Prepare for the worst. Hope for the best. That’s the motto of the nation’s retail industry these days.

With consumers stitching their wallets shut and retailers slashing their margins in an attempt to attract the few Americans left that are willing to spend, expectations are not high for stores setting up shop in the nation’s malls.

But with low expectations come big surprises.

With the first batter of the latest earnings season, Alcoa (NYSE:AA), hitting a triple last night, optimism is on the rise. Thanks to some better-than-expected same-store sales figures this morning, the high hopes are raising the mood for the retail industry.

The morning’s leader board is filled with the names of clothing sellers once tossed aside to the ravens of Wall Street.

Tandy Leather Factory (AMEX:TLF) is taking its shareholders on a ride to new yearly highs after it announced a September sales figure significantly larger than expected. Compared to last year’s figures, comparable monthly sales rose by 14%.

The surprising action has sent shares of the leather retailer up by double-digit proportions so far today, adding to the triple-digit gains already created as the stock more than doubled in value from its March lows.

Better than nothing

While the news from Wet Seal (NASDAQ:WTSLA) is not quite as positive, word of better-than-expected shares has created a profit opportunity for its shareholders.

As a player in the women’s specialty market, Wet Seal has plenty of competition as it fights for what’s left of the nation’s discretionary spending. That’s why analysts were expecting a sales decline of 7.8% from last September’s figures.

But now that the company tells us the figure was actually a decline of just 4.5%, investors are wondering if this is a good buying opportunity. With shares up by over 5% on the day, its obvious plenty of investors are increasingly bullish.

Finally, while the 30% surge from Liz Claiborne (NYSE:LIZ) has little to do with past sales figures, it has everything to do with the company’s future sales growth.

Shares of the clothing designer and marketer are surging on the news the company has signed an exclusive deal with J.C. Penney (NYSE:JCP). The word is J.C. Penney will have sole access to the Liz Claiborne and Claiborne brands.

The contract is good news for the cash-strapped firm as it includes guaranteed minimum profit sharing, royalty payments and design service fees.

While I am weary of the long-term sustainability of today’s surge forward, there is no denying the surprisingly good figures are a sign that the devastated retail industry still shows signs of life.

A lot of innings remain to be played in the current earnings season. So far, the bulls are ahead. But the game is far from over.

Source: Retail Industry is Getting Attractive

Since the stock market rally reached a pinnacle nearly two weeks ago, the Dow Jones Industrial Average has lost about 3.3% while the Standard & Poor’s 500 Index has fallen about 3.7%. And if this week’s earnings report come in below expectations, the rally that helped stock prices surge more than 50% could come to an abrupt end.

Fortunately, many of the companies set to report earnings this week are traditionally strong performers and for the most part, companies that have weathered the financial crisis. But not all of them have met Wall Street’s expectations.

The quarterly results for five companies in particular – Yum! Brands Inc. (NYSE: YUM), Alcoa Inc. (NYSE: AA), Costco Wholesale Corp. (Nasdaq: COST), Monsanto Corp. (NYSE: MON) and PepsiCo Inc. (NYSE: PEP) – will of particular interest to investors.

Yum! Brands Inc.

Scheduled to report today (Tuesday), the Louisville, Ky.-based Yum! will be one of the first companies to report its quarterly take.

As owner of the Taco Bell, Kentucky Fried Chicken (KFC) and Pizza Hut brands, Yum! is the world’s largest restaurant company. Even more impressive, the company has beaten the market’s consensus forecast in the last four quarterly reporting periods.

Analysts’ estimates for the quarter ending September 2009 range from a low of 52 cents a share to a high of 63 cents a share, with a consensus of $0.59 a share. Yum will lean heavily on its international business if it’s going to continue its trend of topping analysts’ estimates.

Yum! is a well balanced company with about 41% of its 2008 operating profit coming from the United States and the rest from overseas – particularly China.

By 2013, China will account for 40% of Yum’s operating profit – up from 28% in 2008 – while the United States and the rest of the world will each account for a 30% share, according to company projections.

KFC, in particular, has long seen its most robust growth coming from China, with less than 10% of its franchises on the mainland accounting for more than a quarter of the company’s earnings.

Yum! added 328 new restaurants in the second quarter, including 118 in Mainland China.

