Alcoa and CSX Earnings: Not as Positive as They Look

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


The Q2 earnings season began with aluminum company Alcoa and rail freight operator CSX reporting on Monday. The stock market reacted jubilantly to the news. Careful examination however indicates there is very little reason for economic optimism based on these releases.

On the surface, comparisons looked good versus the Q2 2009. However, Q2 2009 was right off the Great Recession bottom and it would be almost impossible not to do a lot better. Alcoa's (AA) revenue was up 18% and CSX's (CSX) was up 22%. A 44% increased in metals freight shipments by CSX were seen as verification that Alcoa should be doing better. Automotive shipments by CSX were up 63% by volume year over year and vehicle manufacturing requires a lot of aluminum. It all looks really good as long as you don't look any further.

New car sales were in the dumps in Q2 2009 with only around 9.6 million vehicles sold. By Q3 2009 however around 11.5 million vehicles were sold (thanks to Cash for Clunkers), so comparisons next quarter are going to be difficult for both CSX and Alcoa. Approximately 11.2 million vehicles were sold in the U.S. in Q2 2010, but sales dropped 11% between May and June (the usual seasonal drop is 3%). So it looks like the summer will be weak for auto sales and sales for Q3 2010 will possibly be much lower than the previous year's level. This can only negatively impact next quarter's earnings for both Alcoa and CSX.

The market also got excited about Alcoa's revising its global demand forecast up 10% to 12%. While this would certainly be good news if it happens, traders seemed skeptical based on the action in the stock. Alcoa peaked in January and has been trading in a bearish pattern since mid-May. The stock is up only a very modest amount so far today. After a six-month drop, a more enthusiastic reaction should be expected on good news.

The stock market is supposed to look forward at least six months. Earnings are backward looking. They are only significant to the extent that the underlying trends that created last quarter's earnings continue to hold. There is a lot of reason to believe that this will not be the case. Big government stimulus programs are fading and the economy is weakening, not strengthening as it was a year ago.

Disclosure: No positions

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

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.

Before Earnings: A Sector Analysis of Stocks

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


Second quarter earnings season begins this week and the bulls are hopeful that good earnings will turn the market around. While the Dow and S&P 500 have given bear market signals, not all nine economic sectors have turned bearish and this provides some insight as to where the market is most hopeful for positive reports.

The two sectors of the market that have remained technically strongest are the Industrials (XLI) and Consumer Discretionary (XLY).  A third sector, Utilities (XLU), was the first to turn bearish at the end of May, but its price moved above the 50-day and 200-day simple moving averages on Friday. It needs to hold at that level in order for the chart to regain a bullish tone. Utilities are highly interest rate sensitive and the big drop in interest rates in the last three months should be bullish for them. While dropping interest rates indicate a weakening economy, Industrials and Consumer Discretionary doing well indicate a relatively strong economy. Good industrial earnings may make some sense at this point, but good consumer discretionary earnings do not.

The charts for Basic Materials (XLB) and Energy (XLE) both became bearish in mid-June. Since their products are inputs for industrial companies, profits for industrials could improve because their costs are decreasing. Technology (XLK) company profits though are not that sensitive to lower raw material costs and this sector turned bearish in early July.

The two sectors that tend to be relatively recession proof, Health Care (XLV) and Consumer Staples (XLP) turned bearish in early June and early July respectively. Both had major sell offs during the Credit Crisis though - a major downturn will take everything with it. Health Care stocks are possibly more affected by recent legislation than other factors, so it is difficult to say much about them at the moment. Consumer Staples though should not be bearish, while Consumer Discretionary is bullish. In a good economy, staples will rise more slowly than the discretionary stocks, but they will both be bullish.  The economy generally has to be very troubled for a significant downturn in Consumer Staples.

The remaining sector, Financials (XLF), turned bearish in early July. This is taking place despite an array of government programs to pump money into the banking system. Government actions are so predominant for this sector, that a downturn is difficult even if the economy is deteriorating rapidly.

It will be interesting to see how bullish or bearish each sector looks after earnings season is over. In 2008, Consumer Staples, Basic Materials and Utilities had charts that were at first bearish, but then turned bullish during the spring or summer before the complete collapse in the fall. Industrials appeared to briefly turn bullish at the same time as well. Energy didn't turn bearish at all until August. Only Financials, Consumer Discretionary and Technology were consistently bearish all year. The worst possible economic and market conditions are generally necessary for all sectors to turn bearish at the same time.

Disclosure: No positions

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

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.

