Reconciling Bad Economic Data and Good Earnings

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.


So far this earnings season, company reports indicate that business is going gangbusters. U.S. economic reports are painting exactly the opposite picture however. This may not be as contradictory as it appears on the surface.

As for earnings, Intel reported record numbers yesterday, after Alcoa upgraded its forecast for global aluminum sales and U.S. railroad company CSX said shipments were up considerably. This morning however U.S. retail sales numbers disappointed again, falling 0.5% in June following a 1.1% drop in May. Mortgages for home purchases fell to a 14-year low. According to the non-farms payroll reports, close to a million people net left the U.S. labor market in May and June because jobs were so scarce that they simply gave up looking.  Later today, the Federal Reserve is expected to lower its expectations for second half U.S. economic growth.

One of the important things to note is that both Intel and Alcoa are global companies. While many people assume that the U.S. is Intel's major market, it isn't. East Asia dominates Intel's sales. Strong Intel numbers generally indicate a robust East Asian economy. Growth has indeed been strong there. Intel's biggest growth sector by far was servers, which were up 170%. These are used for the Internet. Intel also cited cloud computing as a driver of sales. It is possible for a new technology to grow while the economy declines. The best example of this is the growth of radio during the Great Depression 1930s.

As for Alcoa, its projections may prove to be much too bullish. Industrial metals appear weak across the board and this indicates global manufacturing could turn negative in the next few months. CSX's good numbers were dependent on auto shipments. That market in the U.S. peaked in the third quarter of 2009 because of the Cash for Clunkers program. In the June retail sales report, autos were the weakest component.

Investors should not make judgments for the U.S. economy based on figures for global companies, especially when the U.S. is only a minority of their business. The U.S. economy can be much weaker than Asian economies. Asia was in the driver seat pulling the world out of the Credit Crisis recession and the U.S. followed. The U.S. may lead once again though bringing the world into the next recession.

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.

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.

It's Not the News, It's How the Market Reacts to the News

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:

At the moment, world stock markets are acting more like bull markets than bear markets. In a bear market all news is bad and in a bull market all news is good. There is still plenty of really bad news out there about the economy and corporate earnings - and the media is flooding the airwaves and using a lot of ink on stories of bad news, more bad news and still more bad news. The average investor will act like a deer caught in the headlights frozen in inaction. Meanwhile stock prices keep going up and up because professional traders are buying. What the market does is the only thing you should pay attention to. If any of the reporters writing these stories actually knew anything about making money in the stock market, they would be successful traders making a hundred times more money than they do as reporters.

Last week Alcoa (AA) offered a perfect example of the bull market reaction to news. Earnings were not just bad as everyone thought they would be, but were even worse than expected by 3 to 5 cents (depending on which analyst survey you looked at). The stock actually opened up the next morning and then settled down for a small loss on the day. I had sold out my position (purchased off the bottom) in anticipation the earnings would be worse than expected. However, since the market obviously didn't care about that, I bought the stock right back the next day (at the market, I don't take the risk of not getting a good bargain by setting limit orders). Alcoa then had a big rally on Thursday. When a stock goes up like this on bad news, it indicates all the bad news has already been priced in. When that happens the price can only go up. You didn't read about that in the mainstream press however. All you saw was negative coverage of how poor the aluminum business was last quarter even though the market couldn't care less what happened last quarter.

As we detailed in last weeks meeting, the press has been not just irrelevant when it comes to the coverage of the oil market, but out and out misleading about the actual state of affairs. The oil bears have managed to drive the price of light sweet crude below the 50.50 breakout point 3 times so far. I have bought more oil related stocks at each point (Recently I started purchasing drillers which are usually the last to rally). Nymex oil closed the trading week at $52.24 on Thursday. The media is doing its best again today to highlight the negative view on oil. The IEA, International Energy Agency, is now predicting that global oil demand will fall 2.4 million barrels a day this year. Media stories didn't mention any statements from the agency concerning predictions on supply (which is falling rapidly). Meanwhile Iran's oil minister, a source that would not have any credibility with U.S. readers, released a statement that the price of oil should go to $75 to $80 a barrel and the media highlighted this. In response, renowned oil "expert" Victor Shum, a source that should have no credibility with U.S. readers, said, "nobody, even in OPEC, expects the price [of oil] to get to $75 this year". Obviously, Mr Shum doesn't follow the New York Investing meetup. If he did, he might improve the accuracy of his forecasts.