“Yum!’s global growth potential, consistent performance and track record of generating strong free cash flow give us the confidence and ability to return significant cash to our shareholders even in these challenging economic times,” said Yum! Chief Executive Officer David Novak.

An analyst with Credit Suisse Group AG (NYSE ADR: CS) earlier this week told Barron’s that Yum! shares deserve a better premium because of its large international footprint and ongoing reallocation of capital.

Yum! shares should trade at a premium to their peer group and could climb nearly 25%, a the analyst said.

Shares of Yum! surged 5.13% yesterday to close at $34.85.

Alcoa Inc.

Though its release comes a day after Yum’s, Alcoa’s quarterly report marks the unofficial start of earnings season.

Hit hard by the collapse of commodities prices and sluggish industrial demand, Alcoa has missed earnings expectations in three of the past four quarters. And the company’s latest earnings report will likely show that its struggles continued, albeit at a slower pace.

Alcoa is expected to report a net loss of 12 cents per share for the three months that ended in September. That’s down substantially from a profit of 37 cents a share in the same period last year, but would be a marked improvement on the 32 cents a share loss the company posted in the second quarter.

Indeed, Alcoa’s earnings will provide an important look at just how far global demand for industrial metals has come. Hopes are high, as Alcoa stock has surged more than 143% since mid-March.

Deutsche Bank AG (NYSE: DB) analyst Jorge Beristain has increased his rating of Pittsburgh-based Alcoa to “Buy” from “Hold” and increased his price target to $17 from $12.

The upgrade partially reflects Deutsche Bank’s higher price projections for base metals. The bank sees base metal prices climbing an average of 31% next year, on account of strong third-quarter “price surges” and increased demand from China, Beristain said in a note to clients.

“China’s seemingly insatiable appetite for industrial raw materials has led to record high imports in many metals and a consequent tightening in market balances,” he said.

Alcoa’s stock rose 4.68% in trading yesterday, to close at $13.42 a share.

Costco Wholesale Corp.

Costco is the largest membership warehouse club chain in the world by sales volume. That makes it an ideal choice for cost-conscious consumers. Costco has enjoyed seven straight years of earnings growth, but the company’s past two quarters have disappointed investors.

The third time might be the charm for the nation’s largest warehouse chain. William Blair & Co. LLC analyst Mark Miller last month upgraded the stock to “Outperform” from “Market Perform” and after the company stepped up sales in August.

Sales at established locations declined 2%, beating Wall Street expectations for a larger 5.7% decline.

“With the step-up in sales during August and positive takeaways from our meeting last week with [Costco Chief Financial Officer] Richard Galanti and [Vice President of Financial Planning and Investor Relations] Bob Nelson, we are more confident that sales and earnings could meaningfully surpass Street expectations over the next year,” said Miller.

Like Yum!, Costco could receive a significant bump from its overseas operations, as recent store openings in Asia have been strong and the dollar has weakened.

For the third quarter, the average analysts’ estimate is for a profit of 76 cents a share – a 17% drop from the 92 cents a share it earned in the same quarter last year.

Costco CEO Jim Sinegal said earlier this month in an interview with Motley Fool that he expects his company to turn around regardless of whether or not the economy experiences a quick recovery.

“We can always blame bad sales on weather and on economic conditions and everything else,” he said. “But when we have the right merchandise out on the floor, it sells. … [We] don’t like the fact that the [average customer] basket is down, but we certainly like the fact that the customers are coming back more frequently and, as things turn, they will start to buy again. Now it is on us to get the hot merchandise.”

Costco stock edged up 0.73% yesterday to close at $56.88 a share.

Monsanto Co.

As the world’s largest producer of genetically modified seeds, Monsanto is a closely watched biotech bellwether. Like Alcoa, Monsanto was hit in recent quarters by a drop in commodities prices, as well as a drop in demand for its products.

However, the company announced an acquisition, a partnership, and a divestiture in its fiscal fourth quarter. It is expected to squeeze out a one cent per share profit, compared to three cents per share loss in the same quarter last year.

