David White

Equities Update: Mixed Feelings Ahead of Earnings Season

Some pundits have put forth the theory that Family Dollar Stores (FDO) and Costco (COST) doing great means the recession is still with us. Certainly FDO and COST did do well today.

Equities Update: Mixed Feelings Ahead of Earnings Season

AA beat after hours too. Generally the day looked about as good as it could. However, Q3 earnings are still being predicted to be a 25% decline from last year. They were a 27% decline overal in Q2. Even if Q3 earnings mostly beat, we will still see lower overall earnings than a year ago. This means stocks are still trading at multiples which are too high. A retracement is in order. We are unlikely to see a huge surprise because commodity stocks (energy and materials) are expected to come in about 60% below last year. For example, we all know about the approx. 40% fall in the price of iron ore. It is not hard to believe that this has had a more than 40% negative impact on earnings for the miners involved. MOS and MON are two notable misses with already substantially lowered expectations in this category already. GDP will likely be positive this quarter though. We likely have a better ratio of exports to imports this Q3 over last year's Q3. "Buy American" has taken hold to some extent.

My own inclination is that the retracement will continue. Estimates for earnings may be far too low (easy to beat), but stocks are already approx. 20% over fair value. It will be hard for the markets to keep going up, even in the face fo good earnings. There are the bulls, but the Put/Call Open Interest on the SPY is over 2 (i.e. bears are rampant too).

Wall Street Breakfast: Must-Know News

The first Q2 GDP estimate came in at -1.0%. This was better than the expected -1.5%. However, some people had apparently been hoping for an even better result. Obama pre-announcing a negative result was a big clue that expectations were likely too high.

The Q1 GDP revision to -6.4% was a huge disappointment to the markets. The markets had been hoping for an upward revision. This means the overall result was worse than the market expectations. This result also makes the likelihood of a downward revision of Q2 GDP more likely. This is not good news for the markets either.

Wall Street Breakfast: Must-Know News

Reuters:
Moody's credit card charge off index rose to 10.76% in June.
Moody's estimates that the credit card charge off rates will peak in mid 2010 at 12% to 13%. It estimates that the unemployment rate will in 2010 at 10% to 10.5%.

Wall Street Breakfast: Must-Know News

Some "Good News": Ford announced 14% y-o-y gains in car sales in China for the first 6 months of 2009. Total sales for that period were 197,212 units. China sales are only likely to grow in the near term.

Ford also saw some increased profitability through Mazda (Changan Ford Mazda), which saw a 20% sales increase over the first 6 months of 2009.

Wall Street Breakfast: Must-Know News

AndrewBaker: I completely agree. The markets just seem to want to go up today. Perhaps it is just a technical rally from oversold conditions. The Retail Sales numbers were bad today, yet they tried to paint them as good. The number ex-auto and ex-gas was particularly telling (-.2%). The ICSC Chain store sales were down -.9%. The Redbook Retail Sales were down -5.7% vs a year ago. they were down -1.7% for the first week of July vs. June. The Business Inventories were down -1% (estimate was for -0.8%). OPEC raised output even in the face of falling oil prices. The PPI was up too much at +1.8%, showing too high inflation. I am not sure how things could have been that much more negative. Yet the markets have rallied off their lows today. They may have just turned down again, but who knows how long that will last (or if it will).

For an unstable market the VIX is getting into a fairly low range. It makes no sense for it to go into the teens in this type of economic environment. That likely leaves it with limited downside potential. When it heads back up, the markets will likely fall.

Wall Street Breakfast: Must-Know News

ISCS Chain Store Retail Sales were down -.9% for the week of July 11 (only 10% of retail sales).

government reported retail sales for June were up by 0.6%. This beat the estimates of 0.5%. However, a closer look reveals that Ex-autos it was only a +0.3% gain (less than the forecast +.4% gain). Ex-autos and Ex-gas the result was -.2%. This was actually very negative. The automakers had to sell a lot. They closed dealerships (especially GM and Chrysler, which entered bankruptcy). Those numbers were an anomaly. I don't think you can count the autos numbers too seriously until they are done closing delearships. They still have a ways to go. To me this says the retail sales were a disappointment. When you also consider the ex-gas ex-autos statistic of -.2% growth in retail sales, you can see the real trouble. The growth due to gas was likely the higher prices and/or summer driving factors. This report really says retail sales were down. This is a negative for the economy.

The June PPI was up +1.8%. This was much higher than the forecast +1.0%. It also indicates inflation. This is not something the Fed (or anyone else) wants to hear. This is bad news for the economy even if it was driven by a 6.6% increase in energy prices.