Look for the Gaps

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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Gaps, in more ways than one, are the key to making money in this market. Gaps in logic of the media coverage and gaps in stock charts. We are at the peak of first quarter earnings season this week and you are seeing one media report after another with glaring headlines about how earnings are down for major companies as if somehow this is a surprise. What exactly was the press expecting to happen during the worst economic downturn since the 1930s? I am actually surprised that earnings are not down much more. The news is also leading to stock prices that gap up and down - sometimes two or three times in a week. This amount of choppy trading is unusual, but is great for making money trading, since gaps frequently get filled shortly after they are made.

Today we had earnings from big caps United Technologies (UTX), Dupont (DD) and Caterpillar (CAT). Earnings for United Technologies were down 28% and my reaction in contrast to the media's was, "Is that all?". Highly cyclical DuPont's earnings were down 59% and Caterpillar had a loss because of write offs. All of these stocks had have significant drops from their highs with CAT having fallen around 75% just in the last year alone. All in all, I would say the market has been anticipating a lot of bad news for a long time and has priced it into these stocks (and almost every other stock in the market for that matter). But does the media report, 'things not so bad, considering'? Not at all. The press coverage reads like the funeral scene from a Greek tragedy. You will also not read in most of the reports that these stocks are well off their lows. Why is that if things are going to be so bad in the future - the only thing the market cares about?

Hysterical media coverage is leading to short term panic selling on many stocks (and sometimes panic buying is taking place by the contrarians who are seeing the incredible bargains being made available). This has created very choppy charts that are filled with gaps. Unless you have a breakaway gap - a sudden move up (or down) to a new trading range, gaps usually get filled in the short term. When a stock has gapped down, it is likely to fill the gap on the upside later, so you can buy and wait for this to happen (two gaps down is an even better deal, usually rare, but common these days). I have also seen two or three gaps up. The stock is likely to fall and fill these gaps - and then you buy for usually handsome profits.

Helpful advice on making money in the market will almost never appear in the media (it is likely an accident if it does). What investors are more likely to get is this quote that appeared today from Noriel Roubini: "For people who say there are green shoots, I see only yellow weeds frankly," Roubini said from a conference in Hong Kong Tuesday. "It's not a true recovery. It's just a bear-market rally, it's a suckers rally." Roubini is an economist and not an expert on the stock market, so why is he being quoted. Has he ever made any money trading stocks? My guess is no.

NEXT: If It's Wednesday, It's the Oil Storage Report

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

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.

How to Handle Earnings Season

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.

Our Video Related to this Blog:

Earnings season officially begins today with Alcoa's earnings after the bell. While some company earnings are released every day, there is a huge bulge of announcements in the two weeks following the 7th of the month at the beginning of a quarter. Dow component Alcoa kicks off this period. While earnings are likely to be almost universally bad this doesn't mean that stock prices will go down. They may indeed go up.

Everything is relative on Wall Street. Any information that is known or suspected has already been incorporated in the price of a stock. Since the market overall fell from October 2007 to March 2009, a lot of bad news is reflected in current stock prices. So much so that anything short of a declaration of bankruptcy will be bullish for some stocks. The mainstream media will not emphasize this however and as it is doing today will write articles how earnings will be bad for last quarter. Since this is already known, your reaction should be that everyone already knows that so why are you wasting my time telling me about it. Only if earnings are worse than expected are they likely to be negative for stock prices (for more than a day or so).

If you are holding company stocks like Alcoa (AA), you have two choices. You can sell before the earnings announcement and buy back after or just hold through it. This decision isn't always clear cut. Having bought AA just off the bottom and having a nice profit it in in just a short time, I chose to sell it with the intention of buying it back. The market has had a sharp up move in the last 3 weeks and it vulnerable to a drop this week in general, so AA's earnings are coming out during a period of weakness. The market reacted quite negatively (at least for a short time) to Chalco's (the Chinese Aluminum company) earnings and negative description to the aluminum industry several days ago, so it is not unreasonable to assume a short negative reaction for Alcoa as well. Of course, Alcoa could surprise on the upside, it which case I would wait a few days for a pull back to buy it.

In general, I am still looking to buy beaten down stocks in a some commodity sectors (not copper since is has rallied since last fall, I also sold my FCX holding recently) and a technology stock here or there and will view a drop on earnings as an opportunity to get a good price. The market is filled with under priced bargains at the moment (some stocks are even selling for less than their yearly cash flow). You should look at anything that will do well in a high inflation environment and avoid the financial sector, where a low price these days usually indicates cheap goods as opposed to a bargain. It is important to know the difference.

NEXT: The News is Bad ... Time to Buy

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

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.