Monsanto’s acquisition of WestBred LLC – a Montana-based company that specializes in wheat germplasm – will bring wheat into its seeds and traits portfolio, and its joint venture with Dole Fresh Vegetables, Inc. will put more genetically modified vegetables on Monsanto’s plate. Meanwhile, Monsanto’s divestiture of its global sunflower assets to Syngenta brought in $160 million.

The company also shed 9,000 employees in a bid to cut costs, and despite being heavily targeted by anti-trust groups and chief rival E.I. du Pont de Nemours & Co. (NYSE: DD), Monsanto insists it’s on track to more than double its 2007 profit by the year 2012.

“We have committed to using our technology to double yields in our three core crops – corn, soybeans and cotton – by 2030, while reducing our use of key resources by one-third per unit produced,” said Monsanto Chairman and CEO Hugh Grant. “Innovation has us well on our way to achieving this, with our most robust pipeline ever. We’re on the verge of an unprecedented technology explosion that will deliver the types of products growers want most – those that offer greater yield and value.”

By 2012, Monsanto expects its gross profit from its core seeds and traits business to be between $7.3 billion and $7.5 billion – about 2.5 times its 2007 level. Grant said this increase will be facilitated by the development of seven new “high impact technologies” that by 2020 will boost revenue by $3 billion.

Monsanto has reported better-than-expected earnings in the past three quarters, and at Monday’s close of $74.85 a share is an undervalued stock according to Morningstar.

“Monsanto is a fierce competitor that continues to dominate a market that it essentially created more than a decade ago,” said Morningstar senior analyst Ben Johnson. “Through its ongoing commitment to research and development and assertive capital allocation, the company has positioned itself to grow value for its shareholders over the long haul.”

PepsicCo Inc.

Of all the companies reporting this week, PepsiCo has generated the most buzz. Bullish speculators yesterday piled into PepsiCo call options after Deutsche Bank raised its earnings for the salty-snack-and-soda giant.

Call volume surged by nearly 700%, according to optionMonster.

Deutsche Bank raised its price target for PepsiCo shares, which closed yesterday at $60.85, to $70 from $66. The bank maintained its buy rating on the stock, and said shares have been negatively affected by an “unwarranted deal overhang” related to the company’s acquisition of Pepsi Bottling Group Inc (NYSE: PBG).

PepsiCo in August said it would merge with Pepsi Bottling, as well as invest in Russia, during the three months that ended in September, and is expected to post a profit of $1.02 per share – four cents per share less than a year ago. Revenue for the quarter is expected to come to $11.3 billion, about the same as last year.

PepsiCo has only missed expectations in one of the past four quarters, and by just two cents at that.

Source: The Five Stocks to Watch This Week

The gap between imports and exports rose 16% – the largest percentage increase since February 1999 – to $32 billion in July from a revised $27.5 billion in June that was larger than previously reported, the Commerce Department said. After eliminating the influence of prices, which are the figures used to calculate gross domestic product (GDP), the trade gap widened to $38.8 billion from $35.8 billion.

Imports surged 4.7% to $159.6 billion, fueled by an increase in oil prices and strong demand for industrial materials. Crude oil prices rose to an average $62.48 a barrel from $59.17 in June. And imports of capital goods, which include cars and auto parts, jumped to $30.2 billion from $28.9 billion.

The government’s Car Allowance Rebate System (CARS), popularly known as “Cash for Clunkers,” was the driving force behind the increase rising demand for capital goods. The program fueled a 1.8% increase in durable goods spending for the month, as sales of cars and light trucks rose to an annual pace of 11.2 million units in July – the most since September 2008. The gain in auto imports was probably even bigger in August when car sales surged to an annual rate of 14.1 million units.

The rise in imports far outpaced the increase in exports, which rose just 2.2% to $127.6 billion. That, too, was the result of greater demand for capital goods and industrial supplies – particularly in China.

Despite the worsening in the overall trade gap, the U.S. trade deficit with China narrowed to $20.42 billion in July from $25.03 billion in the same month last year.

“China is back,” Alcoa Inc. (NYSE: AA) Chief Executive Officer Klaus Kleinfeld said in an interview with Bloomberg News. “They had a lot of shovel-ready projects” planned for 2011 that starting now as part of the country’s stimulus effort.

Alcoa last week raised its 2009 forecast for global aluminum consumption because of demand unleashed by China’s $586 billion (4 trillion yuan) in stimulus package.

