. an estimate of $.21. Thus far on Yahoo Finance, the analysts' estimates for Q4 2009 have been lowered to -$.26 from -$.16. This means HOG now stands to earn $.43 in FY2009. This translates into a FY2009 P/E of 65 based on Friday's closing price of $27.86. This P/E is far too high for a company whose earnings and revenues seem to be going in reverse instead of growing. Earnings were down more than 80% and sales were down 21% year over year (i.e. revenues are down).

HOG announced it was discontinuing two product lines -- Buell and MV Agusta -- in order to focus more strongly on the Harley-Davidson brand. We'll have to see how good a strategy this turns out to be. Many people have expressed doubts that the Harley-Davidson brand will continue to have the same appeal as the baby boomer generation ages out of the motorcycle buying demographic. Those same people have suggested that both Buell and MV Agusta had more appeal to younger generations.

The airlines have been hit hard by the recession. Unemployed people do not take as many airplane trips. Employed people with less job security do not take as many airplane trips. Businessmen and women are operating on more restricted budgets during this period of economic recession / slow down. They take fewer airplane trips. The Swine Flu, its pandemic designation, and the predictions for a huge percentage of the populations of many countries contracting the Swine Flu have put a big dent in airplane traffic. For instance, Russia has issued warnings about travelling to the UK. The US is probably on a lot of countries “avoid if possible” lists.

The price of oil has more than doubled since earlier in the year. Predictions are for the price of oil to go up even further next year. All of these conditions are likely to persist or worsen in the next two years. Moody’s (MCO) estimates that the credit card charge off rate will peak in mid 2010. This will likely mark the bottom for the amount of individuals’ airplane travel. It will likely be close to the bottom for business travel. The Swine Flu is supposed to be prevalent for two years. The unemployment rate is supposed to remain above 9% well into 2011 (and possibly further). Dr. Roubini has predicted slow economic growth in the US (1% approx. in 2010 and 2011) and Europe. The Fed has predicted slow economic growth in the US in 2010 and 2011. Both think there is a good possibility of a double dip recession.

Paper companies have been struggling in these difficult times. Not only do they have to deal with the recession, but they have to deal with fairly dramatic changes in their markets. In paper, the business market has been moving increasingly toward a paperless environment. Most documents are now sent by email; and/or they are stored on disk. Most are never printed on paper. Even newspapers have gone paperless. The Wall Street Journal is “Online”. Ditto the Investors Business Daily, and many if not most daily newspapers. Of course, most of these still publish a paper version, but the circulations of those paper versions has been falling for many years now. The fall in circulations is noticeable in the fall of newspaper stock prices. Additionally, International Paper (IP) still has lawsuits pending over a Mississippi plant explosion which killed one and injured about 2 dozen others. These lawsuits will likely continue to hurt profits over the near term.

Even though paper equities are over the long haul trending downward, they can still make you money. In the latest 50+% run up from the march lows, the general recovery euphoria became so strong that even these struggling stocks benefitted. Some are significantly over valued at present. You can make money by shorting them as they likely retreat from their current price levels. Plus in late Sept. 2009, three US paper companies filed an antidumping complaint against Chinese and Indonesian paper makers. It takes a while for such a complaint to move through the Federal system. There won’t likely be any action in the immediate future. This means that the paper companies not only have to contend with declining markets and low prices, but unfair trade practices as well. In the short term the Chinese and Indonesian dumping has to hurt IP on the bottom line. It will be months before tariffs may be applied, if they are granted by the Obama administration. With a general market retracement trend seemingly in place now, paper company equities are likely to decline rapidly in the near term.

China grew its industrial production by 12.3% last month. That is good or great in any environment. When the world is in a recession, it is undoubtedly great. China’s retail sales grew right along with it by 15+%. Could the economic world look any rosier for China?

