Earnings Season Outlook Soft for Crude, Retail, Financials

by: TraderRob
Crude Oil

The oil sector has been speculative to this point. It's hard to argue against $90 oil when we saw $145 in July 2008, but the fundamentals don't correspond to the price growth we've seen. In fact, this trader finds it easier to argue for oil $60 per barrel.
Crude supply in the U.S. remains high, at 330 million barrels, while gasoline demand remains week and imports are rising. Crack spreads for refiners are reflected in their output averse management of facilities, where capacity utilization rates have stagnated at 81.3%. Refiners are the effective buyers of crude, and the capacity numbers are sending signals of distress. The IEA's world demand predictions for 2010 were recently raised from the current 2009 level of 84.9 million barrels a day (mb/d) to nearly 87 mb/d by 2010 Q4. (It should be noted that predictions for Q4 2009 global demand at 85.5 mb/d overshot the actual level of 84.9.)
Rate hikes in China this week will calm the giant and should increase the likelihood of U.S. rate hikes in the first half of 2010. Rate hikes will cool speculative trades and pull a significant amount of upward speculation out of crude, as they increase capital holding costs and the risk of trading on margin. Softening Chinese growth will also cool global supply and demand speculation with respect to crude, in an equally bearish development for the commodity.


Earnings season may present upside risk to short positions, which is why our stops have been tightened on our SDS and SCC positions. SPX might make it's way to 1200, where a lot of traders are calling the next Fibonacci resistance level, but momentum seems to be sputtering as earnings have begun.
The December retail sales report showed a 0.3% decline combined with the revised higher 1.8% November rate, making it difficult to gauge buying sentiment moving into 2010. However, the negative growth in the Christmas month will leave many scratching their heads and suggests that energy prices are playing a bigger role in retail sales than previously thought.
All in all, crude seems to be weakening, even on the backs of solid earnings from Intel (NASDAQ:INTC) which should have been interpreted as positive to the overall economy. In after-hours trading, Intel traded up about 0.8% on a $0.55 EPS report vs. $0.34 EPS expected. Granted, the day saw some sour economic fundamental data from the previous mentioned reports, but the market response was weak for a 62% profit beat.


Markets are becoming tougher to surprise at these levels, and we could see more weakness from the banks. Soc Generale (OTCPK:SCGLY) had an awful quarter in France, and the U.S. regional First Midwest Bancorp (NASDAQ:FMBI) missed the -0.07 EPS consensus by $0.76 at -$0.83 EPS.
If regional financial problems due to mortgage-backed securities and the potential for more mortgage pain continue to show their fangs, financials could sell off through earnings. Financials are the guts of the recession and will surprise many at how fast they can lower the tide for all. Depending on how JP Morgan (NYSE:JPM) answers questions in this category on Friday, weakness from the best-in-breed lending giant could create malignant concern in the banking sector at large.

Disclosure: Long SDS, Long SCC, Long DTO

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