China’s economy grew by 7.9% in the second quarter, exceeding most analysts’ expectations, and lending credence to Beijing’s goal of 8% annual growth.

U.S. exports to the rest of the world are expected to rebound in the months ahead as the global economy inches toward recovery.

“The outlook for U.S. exports is becoming increasingly positive,” wrote Michael Feroli, an economist for JP Morgan Chase & Co. (NYSE: JPM). “Foreign economic growth has returned.”

U.S. trading partners grew at a 4% annual rate in the second quarter on a trade-weighted basis, Feroli noted.

Trade has been one of the few bright spots in the economy throughout the recession, contributing 1.6 percentage points to second-quarter GDP, helping to make up for declines in consumption and investment. Total U.S. GDP contracted 1% last quarter.

Source: U.S. Trade Deficit Widens, but Signals a Healthier Economy

Stock investors will key next on earnings from tech giant Intel Corp.(Nasdaq: INTC) and banks including J.P. Morgan Chase & Co. (NYSE:JPM) for hints of what to expect in the third quarter — and how badly the recession hurt businesses in the second quarter.

The Standard & Poor’s 500 Index and Dow Jones Industrial Average delayed declined for the fourth straight week last week – the longest string of losses since stocks hit their low point in March – and investors are looking at the tech sector to squelch the ongoing decline. The Nasdaq Composite Index complost 2.47% in the week ended Friday.

Earnings reports this week from computer-chip giant Intel and several big banks – including JPMorgan Chase & Co. - could provide investors and economists some insights on where the U.S. economy appears to be headed. Earnings are expected to improve over the last quarter, even though they’ll still be down substantially on a year-over-year basis, Binky Chadha, chief U.S. equity strategist at Deutsche Bank AG (NYSE: DB), told MarketWatch.com,

“A necessary condition for the markets to go up from here is that earnings have to deliver, and we need a dissipation of the uncertainty about earnings,” Chadha said.

Year-over-year (annual) earnings comparisons are typically the financial yardstick that analysts use to assess whether the U.S. economy is growing or declining, meaning that “sequential” (quarter-to-quarter) earnings aren’t as crucial. This time around, however, the quarterly numbers may be viewed as important because they might give a better picture of the economy’s health.

During periods of extreme uncertainty, earnings estimates for companies tend to be widely dispersed – a function of investors not really knowing what to expect. That’s particularly true right now of banks and financial-services companies – and companies that derive most of their income from discretionary consumer spending.

And that makes sense, given that those are the two most uncertain portions of the U.S. economy – thanks to the ongoing global financial crisis and a jobless recovery that is badly crimping consumer confidence.

After mounting one of the strongest surges in history from their March lows, U.S. stocks have fallen back in recent weeks as investors dealt with a growing realization that the U.S. economy – and its counterparts abroad – won’t rebound with the speed or strength that had been widely expected. Further evidence of this came on July 2, when a U.S. payrolls report said the economy had lost more jobs than had been expected.

Against that backdrop, analysts and other investors are looking to the U.S. high-tech sector to pull the economy out its doldrums, Money Morning recently reported as part of its mid-year forecast series.

Thomson Reuters predicted that S&P 500 earnings will decline by 36% from last year’s levels, with financials (-53%) leading the way and techs (-24%) performing better than other sectors.  This should represent the eighth-straight quarterly decline, though analysts seem more concerned about the ensuing management comments on future operations, since that will shed some light on where the economy is headed.

When Intel reports tomorrow (Tuesday) analysts expect to see that /quotes/comstock/15*!intc/quotes/nls/intcsecond-quarter sales and earnings plunged, but some analysts believe demand may be returning to the battered market following a sharp slowdown in demand for high-tech goods. Internet-search juggernaut Google Inc. (Nasdaq: GOOG) will report on Thursday.

Other firms that report this week include Goldman Sachs Group Inc. (NYSE: GS), Bank of America Corp. (NYSE: BAC) and Citigroup Inc. (NYSE: C). JPMorgan reports Wednesday.

“The market is filled with folks who want to be optimistic, but simply cannot find enough genuine reasons to buy into the market,” Mike Gambale, an analyst at Informa Global Markets, told journalists. “We don’t expect impressive numbers across the board, but there will be some surprises, as there always are.”