The answer is apparently “yes”. People are questioning China. They are suspect of its banks. They are suspect of the numbers the government is providing. Why do they doubt it economic numbers? The answer would seem to be that the numbers just seem too good to be true. Are they?

Harley Davidson (HOG) was upgraded to Hold yesterday by Citi based on better than expected motorcycle sales in August. Apparently the Citi analyst thought this was the start of an up trend in motorcycles sales. While no one can be absolutely sure, this seems unlikely. August auto sales were much better (yet still disappointed) due to the Cash for Clunkers program. More than likely some of the enthusiasm for buying cars during that period spilled over into the motorcycle arena. The big surge in auto buying is not expected to continue without Cash for Clunkers. Just the opposite is true. Future sales may have been robbed so people could buy at a discount during Cash for Clunkers.

A much larger proportion of the buyers are now experiencing “buyer’s remorse”. They probably could not afford the new cars they bought – even at a discounted price. They probably had good reason to be worried. The national rate of auto loans that were 60 days past due was up 7.35 percent for the Quarter ended in June.

1. The equities markets have had a huge run up of over 50%. They are overbought. At approximately 18x 2009 Earnings, they are priced far above fair value. At the beginning of March 2009, they were price at only 11x 2009 Earnings. According to Art Cashin and others, fair value for the S&P500 is at about 850 to 880. At approximately 1020, the S&P500 is far from there.
2. The Insider Selling/Insider Buying ratio is 30.6. This is the highest that ratio has been since it has been tracked (2004). Those corporate officers probably know something.
3. Retail Sales are still decreasing. They were down about 4.4% for Aug. year over year according to Redbook. The much anticipated back to school season has been a bust so far. Even the Cash for Clunkers program, which gave automakers a shot in the arm, disappointed analysts. Plus it likely robbed future auto sales to record better numbers now. The national rate of auto loans that were 60 days past due was up 7.35 percent for the Quarter ended in June. That doesn’t sound like a lot of people are going to be able to afford to buy new cars soon.
4. The latest Factory Orders figures were a disappointing +1.3% vs. an expected +2.3%. July Factory Orders excluding transportation were a negative -0.7%.
5. Unemployment continues to grow. Last week’s announcement put it at 9.7%. With unemployment still rising, it is unlikely retail sales will improve soon. The lack of consumer buying may also help unemployment continue to grow.
6. Although a high percentage of companies beat earnings estimates for Q2, actual earnings were still down approximately -30% for the S&P500 stocks. Earnings predictions for the S&P500 for Q3 are still negative (approximately -20%). Much of this negativity is in the energy and the materials sectors. Q3 is likely the last high oil/commodity price quarter from last year. Future quarters should yield better results in these two areas. Still, most of the improvements to earnings this year have come through greater efficiencies. Very few companies have shown any revenue growth this year. That seems unlikely to change soon with still growing unemployment figures (and anemic retail sales). Companies will need to show revenue growth in order for the economy to really recover.
7. The “Flu Season” has started. Swine Flu is rampant in the UK. With respect to business, 72 percent of employers in the UK reported absenteeism due to Swine Flu. 38% of employers in the UK anticipated sales would be hit (Reuters). It is starting to take hold in the US. A presidential panel estimated that Swine Flu could infect 50% of the US population this fall and winter (Washington Post). This could cause 1.8M hospitalizations and as many as 90,000 deaths. I am not sure anyone would want to discount the negative effect this is likely to have on the US economy. This is a worldwide problem. The “real pandemic” is just beginning to take hold. It will have serious negative economic effects. One only has to think of the airline, cruise line, restaurant businesses, etc. to realize how true this is.
8. Inflation is starting to rear its ugly head. The ISM August Non-Manufacturing Prices Index rose to 63.1 from July's 41.3. The August ISM manufacturing data Prices index rose to 65 in Aug. from 55 in July. This looks like huge inflation. Fed Governor Hoenig was recently cited as worrying about inflation. He said that the Fed should not leave interest rates too low for too long. The fact that the Fed’s thinking is leaning this way is very bad news for businesses and for the real estate market. Hence it is bad news for the equities markets.
9. Both the residential real estate and the commercial real estate markets are still a problem. Residential real estate has shown some gains recently. Still, these gains are precarious. If inflation rears its ugly head soon, the increased interest rates could cause another downturn in residential real estate (i.e. make it effectively much more expensive). Commercial real estate seems to be worsening if anything. In fact, commercial loans are "going to be a bigger driver of bank failures towards the end of this year into next year," said Sheila Bair (FDIC).
10. We have had about 89 bank failures so far this year. Kanas predicts 1000 banks will fail in the next 2 years. If that happens, we have a lot of pain to come.
11. Wegelin & Co., Switzerland's oldest bank, is telling wealthy clients to sell their U.S. assets. Other Swiss banks may follow suit. Swiss banks account for 27% of the world's privately held offshore wealth (about $2T). If they sell all their US assets, US bonds and stocks will be hurt.
12. Consumer Sentiment in August was down to 65.7 vs. 66.0 in July. The Consumer Sentiment Current Index was worse. The August figure was only 66.6 vs. July’s 70.5.
13. The Fed is gradually ending stimulatory measures. The Fed is withdrawing money from the money supply after stuffing money in during the prior year. M2 has shrunk at a 3% pace since mid June, while MZM, the St. Louis Fed's measure of liquid money, is down by 2% over the same period. The Fed’s $300B Treasury buying program is set to end in October.
14. Prechter has called a bottom on the USD. He says that the only 3% bullish sentiment is a clear sign of a bottom. The charts seem to bear out that the USD is trying to bottom. If the USD starts going up, it likely will cause the US equities markets to go down.
15. Commodity prices have generally been going up since March. This will cut into businesses margins. This will make them less profitable, not more. It will be hard to raise prices of finished products appreciably in the current economic environment.
16. The charts are indicating a topping pattern. In fact we could be seeing another try at the famous head and shoulders pattern that failed a few weeks ago. It may not fail this time. The decreasing volume as the equities market rose is a strong indicator that the up trend is weakening. It may be in the first phases of a fairly strong reversal. See the 3 month SPY chart below:

No one can say for certain which way the market will go. Still the fundamental reasons for a strong retracement are growing. The markets generally only ignore fundamentals for short periods. We may soon see a strong acknowledgement of current fundamentals.

Yesterday, 9/3/09, the COO of Amedisys (AMED) left the company. Ditto the CIO. AMED tanked more than 25% on the news. It ended the day down about $10 at $34.04. The CFO did not quit. There does not appear to be anything demonstrably wrong with the company. The CEO is still there. In fact it seems the COO left because he was not going to be made CEO as quickly as he had been led to expect. In other words, he was a very disappointed, very ambitious corporate officer. The CIO's job is being split into two different jobs. Perhaps the CIO left in response to a request that she cede some of her power. Perhaps the CIO was a big supporter of the COO (and vice versa).

AMED gives every indication of a great company. It is now trading at about 7 * 2009 earnings. This seems to be a bargain. It looks even better when you see that the analysts have raised their earnings estimates for FY 2009 by more than 15% over the last 90 days. They have raised FY 2010 estimates substantially also. AMED beat earnings estimates by almost 25% last quarter. AMED has beaten estimates each of the last four quarters. Good signs about a company don’t get much better.

1. Crude is at a near term high for the year. It closed Friday at $73.89. This is at a major resistance point for crude. The charts below illustrate this point. The monthly chart shows the longer term major resistance from 2006 at approx. $75/barrel.

The daily chart shows the near term resistance at approx. $74 and $75. It shows near term support at approx. $61 and $55. There are also some weaker support points in the $65 to $69 range.

Earlier this year, when the swine flu first hit, Joe Biden advised staying away from crowded public places as much as possible. He was later asked to correct himself because others realized his words would hurt businesses.

