I have to hand it TradeMaster Daily Stock Alerts‘ Jason Cimpl. Yesterday, his morning alert to his traders was titled "The Biggest Story You Didn’t Read Yesterday".
And I’ll admit, I missed this story. But Jason, ever on the lookout for events that can lead to solid profits for his readers, was all over it.
Of course the biggest story yesterday, which was the failed auction in China, received no coverage from the U.S. media. China’s finance ministry could not come up with enough bids in yesterday’s $4 billion 1-year auction. Over the past year there has been much debate as to whether or not China’s yuan is undervalued. Speculators have slowly priced in a currency adjustment, but yesterday’s auction could indicate that the adjustment will happen this year.
The PBC has gradually raised reserve requirements on Chinese banks for the past year and it is widely expected that the bank will raise interest rates for the first time in three years this quarter. In that environment banks favor long-term debt, which typically have higher yields, but the notion that a 1-year auction did not receive enough bids is bizarre.
I don’t have a problem with investors who are bearish on the stock market and the U.S. economy. After all, official unemployment is near 10%. U6 unemployment, which includes those who are underemployed or have simply given up looking for work, is significantly higher.
The housing market is likely to only gradually improve over the next couple of years. There’s record government debt here in the U.S. and in many other countries.
But the bears need to take another look before they add high stock valuations to the laundry list of downside catalysts. Because the numbers say stocks are as cheap as they’ve been since 1990.
*****Sure, it’s easy to look at the 79% move by the S&P 500 and think stocks must be expensive.
But so far, 1st Quarter earnings have beaten estimates by an average of 22%, according to Bloomberg. 80% of reporting companies have beaten expectations.
Analysts have raised forward earnings estimates for S&P 500 companies by 9.3% in April. The index has responded with a 3% move in April.
Analysts say that S&P 500 companies will earn $85.96 a share in 2011. The record for per share earnings is $89.93, set in 2007. The S&P 500 was 20% higher then. The current P/E for the S&P 500 is 14.
It was two weeks ago that I likened the ongoing Greek debt saga to a slasher flick bad guy that keeps rising from apparent death. The Greek story is truly one that will not die.
It should be clear by now that none of the parties involved are playing it straight. Greece has made several misleading statements about the size of its debt and its plans to pay it off. Germany has reneged on its promise of support several times.
Even the aid talks with the IMF seem to be taking far too long. In fact, this Greek aid process is taking so long that investors are starting to speculate that Portugal will not be able to get aid quickly if it needs it.
At first, I called the endless wrangling over aid to Greece dysfunctional. Now, I’m starting to wonder if it’s deliberate. When you consider the discrepancy in economic strength between members of the EU, would it be any surprise that a country like Germany might be second-guessing its decision to join the EU?
*****You may recall I have repeated the phrase "never underestimate the American consumer." Consumer spending almost always exceeds expectations as the U.S. economy emerges from recession.
This time appears to be no different.
Retail stocks have been performing extremely well over the last six months as consumer spending and retail sales numbers have exceeded expectations.
And economists expect that consumer spending in the 1st Quarter may have risen by as much as 4%, which greatly exceeds earlier estimates.
What’s more, individual investors seem to be discounting the potential for spending to rebound while unemployment is high. Consumer sentiment surveys continue to point to weakness in spending.
In a recent survey by the National Association of Business Economics, 70% of economists said they believe the U.S. economy will grow by more than 2%. Just three months ago, only 61% of surveyed economists had such bullish expectations.
And it gets better. 24% of surveyed economists believe 3% growth is coming, up from just 14% January.
The details of the survey also show that employment is improving in the hardest-hit sectors: real estate, finance and manufacturing. And salaries are also on the rise.
*****Heavy equipment maker Caterpillar (NYSE:CAT), a bellwether for global economic conditions, reported solid earnings this morning. And it raised full-year 2010 earnings projections, saying that "…economic conditions are definitely improving..."
The stock market is certainly acting as though better times are ahead. Still, it seems that individual investors remain skeptical.
Caterpillar’s comments point to the reason why: much of the growth in orders it is seeing is coming from outside the U.S. Caterpillar actually lowered its estimate of housing starts in the U.S. by 20%, from 1 million to 800,000. It said the weak labor market was "the major reason many remain pessimistic about the U.S. economy."
I suspect that fact is what’s weighing on investors right now...
If the stock market has you scratching your head, don’t worry. You’re not alone.
I’ve been half-jokingly calling the stock market "bulletproof" for the last couple of weeks. And it’s because stock prices just keep marching higher. It’s like there’s no bad news that could possibly bring it down.