[If you're new to the commodities-investing arena, and are uncertain about the landscape - or even if you're an "old hand" at natural-resource stocks, but want some insights into the new profit plays and new players - consider hiring a guide: Money Morning Contributing Editor Peter Krauth, a recognized expert in metals, mining and energy stocks, is also the editor of the Global Resource Alert trading service, which ferrets out companies poised to profit from the so-called "Secular Bull Market" in commodities. A former portfolio advisor, Krauth continues to work out of resource-rich Canada, which keeps him close to most of the companies he researches. Against the growing global financial malaise, Krauth says that commodities are among the most-profitable and least-risky investments available, and notes that this may well be the most powerful bull market for commodities we'll see in our lifetime. He makes a strong case. To read more about his strategies, and the sector plays he likes the most, Please click here. ] 

Market Matters

“New and improved” was the market mantra of the week. General Motors Corp. (OTC: GMGMQ) emerged from Chapter 11 bankruptcy protection after just over a month, eager to start anew as a “new and improved” automaker.

The Commodity Futures Trading Commission (CFTC) set its sights on “new and improved” trading regulations to limit excessive speculation within the energy and other commodities markets.  Some politicos are calling for a “new and improved” stimulus package to move the economy beyond the worst recession since the Great Depression.  A “new and improved” Public-Private Investment Program (PPIP) was scaled back dramatically as selected managers will begin purchasing toxic assets from ailing banks.  Unfortunately, as the week progressed, investors did not seem too keen on these “new and improved” developments.

Despite harsh protests by consumer groups and creditors, new GM reopened for business, “leaner and meaner” than ever.  A judge’s ruling allowed the once-bankrupt company to sell its performing assets to a new government-controlled entity (thanks to a $50 billion “investment” by taxpayers).

The government then shifted its attention to the regulatory world and announced plans to propose trading restrictions on certain commodities and increase the oversight over risky derivative products that have proven so detrimental to the financial markets.

The widely anticipated earnings season got started as Alcoa Inc. (NYSE: AA) reported another quarterly loss (with better-than-expected numbers) and oil giant Chevron Corp. (NYSE: CVX) warned that its results would be hindered by poor refinery operations and a weak dollar.

Investors have taken a more cautious approach heading into the new (but not improved) earnings season, particularly after last week’s pessimistic labor data.

Stocks fell throughout the week and fixed income again became beneficiary of safe-haven trades.  The tech-heavy Nasdaq now remains the only major domestic stock index “in the black” for the year.

Fickle energy traders suddenly turned bearish, as well, as the weak economic data implied that oil demand would be curtailed for the foreseeable future (or, at least, until 2013 according to Organization of the Petroleum Exporting Countries’ “2009 World Oil Outlook”).  Crude oil plunged beneath $59, or more than 10% during the week, on ongoing economic concerns,  although consumers ultimately may be recipients of cheaper gas prices.

Economically Speaking

Talk of a second stimulus surfaced this week, with several leaders – including U.S. Vice President Joe Biden and investing icon Warren Buffett – stating that the Obama administration’s $787 billion stimulus isn’t enough to jumpstart the U.S. economy.

On the other hand, Senate Majority Leader Harry Reid, D-Nev., believes the plan needs more time to work through the system as only 10% or so has even been distributed thus far.  Economists seem to agree with “Hank,” as the latest Wall Street Journal survey reported that over 80% of respondents feel that the country does not need a new round of stimulus in the current environment.  Still, the “Oracle of Omaha” painted an optimistic picture of the future by stating that the United States is “going  to come out of this better than ever, the best days of America lie ahead but not next week or next month.”

On the global front, the International Monetary Fund (IMF) revised – upward – its forecast of economic growth for 2010 and confirmed its belief that the developing economies in China and India will greatly contribute to the global rebound.

The May trade balance highlighted a slow week of data as the deficit declined to its lowest level since late 1999 and the weak labor market helped reduce consumer demand for foreign goods.

While initial claims for unemployment benefits fell to levels not seen since the beginning of the year, continuous claims (those folks who remain on the unemployment rolls for over a week) rose by another record amount.