Those words are about to come home to roost. The fall, typically flu season, is almost upon us. Several biotech companies have developed a swine flu vaccine, but it probably won't be ready in time in sufficient quantities to immunize the huge number of people who will want and need it early this fall.

Now that the markets have risen about 50% from the March lows, everyone is anxious to get in on the profits. Everyone is anxious for the uptrend to continue. Most think the markets need a strong sector leader to lead them still higher. Many suggest technology is going to be that leader.

With that in mind, I have taken a quick look at a few of the major technology stocks and the SOX – the Philadelphia Semiconductor Index. The Chart of the SOX is below:

This was a DVD presentation given by Richard Arms. According to him everything distills down to price and volume. The Arms Index or TRIN (the Traders’ Index) is one way of tracking that for trading. The Arms Index is a measurement of price and volume covering all of the stocks in the NYSE.

Arms Index = (number advancing issues/number of declining issues) /

At the time of this writing on Friday, Harley-Davidson (HOG) was trading at $22.65. This is 38 times 2009 earnings. From July 6, 2009, HOG has moved up from $14.99 to $22.65. That’s a whopping +52% in less than a month. Its March low was a lowly $7.99 (an almost 300% rise from there).

Since early March, the S&P 500 has risen 44% to its recent high, it is unlikely to go on at this pace for very much longer. We are still seeing overall losses in earnings and losses in revenues. Efficiency measures are lessening the losses in earnings, but this cannot go on forever. In order for the economy to grow, we will need overall increases in revenues.

Currently we seem instead to be riding a wave of almost irrational exuberance. The earnings bar was set at approximately -36%. The S&P 500 stocks are beating that so far (as of the end of last week) by 10%. They are still reporting on average substantially lower earnings than 1 year ago.

Last week, Harley-Davidson (HOG) reported earnings (see conference call transcript here). U.S. retail sales fell 35%. International sales fell just 18% as HOG was aggressively pursuing sales in Latin America, Europe, and China. This translated into a 91% decrease in profit year over year.

The major solace HOG can derive from these numbers is that overall motorcycle sales decreased 48% in the U.S. In other words, HOG picked up market share. HOG’s market share in Q2 2009 was 51.5%, an increase of 10.3% over last year’s Q2. The increased market share was really the only bright spot in HOG’s report.

The markets all did well yesterday, but they were doing better before the Fed minutes came out. It is almost as if investors were being almost insanely giddy. Then the Fed slapped them in the face to bring them back to reality. Of course, that didn’t last long.

One example of what I am talking about was the retail sales data which came out on Tuesday. All anyone could talk about was the headline figure had come in at +0.6%, which was 0.1% better than expected. No one mentioned that auto sales being up was likely the result of steep discounts by dealerships being discontinued by the parent company (mostly GM and Chrysler). No one mentioned that those closing dealerships would provide 0 sales in the very near future. This would virtually ensure a future drop in auto sales (and overall retail sales). No one mentioned that a lot of the increase in retail sales was due to the increased sale price of gas. This is the same mostly imported crude oil/gasoline that is bankrupting the US via the trade deficit.

Today AP reported that Andy Burnham, the British Health Minister, said the UK could have up to 100,000 new cases of swine flu per day by the end of August. Currently we have seen only about 100,000 reported cases worldwide. If the cries of Andy Burnham are anywhere close to accurate, the world may be in for a huge health crisis. The UK won't be the only country that has big problems. The North American countries seem like a sure bet to join in. Japan is very worried. I'm sure many European countries, the former USSR countries, and China will get their share too.

As I understand it, there is a swine flu vaccine. However, the swine flu viruses they are using to make the vaccine provide only about half the normal usable active ingredients. This is apparently such a big problem that they do not think they can have the huge quantities of the vaccine needed by the world ready until the end of 2009. This would likely be too late to prevent much of the damage to both health and economies.