Last week, we had a volcano eruption that grounded European flights and cost those airlines at least $2 billion. Then Goldman Sachs was accused of fraud by the SEC, which makes a financial reform bill that could affect the entire banking industry’s profits, and the net result for stock was a one-day decline.
And even then, the S&P 500 immediately recovered that loss and made a new yearly high. What’s going on?
"It was the last wish of the Icelandic economy that its ashes be spread over Europe."
I wish I could take credit for that gem.
Flights are grounded once again in Europe as more ash from Iceland’s unpronounceable volcano drifts over the continent.
Europe is providing a major downer for the stock market these days. It’s not the grounded flights, however. It’s debt problems with Greece (again), and potentially Spain, Italy, Portugal and Ireland.
The news from Greece is not good this morning. Goldman Sachs is saying Greece is likely to cut or suspend debt payments for its bonds. The market is re-pricing Greek bonds for this possibility, which is why Greeks’ bonds have been falling for 6 straight days.
*****Greece’s debt to GDP is over 13%, a far cry from the EU’s 3% debt to GDP rules. That’s pretty bad. But it’s the way that this whole situation has been handled that’s helping to push Greek bonds to a crushing 8.49% yield.
As recently as April 7, Greek officials maintained that its debt was 12.7% of GDP. Now it’s 13.6%, and may rise higher.
Then there’s the dysfunctional way the bailout plan was negotiated... "It was the last wish of the Icelandic economy that its ashes be spread over Europe."
I wish I could take credit for that gem.
Flights are grounded once again in Europe as more ash from Iceland‘s unpronounceable volcano drifts over the continent.
Europe is providing a major downer for the stock market these days. It’s not the grounded flights, however. It’s debt problems with Greece (again), and potentially Spain, Italy, Portugal and Ireland.
The news from Greece is not good this morning. Goldman Sachs is saying Greece is likely to cut or suspend debt payments for its bonds. The market is re-pricing Greek bonds for this possibility, which is why Greeks’ bonds have been falling for 6 straight days.
*****Greece‘s debt to GDP is over 13%, a far cry from the EU’s 3% debt to GDP rules. That’s pretty bad. But it’s the way that this whole situation has been handled that’s helping to push Greek bonds to a crushing 8.49% yield.
As recently as April 7, Greek officials maintained that its debt was 12.7% of GDP. Now it’s 13.6%, and may rise higher.
Then there’s the dysfunctional way the bailout plan was negotiated...
Morgan Stanley (NYSE:MS), McDonald’s (NYSE:MCD), Boeing NYSE:BA), United Technologies (NYSE:UTX), Apple (Nasdaq:AAPL) - all beat earnings expectations in the latest round of quarterly reports.
Yes, earnings estimates appear to have been too low. But at the same time, the economy is surprisingly strong. I’m not sure there’s much reason to think analysts should have seen these numbers coming.
Apple was the star of the bunch. It reported $3.33 a share in earnings, when analysts were looking for a measly $2.45. That’s a humongous beat by Apple. And the stock is moving 6% higher this morning...
Yesterday, investors spoke loud and clear. And they said "If it comes down to Goldman Sachs (NYSE:GS) vs, SEC, I’m betting on Goldman."
And why not? Goldman is all-powerful. It’s #2 on my "never short" list, after Apple and before Google.
Goldman has proved its ability to stay ahead of the curve. It survived numerous lawsuits and a $110 million settlement with the New York Attorney General for IPO fraud during the Internet bubble.
Most recently, the accusations that inflated price projections and a huge oil trading desk at Goldman were behind crude oil’s run to all-time didn’t have any effect on the company.
Why should this little matter with the SEC over taking advantage of the housing bubble be any different?
Besides, Goldman reported earnings this morning. Did anybody really think they wouldn’t beat analysts’ expectations? Yeah, I especially wouldn’t want to be short Goldman ahead of earnings. Talk about a sleepless night...
I’m sure by now you’ve heard that Goldman Sachs (NYSE:GS) has been indicted for fraud. Goldman is accused of creating securities that were designed to fail, so it and its hedge fund cronies could make billions in profits.
Case in point: Abacus 2007-AC1. "Abacus" was a 23-part series of "synthetic collateralized debt obligations" that Goldman Sachs constructed and sold to supposedly sophisticated investors.
According to Bloomberg, a "synthetic collateralized debt obligations" was a mixture of "…credit- default swaps (CDO), used to transfer the risk of losses on debt, and securitization, used to slice the risk in a pool of assets into various new securities."
(We’ve discussed how the securitization process allowed good (prime) and bad (subprime) mortgages to be combined to create new securities that inevitably received undeserved AAA ratings from rating companies.)
I said I would be using the banks as my "canaries in the coalmine" for earnings season. Financials tend to lead the stock market, both on the upside and the downside.