In other words, no matter how one dissects the numbers, the labor picture looks dire and may not begin to improve for some time.  As such, the latest University of Michigan consumer sentiment reading dropped for the first time since February, another sign that the optimism of the past few months may be fading fast.

Weekly Economic Calendar

Source: Investors Looking to Tech to Pull U.S. Stocks – and the Economy – Out of Their Doldrums

With the “not-as-bad-as-expected” news surrounding the economy and the initial government stimulus measures have been priced in to the market, we are moving into a period of profound uncertainty. With the release of Alcoa Inc.’s (NYSE: AA) earnings report, earnings season has officially begun.

In most cases each company’s own “easy” restructurings are also behind us.  They have resorted to massive lay-offs and inventory liquidations to bring costs down to the bare minimum required to run their respective businesses.  Those cuts and gained efficiencies also have been priced in.  Now, it is time for these companies to show what they can do organically.

Energy companies appear to have hit a wall now that China has run out of space to store oil. And other commodities businesses are suffering, too, as the U.S. Federal Reserve seems to have found religion and veered toward a much more prudent monetary policy.

After its last meeting the Federal Open Market Committee (FOMC) signaled the end of quantitative easing, at least for the foreseeable future.  This is of paramount importance, because it seems to be a concession to those who worried that the Fed might debase the U.S. dollar with by over-expanding its balance sheet and fanning inflationary forces down the road.

The Fed has done a tremendous job of first restoring some sense of “normalcy” and confidence in the core markets, like interbank lending and money markets, and then proceeding to work outwards to U.S. Treasuries and mortgage-backed securities.  This later step towards more prudent actions is welcome and you are seeing it in the U.S. dollar and renewed confidence in Treasuries.  The latter have been received extremely well by investors and yields have started to move down, reflecting not only the lack of current inflation, but also the confidence that the Fed will not go bananas with quantitative easing.

So, ahead of a very difficult earnings season, I am not going to try to out-predict the market.  The experts have been going around for a couple of months trying to just that by using expensive consultants that do channel-checking and by contacting the companies themselves to clarify statements made under full disclosure.

But the earnings season has extraordinary challenges to surmount, that are deriving from the uncertainty that is hanging over the markets like the proverbial sword of Damocles.

General Motors Corp. (OTC: GMGMQ) and Chrysler Group LLC are emerging from bankruptcy in record time and their costs, debt and massive corporate restructurings will probably make them internationally competitive once more.  But there are still questions about how these companies will cope with the still dormant auto market.

The outlook for the large financial behemoths that are due report earnings is equally uncertain. We still need to see how these institutions play around with their toxic asset valuations, their loan loss reserves and their predictions for the future, particularly given the potential stumbling blocks on the road to recovery.

The three obstacles that I find especially troubling are:

1. The spike in credit card delinquencies.
2. The outlook for commercial real estate.
3. And the pending second wave of residential foreclosures, now in the prime and option-ARM sectors.

But do not discount the possibility of seeing mark-ups in toxic asset valuations that might favor some financials strongly.

Now, with the Fed seemingly on hold and the U.S. government’s stimuli only 30% deployed and showing little traction, where is the growth going to come from, especially since unemployment blew right through the promised 8% peak to the current level of 9.5%? On top of that, last week’s rise in continuing jobless claims and Friday’s drop in consumer sentiment offered little solace.

The good news in all of this is that savings rates spiked to 7% as consumers used their money to pay down debt.  Even though this improvement in consumers’ balance sheets does not show in immediate sales growth, it bodes very well for the future.  And this savings trend, which translates into reduced demand for imported consumer products, together with rising exports, resulted in the lowest trade deficit in nearly a decade.

We are making the difficult progress that we need to make in order to restore the U.S. economy to financial health, and that, in turn, is helping the dollar and Treasuries in the short term.

So, based on these massive uncertainties, waiting to be played out, the best risk-reward ratio appears to be in bonds.  With a massive U.S. Treasury supply well absorbed, we are going to jump into long term U.S. Treasuries for a conservative upside, while we keep waiting for resolution on the healthcare reform, social security, and corporate earnings.

Recommendation: Buy the iShares Barclays 20+ Year Treasury Bond ETF (NYSE: TLT) (**).