People don't make money in the stock market because they focus on the irrelevant - and the mainstream media is more than willing to help you do this. Pay attention to what the market is actually doing if you goal is to make money investing. Then you need to take action. If a consumer goes shopping and sees an incredible bargain at 90% off, they don't usually say I'll come back next week to see if its 95% off or I'll come back and get it in a couple of hours when I'm done with my shopping (lots of luck that it will still be there). People do this with stocks all the time though and this is one of the major reasons the average person has trouble making money investing.

NEXT: Rallies Make You Rich, No Matter What the Type

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.

The News is Bad ... Time to Buy

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:

In the New York Investing meetup last night, we had a talk on media manipulation of the news in the oil market. The news reported is almost completely negative and is contradicted by the facts. Under such circumstances, it's not surprising investors who rely on the news make bad investing decisions. The headlines today will likely turn out to be another great illustration of this point. When I turned on my computer this morning, there was an unrelenting barage of negative headlines. My initial reaction was that I had better buy quickly after the market opens to take advanatage of this.

What impression would these headlines make on you?

- "Stock Futures Fall on Earning Worries"
-" World Markets Track U.S. Lower Amid Earnings Fears"
-"Oil Falls below $48, Following Stocks Down"
-"Sharp Forecasts Bigger Loss Amid Global Slowdown"

The unrelenting picture of danger and risk painted by the media will keep the average investor far away from the market - and he or she will not make money as a result.

The news is also not actually as bad as the headlines indicate either, but you have already been put into a certain mindset before reading the article (assuming you do, many floor traders only see the headlines). For instance, how bad were the stock futures that were down on earning worries? A quote from the article: "Ahead of the market's open, Dow Jones industrial average futures fell 42, or 0.5 percent, to 7,720, ... Standard & Poor's 500 index futures fell 3.40, or 0.4 percent, to 810.60, while Nasdaq 100 index futures were unchanged at 1,280.75." A more accurate headline for this story might be: "Despite Earnings Worries Market Having Trouble Selling Off". Don't hold your breath in waiting for headlines that provide an accurate picture on what is going on though, it's not going to happen.

Alcoa supposedly set off these earnings worries the media is reporting today. It earnings were a few cents below expectations. Nevertheless, the stock is having trouble selling off in premarket trading. This is extremely bullish and is another piece of evidence that all the bad news has been priced into the stock. That's not the slant in media reports however. Today's stories are emphasizing how bad things were LAST quarter. The market doesn't care about this. It is interested in what is going to happen two or three quarters in the future. If the stock goes higher, the market is optimistic about the future - and its only the market's opinion you should care about if you want to make money.

NEXT: Fed Minutes Take Oil on Roller Coaster Ride

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.

Commodities Rumble, Financials Tumble

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:

Alcoa was one of the biggest movers in the market yesterday. At one point it was up over 20%. It was also the stock that I pounded the table to buy at Tuesday night's class on Technical Analysis. Our February choice, DXO, is up over 50%. Basically every stock I mentioned during the class had a good to huge rally. Even FCX, used to illustrate a number of technical points and well advanced in its rally would have made you good money. It was in the upper 34's on Wednesday morning, but over 42 at its high yesterday (there are better bargains in the market at this point). Even a Canadian Royalty Trust that I only mentioned in passing that I had purchased, went up nicely. A couple of attentive attendees took the hint. Coal stocks across the board had terrific rallies. We spent a lot of time looking at coal in the class. While I wasn't sure steel had bottomed, it rallied sharply nevertheless. No one apparently picked up on the shipping company that I made a gratuitous remark about, probably because I didn't state that I owned it. It was up 28% yesterday.

What wasn't up yesterday were financials. Citigroup was down 26% at its low, but closed down 16%. It is planning a reverse split. Wells Fargo was down 10% and Regions Financial down 12%. Broker, Morgan Stanley was down 13%. Insurance companies were clobbered (watch this space for a future bailout). Prudential was down 25% and Met Life, 12%. While you can make good money day trading financials, their long term picture is down while the long term picture for commodities is up. You can no more walk away while holding these positions than you could leave a big pile of chips unattended at the gambling tables in Vegas or Atlantic City. Of course you would eventually not have that pile of chips anyway since gambling, unlike investing, is ultimately a losing activity.