Of the big banks to report so far, we’ve heard from JP Morgan (NYSE:JPM) and Bank of America (NYSE:BAC). And their results have been remarkably similar.
Both banks posted better-than-expected profits based on strong trading results. And both banks continue to be hampered by impaired assets and non-performing loans.
JPMorgan said it lost $1.3 billion on its real estate portfolios, slightly more than the $1.1 billion it lost the previous year. Signaling that it expects further credit weakness, the bank set aside $3.3 billion for real estate loan losses, up from $3.1 billion a year earlier.
Overall, JPMorgan set aside $7 billion for loan losses in the quarter, down 30 percent from a year ago.
Today, I start by offering my condolences. It’s tax day, never a pleasant time of the year.
*****Yesterday, I noted that the recent rally lacked enthusiasm. Low volume and small daily gains were the hallmarks. Did all that change yesterday after Intel (Nasdaq:INTC) posted blowout numbers?
Maybe. Volume posted its best totals since February. And the S&P 500 made its biggest gain since March 5.
But more importantly, we’re seeing money come out of money-market funds. iMoneyNet reports that U.S. money market mutual fund assets fell by $31.49 billion to $2.908 trillion in the week ended April 13.
Clearly, there’s still a lot of cash sitting on the sidelines. Some would say that this money belongs to individual investors who don’t want to be burned by another market crash. And cynics would say that the recent rally has been engineered to attract this money back into the stock market.
Unfortunately, the individual investor has a tendency to get bullish right at the top of a rally.
Now, just because anecdotal evidence suggests that the retail investor may be getting bullish is not a definitive sign that the stock market has peaked. Still, if the advance for prices continues like yesterday, we should be on our guard.
Yesterday I gave a somewhat tongue in cheek treatment to the question of whether Alcoa (NYSE:AA) had beaten analysts’ earnings expectations or not.
Intel (Nasdaq:INTC) left no room for doubt. The chip-maker crushed estimates by $0.05 a share, beat on revenues and profit margins and guided higher for the second quarter.
What’s next for Intel? Fixing the housing problem?
Seriously though, Intel’s earnings give us insight that Alcoa doesn’t. Namely, that corporate IT spending is strong. And that bodes well for profits at a range of companies, reinforces the pace of economic recovery and may even have implications for unemployment.
*****Intel’s earnings come at an important juncture for the stock market. Stocks have been struggling to take out resistance at Dow 11,000 and S&P 500 1,200.
The grumblings that the market was headed for a correction were getting louder. And while the recent low-volume push higher may still be vulnerable to a reversal, there’s finally a solid, tangible reason to buy stocks.
And a good catalyst for stocks prices is something that’s been lacking lately.
Not that there’s been no catalysts for stock prices. Gold’s been strong, oil’s been rallying and employment figures have improved, giving new hope for retail stocks…
There are some investors who think the significance of aluminum company Alcoa’s earnings is overblown. There are stocks that provide a better measure of consumer spending habits, or otherwise give more insight into the economy’s health.
But because Alcoa is always the first major company to report, it’s numbers are still treated like an omen for the 499 companies on the S&P 500.
So, if you ignore one-time charges, Alcoa (NYSE:AA) reported $0.10 a share 1st Quarter profit yesterday afternoon. I would swear I read on Yahoo! Finance that analysts were expecting $0.11 a share. That would mean Alcoa missed estimates.
Then last night, Reuter’s reported analyst expectations were for $0.10 a share in earnings, which would mean Alcoa matched estimates.
But THEN, the Financial Timessaid that the real per share earnings expectation was $0.09. So Alcoa actually beat the number.
Frankly, I have no idea whether Alcoa, missed, met or beat earnings expectations.
Is business at Alcoa good, bad, or somewhere in the middle?
Finally. Greece has been offered a lump-sum loan by the European Union. It’s been obvious for weeks that this needed to happen. Now that it has, at least we can look forward to not reading about this saga every day.
A month ago, this Greek bailout might have been a significant catalyst for the stock market. Now, after the seemingly endless back and forth, there’s not much impact beyond a rally for Greek banks and bonds.
From a trading perspective, the Greece news is being overshadowed be earnings season...
******It seems like 4Q 2009 earnings just ended, but Alcoa (NYSE:AA) kicks off 1Q 2010 earnings today after the closing bell.
Overall, earnings are expected to post a 30% gain over last year. But given the "bullet-proof" rally we’ve enjoyed over since mid-February, it’s reasonable to wonder how much of the expected earnings growth has been priced into current valuations.
Bloomberg is reporting that the price of put options (downside bets on stocks) have increased compared to call options (upside bets on stocks). That indicates that investors are buying put options to hedge their stock portfolios against a decline in stock prices.