(**) - Special Note of Disclosure: Horacio Marquez holds no interest in the iShares Barclays 20+ Year Treasury Bond ETF.

Source: Buy, Sell or Hold: Buy iShares Barclays 20+ Year Treasury Bond ETF For Solid Profit at a Time of Great Uncertainty ]]> http://www.contrarianprofits.com/articles/buy-sell-or-hold-buy-ishares-barclays-20-year-treasury-bond-etf-for-solid-profit-at-a-time-of-great-uncertainty/19017/feed 0 http://www.contrarianprofits.com/articles/dow-component-alcoa-kicks-off-lackluster-earnings-season-with-a-lower-than-expected-loss/18969 http://www.contrarianprofits.com/articles/dow-component-alcoa-kicks-off-lackluster-earnings-season-with-a-lower-than-expected-loss/18969#comments Fri, 10 Jul 2009 14:55:49 +0000 Money Morning Staff http://www.contrarianprofits.com/?p=18969

Alcoa Inc. (NYSE: AA) reported a lower-than-expected second-quarter loss on Wednesday, the first in what is projected to be a lackluster season for U.S. corporate earnings.

Alcoa reported a loss of $312 million, or 32 cents a share, well ahead of analysts’ estimates of a loss of 38 cents a share – but down from its year-ago profit of 66 cents per share. The giant aluminum producer is the first component of the bellwether Dow Jones Industrial Average to report its second-quarter performance, marking the beginning of the U.S. corporate earnings season.

Overall, earnings expectations are bleak. The companies that make up the Standard & Poor’s 500 Index are expected to post declining profits for the eighth consecutive quarter, a 36% decline, according toThompson Reuters.

Alcoa’s performance was a result of…

Source: Another Dismal Earnings Season for U.S. Companies?

Consider the course of the last 12 months, and then look at this chart… is China even part of the global slowdown?

We don’t want to get too excited about this growth, as much of these sales are a product of Chinese government stimulus. But I.O.U.S.A. is certainly throwing a bunch of money at this crisis as well, and the same measure of auto sales here fell 34% in May… so they must be doing something right over in Beijing.

Chinese property sales rose 45% in the first five months of 2009 compared to the same period in 2008, their National Bureau of Statistics announced today. Heh, notice a trend?

Again, these numbers are manipulated by government intervention… but 45%? That’s pretty big. We also note that real estate investment over the same period rose 6.8%, a rise the U.S. certainly can’t claim.

Thus, the market story today is “buy whatever China wants.” Namely, commodities. Oil’s up to $71, a 2009 high. Copper is at an eight-month high of $2.36 a pound. Aluminum, lead, zinc and nickel are all in the same boat.

Stocks like Alcoa (NYSE:AA) and Exxon Mobil (NYSE:XOM) helped the Dow to open up 1%.

“Buy what China needs, but can’t make enough of for itself,” Chris Mayer urges, taking this investment theme to the next level.

“In other words, as an investor, buy what the Chinese have to buy. Conversely, don’t compete with China. Sell what the Chinese make plenty of. This next chart captures the idea. It shows China’s ability to produce a commodity against its demand for that commodity.

“You want to be in the lower left-hand part of the chart. In short, the very best places to be are in potash, soybeans, iron ore and oil. In these commodities, China’s share of world production is low. For potash, China represents less than 5% of global production, as shown by the vertical axis. It is also not self-sufficient. As the horizontal axis shows, China’s production of potash is little more than 20% of its domestic demand.

“As for soybeans, China was once the world’s largest exporter. In 1995, it flipped to a net importer and has been the largest importer of soybeans in the world since 2000. Much of its supply is in the hands of companies such as Archer Daniels Midland (NYSE:ADM), Bunge (NYSE:BG) and Cargill.

“More broadly, this speaks to China’s growing demand for food, and its growing dependence on foreign suppliers to keep its rice bowls full. This is why we see China in recent months making deals for food.”

Source: Can the Far East Drive American Markets Forward?

The problem I have with this dogmatic definition of a bear market rally is the following: Assuming (and this isn’t a forecast, since I really haven’t the foggiest idea where stock markets will be in six or 12 months’ time) the S&P 500 moved up to 1350 and then declined to 500, as an investor should you care if the move to 1350 — a 100% gain! — was a bear market rally?