Energy prices have come down recently. However, many believe they will head back up quickly. One cannot assume they will stay low. Clearly the US needs to control its energy consumption better, especially if much of it is being imported.

Wall Street Breakfast: Must-Know News

The AP reported yesterday that Andy Burnham, Health minister for the UK, thinks the UK may get up to 100,000 new cases of swine flu per day by the end of August. The flu vaccine will not be available in sufficient quantities for everyone until the end of 2009. If other countries suffer the fate Mr. Burnham is predicting for the UK, we will have a "real worldwide pandemic" on our hands.

A "real" swine flu pandemic might have a -4% worldwide GDP effect. This is not good news for the markets. They seem to be ignoring it completely so far. I confess that I am skeptical myself. However, British Health Ministers are not usually prone to histrionics. There is very little doubt that he knows more about the situation than I.

Wall Street Breakfast: Must-Know News

EIA Petroleum Report out today shows:
Distillate stocks up 3.7M barrels
Gasoline stocks up 1.9M barrels
Crude stocks down 2.9M barrels

This is an overall build of 2.7M barrels. This is an almost identical number to the American Petroleum Institute overall number yesterday.

Wall Street Breakfast: Must-Know News

MarketWatch:
"The global economy is beginning to pull out of recession but the recovery is expected to be sluggish, according to the latest economic update from the International Monetary Fund released Wednesday. The IMF raised its forecast for growth in 2010 to a 2.5% rate, which is higher than the 1.9% growth rate forecast in April. There is much less concern about systemic failure in the financial system. A gradual recovery in the U.S. seems on track, the IMF said. Japan is stabilizing after a dismal first quarter. Growth in the euro-area is expected to strengthen more slowly than elsewhere. Inflation pressures remain low, the agency said. Risks for sustained deflation are small."

This good news is thought to be at least partially responsible for the early lift in the markets today.

Wall Street Breakfast: Must-Know News

The SPY hit its bottom Bollinger band at the close on Tuesday. The McClellan Oscillator indicates near oversold conditions. Technically the market should bounce today. Today will be interesting. Tomorrow will be more so.

Wall Street Breakfast: Must-Know News

The SPY hit its bottom Bollinger band at the close Tuesday. Also the McClellan Oscillator indicates a near term oversold condition. Plus there is good technical support at approx. the $88 level on the SPY. So far it looks like we are seeing a bounce up from $88 on the SPY. This would be the expected technical behavior. Oil is still down about $1 though. Today will be interesting. Tomorrow will be more so.

Wall Street Breakfast: Must-Know News

Oil is down again today after data from the American Petroleum Institute yesterday showed an overall build in stocks.
Distillates stocks were up 3.4M barrels
Gasoline stocks were up 767,000 barrels
Crude stocks were down 1.4M barrels (had expected down 2.4M)

This is a net build of approx. 2.8M barrels. This would seem to add fuel to the drop in oil prices.

It will be interesting to see the EIA statistics this morning at 7:30am.

Wall Street Breakfast: Must-Know News

Data from the May 2009 International Petroleum Monthly (IPM) indicate that the US demand for oil in Jan. and Feb. of 2009 was approx. 1M barrels of oil per day less than in the same period of 2008. The OECD (Organization for Economic Cooperation and Development) demand for oil in Jan. and Feb. of 2009 was approx. 2.5M to 3.0M barrels of oil per day less than in the same period of 2008.

This is a significant drop in utilization of oil. Unfortunately the report does not include figures for China (or overall World demand) for this time period. China demand may have risen. Still the overall demand is assured of being down significantly over last year.

The OECD countries are: Australia, Austria, Belgium, Canada, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Luxembourg, Mexico, Netherlands, New Zealand, Norway, Poland, Portugal, Slovakia, South Korea, Spain, Sweden, Switzerland, Turkey, United Kingdom, and United States.

Wall Street Breakfast: Must-Know News

No one in the western world should overlook the fact that Gordon Brown's government, after a shake up of his cabinet, was reaffirmed yesterday. That likely was the cause of the late afternoon spike up. The market hates uncertainty. It would have hated to be told that Britain had no government. It would have hated to be told that Britain believed that had been doing things seriously wrong lately. Instead the world was told that there is still confidence in the British government. Everything may not be perfect, but the government is making progress in a difficult time. This is what the world wanted to hear. This has pushed all of the European currencies up against the US Dollar. Even the Japanese currency is up against the US Dollar. We will find out tomorrow and Thursday if this is a blip or a longer term trend.

I am expecting the oil inventories in the US to rise tomorrow. This ought to pressure oil to the downside. It may also pressure the European currencies to the downside.