Now, that investors are taking action to protect their gains does not mean a decline for stock prices is at hand. But it does suggest that investors are getting a little nervous as we head into earnings...
How many will we see the headlines say that an aid package for Greece is ready to go into effect? Talk about dysfunction, the way the EU and Greece has handled this situation, it’s no wonder that investors are demanding extremely high premiums to handle Greek debt.
It’s pretty clear that Greece needs a lump sum loan from either the EU or the IMF. I don’t care which. But please, just get it done so we can stop all the drama.
*****The Wall Street Journal is reporting that banks have been pulling a fast one on investors for the last year.
Apparently, banks like Goldman Sachs (NYSE:GS), Bank of America (NYSE:BAC), JP Morgan (NYSE:JPM) and 14 other banks have been understating the amount of debt they use to pay for securities trades.
Toward the end of a quarter, banks simply cut that number by up to 42% to make their balance sheets look less risky.
It sounds as if this debt that’s being cut is essentially margin debt. As any investor should know, buying stocks on margin has inherent risks. If you buy a stock by borrowing against the current market value of stock you already own, you can get in a tight spot if the value of that stock you borrowed against starts falling.
So for the banks, if they have bought securities on margin, it adds debt to their balance sheet. If they can magically write the margin debt down 42% then - voila! - their balance sheets look better…
It figures the minute I call the rally "bullet-proof", we get a down day. Admittedly, 7 points on the S&P 500 isn’t much of a drop, but it’s the biggest move lower since February 23rd.
On February 23rd, the S&P 500 "crashed" nearly 14 points. Since then, pullbacks have subsisted of a point or two, here and there. Not much sustenance for the bears, that’s for sure.
Now, I don’t mind the bears not getting theirs. But markets are a two-way street. Prices move up and down. It’s simply not healthy to move in a straight line higher, because both buyers and sellers lose their incentive. It’s like Tom, but no Jerry. Roadrunner, with no Wile E. Coyote. Boring.
*****Since the S&P 500 broke above 1,160 on March 17, we’ve seen a 30-point range over the last three weeks of trading. That’s a pretty tight range. And because of it, there are numerous minor support and resistance points in this range.
That means we’ll likely see a powerful move that simply blasts through the current range sometime fairly soon. I would expect that move to be to the upside. The S&P 500 looks destined to trade above 1,200 in the near future.
The stock market rally that started on February 5th, 2010 appears to be absolutely unstoppable. Bullet-proof. However you want to say it, there seems to be very little downside to stock prices, even after a strong rally.
Now, we are not surprised. I’ve been relentlessly bullish here in Daily Profit. Sure, I may point out some discrepancies once in a while, maybe even shoot a few holes in the financial media’s neat and tidy explanations, but I’ve had us focused on upside targets for a year now, and there’s one main reason: earnings.
This time last year, it was brutally obvious that analysts were seriously underestimating the earnings potential for bank stocks, even after the government changed the accounting rules to encourage profitability.
And in subsequent months, analysts continued to lowball earnings estimates. Companies kept beating them, and the market kept rallying.
How did we know estimates were too low? Well, partly because stocks kept rallying. It was one if the worst-kept secrets in history.
*****According to Bloomberg, transportation and warehousing companies added 7,800. And healthcare and social services payrolls grew by 37,000.
But hourly earnings fell, and the number of temporary workers grew. at the same time 44% of unemployed people have been out of work for longer than 27 weeks, or just over 6 months. The report didn’t break these numbers down, but it would be reasonable to assume that many of the "long-term unemployed" are construction workers who have been unable to find work since the housing bubble burst.
Even with an economic rebound and improvement to the housing market, it’s going to be a long time before home construction gets anywhere close to 2004-2006 levels. Homebuilding at that time was supported by artificial "bubble" demand. It was a growth illusion that affected not only home construction, but also mortgage lending and the bond market.
This is important to remember because it suggests that a reduction in the unemployment rate to pre-crisis levels can’t be achieved by a return to the pre-crisis economy. New jobs will have to come from new sectors of the economy.
Few numbers have been released with as much fanfare and anticipation as last Friday’s Nonfarm Payrolls number. Is it any wonder that the number was pretty good? Are we surprised that economists across the board are hailing the addition of 162,000 jobs in March as definitive evidence that the economic recovery is picking up steam?
Employment increased at the fastest rate since March 2007. And it wasn’t all Census workers, either. Government hiring accounted for 39,000 workers. That means private companies hired 123,000 people.
Employment numbers will continue to look good, as Census hiring will continue into June. But we’re going to need to see continued solid growth from private sector employment.
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