While the precious metals rallied yesterday, beaten down silver did much better than gold. Both were significantly down on Wednesday morning and shot up like rockets after the Fed announcement. It looks like a lot of traders were stopped out of both during the drop. I've seen this Wall Street racket played repeatedly over the years. Manipulators drive down the stock price driving the small players out and then a sudden reversal takes place and it shoots up to the sky. The inside players get the stock cheap and makes big profits, while the small investor is left holding the bag . Only if you have a accurate big picture of what is going on can you protect yourself from this type of shake down.

Oil continued its rally yesterday, closing at 51.61. This was the highest close since December 1st and represents a very significant breakout. Next resistance for the futures contract around $57. Natural gas finally joined the party and was up 42 cents to $4.10. This is a rally right off the bottom. Probably best to wait for some pull back from the initial rally if you want to buy. Gasoline and even heating oil had significant rallies yesterday as well. Oil has now rallied from the high 33's to over 52 in a month. During this entire time, the mainstream financial media has published one story after another about how oil can't rally until the economy improves and how oil can't rally because demand is declining. Nevertheless, oil has rallied sharply. Apparently the smart money doesn't pay any attention to the media, nor should you if you want to join the big money some day.

NEXT: Making a Silk Purse Out of a Sow's Ear

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.

Dow Breaks Key Support Indicating a Much Lower Low

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:

The Dow confirmed a break of major support on Monday. Yesterday's low just under 7106 was over one percent lower than the 7181 intraday low on October 10th, 2002. The index is now back to where it was in 1997. It should now be considered inevitable the the Dow will have to fall to the 5600/5800 range where the next strong chart support exists. Below that, support is around the 4000 level. Even at 4000, the Dow would be in much better shape than it was in the 1930s when it dropped 89%. As of yesterday, the index is down only 50% from its bull market high. When it would get to even 6000 is open to question as well. It still might take awhile.

The market is deteriorating at this point not because economic conditions are bad, but because it doesn't look like there is anybody in charge that will be making them better. While the market was falling apart last Friday, Treasury Secretary Geithner was MIA. Word was that he was on vacation. It is certainly understandable that after a whole four or five weeks in his new job where he managed to royally screw up in record time, that he would need some rest. Besides, he knew that president Obama would soon be busy announcing that he would be cutting the budget deficit in half by the end of his first term (Republicans were demanding attempts to get the budget under control, something they never did during the Bush administration). The level of economic obliviousness this indicates is simple off the charts. It's sort of like announcing your new snow removal policy while people are dropping dead in the streets from 135 degree heat... and it has never snowed at any point in history in your country. Some immediate action on the banking crisis should be agenda item number one, not that I am confident that this will be handled intelligently by the government. We are almost guaranteed that it won't be.

Wall Street is understandably upset about the confidence gap with the new administration. While many financials took a big hit as usual, Citigroup and Bank of America were actually up and are still holding above the penny stock level (a deal was being discussed to convert the preferred stock the government owns in Citi to its worthless common stock). Resource stocks were crushed. U.S. Steel feel 13% on Monday alone. It is almost 90% off of its yearly high and it has a P/E of 1. Aluminum producer Alcoa isn't doing much better, falling 8% on the day and is down around 85% on the year. Coal company ANR fell 8% and is also about 85% off of its high. If these stocks seem absurdly undervalued it is because they are, but that doesn't mean they will be going up tomorrow. In a major bear market, there is almost no limit to how cheap stocks with real value can get. It is of course important to differentiate them from stocks that become equally cheap and will remain so because they don't have any value (currently the financials).

The biggest drops frequently happen at the bottom of a move. The monthly charts indicate that the market is likely to bottom sometime during March at the latest. Short covering will propel the rally that follows. A sustainable long term rally is still somewhere in the distant future and is receding further because of the current drop. In the longer term, zero interest rates and the unending bailouts and spending plans will provide the market with the liquidity which is the fuel it uses for its rallies. They will also mean that you will be paying $50 for a cup of coffee at Starbucks.

NEXT: State of the Nation - Denial

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.