Tuesday, November 18, 2008

Trojan Horse of Earnings Surprises

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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Last spring Ford reported an unexpected profit. Even though this was inconsistent with almost all other information about the auto industry at the time,which was indicating serious collapse, the press trumpeted Ford's superior performance and that happy days were here again for the company. The stock shot up. Billionaire Kirk Kerkorian who had begun buying Ford stock in early April, announced he was willing to buy another 20 million shares at $8.50. The stock closed at $1.72 yesterday. The auto companies are now fighting for their lives trying to get desperately needed bailout money from Washington to prevent impending bankruptcies. Shareholders could get wiped out.

This morning Hewlett Packard announced surprisingly good earnings. This also seems inconsistent with reports from the rest of the industry. Intel, which has a broad international market similar to HP's was gloomy in its outlook in October. Nevertheless, HP stock shot up 15% in premarket trading and this helped prevent a drop on the open that could have sent the indices to new lows. HP's justification for its better than expected profits is that it sells printers and computers all over the world and this insulates it from economic problems in the U.S. An interesting statement considering that Intel and many other tech companies can say the same, but they are either already having problems or are negative on future business prospects. Unfortunately, the 'magic' that HP is using to produce its great numbers can't be deconstructed yet, since the full details will not be released until November 24th (Thanksgiving week when many traders in the U.S. will be away).

U.S. stock indices are once again scrapping along the bottom. All the gains from last Thursday's sudden explosive and still unexplained turnaround have not yet been dissipated, but they could be soon. A pattern of a big rally and then losing the gains in three to seven trading days seems to be the current norm. All the major indices have made three passes around their lows so far. The Nasdaq and Russell 2000 have made succeeding lower lows, while the S&P 500 tried to put in a double bottom and then made a lower low last Thursday. The Dow put in its low so far on October 10th and then has been trying to put in a double bottom subsequently. The technical picture has been improving somewhat, but in a major bear market like the one we are in, the technicals should look really good before you can put any store in them. Lows so far are 7774 on the Dow, 819 on the S&P and 1429 on the Nasdaq.

The current drama going on about the proposed auto bailout in Washington should be watched carefully. A bankruptcy filing for one of the major auto companies would be as devastating to the U.S. economy as Lehman's filing was for the stock and fixed-income markets after it took place in mid-September (the Depression era equivalent was when the Fed refused to bail out the New York Bank of the United States and this caused a chain reaction of bank and business failures throughout the economy). The lame-duck two month period between the presidential election and the new administration is a risky one for both the economy and the markets. No matter what happens, little government action should be expected.

NEXT: PPI and CPI - Don't Get Excited Just Yet

Daryl Montgomery
Organizer, New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

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