My impression is that investors’ fixation on the recent rally being a bear market rally has actually kept most investors on the sidelines and hoarding cash. Now, put yourself in the shoes of a fund manager who, in the last 18 months, has lost 50% of his clients’ money and missed the recent rally (34% for the S&P 500). What is he likely to do? I would think that he would be inclined to purchase equities as they correct the sharp advance since early March, especially as the economic news in the near term becomes less negative.

Based on our conversations with numerous managers in recent weeks, we believe that most quantitative managers’ portfolios were not positioned in expectation of a rally. Of the nearly 80 managers we have talked to, only one manager said they were up since March 9th and the clear majority admitted to being notably down or stopped out on their positions. These managers were both long-only and long-short quant managers using market neutral and non-market neutral strategies, sector neutral and non-sector neutral strategies, longer term and intermediate-term holding periods. It is fair to say that just about everyone is bewildered and trying to understand when this rally will end.

Another factor to consider is that there has been a significant improvement in the technical position of world stock markets. In the US the largest number of new 12-month lows was reached in October. At the November 21 low at 741 for the S&P 500, the number of new lows had already contracted, and even more so at the index’s March 6 low at 666. Also, market breadth and the number of stocks moving above their 200-day moving averages have taken a decisive turn for the better, indicating that the stock market advance is broadening and that the number of stocks that have bottomed out (at least in the intermediate turn) is expanding.

I have explained repeatedly in the past that if a government is really determined to try and postpone an inevitable collapse by “printing money” in order to lift or support asset prices, it can be done. However, the result of such a monetary policy is to lower the purchasing power of its paper currency, with catastrophic long-term consequences for its economic and financial volatility.

It forces individuals and institutions with cash to buy something…anything. So, this cash is channeled into gold and/or different paper currencies, commodities, equities, bonds, real estate, and consumer goods and services, but obviously with different intensities and at different times. For instance, at some times, such as in 2008, more money will be allocated to gold; while at other times, such as since early March, more money will flow into equities and industrial commodities. It is well understood that these money flows are driven largely by speculative activity (and more than a little dose of manipulation). The result in all asset markets is very high volatility and price fluctuations that don’t appear to make any sense to most market participants and observers who don’t understand the new rules of the investment game that were brought about by “money printing”.

This is where we are today, irrespective of whether or not you and I like policies of “quantitative easing, massive bailouts, and frightening fiscal deficits” and their long-term consequences! Another positive factor for stock markets is that a large number of Asian stock markets and individual stocks in the region had already bottomed out in October and November of 2008 and didn’t confirm the new low in the S&P in early March.

In Asia, the Taiwan and Shanghai indexes, and Korea’s Kospi Index, are all up by more than 50% from their late October 2008 lows. (The Shenzhen Index is up 90%.) But it is not only the Asian equity markets that have outperformed the US and Western European markets over the last few months; since late January 2009, the RTS Russian Index is up 66% and the MSCI Emerging Market ETF is up by 55% from its early November 2008 low.

This is not to say that the global economy is about to embark on a strong and sustainable growth phase. It also doesn’t mean that a new bull market in global equities à la 1982– 2000 has begun. But I think that, at least in nominal terms (inflation-adjusted), the global printing presses being run by the world’s central banks and fiscal deficits have begun to impact asset prices positively. Therefore, in the case of resource and mining stocks, as well as Asian equities (and, for that matter, most emerging and other stock markets around the globe), the lows thatwere reached between October and March of this year are likely to hold — that is, for now.

The markets that have the highest probability of having made major longer-term lows are resource-related equities, emerging markets, and Japan. Conversely, the asset market that has the highest probability of having made a secular high (such as Japan in 1989, or the Nasdaq in March 2000) is the US long-term government bond market.

Despite a still-weakening economy and massive quantitative easing, long-term bond yields appear to be on the verge of breaking out on the upside. I have listed again below all the equity recommendations I have made since December 2008. Some of these equities have already moved up substantially (resource and mining companies, in particular) and, therefore, I would only buy most of these recommendations on a correction.

In addition, a number of BRIC and other (mostly emerging market) closed-end country funds and ETS were recommended, such as Brazil ETF (EWZ), the Templeton Russia Fund (TRF), the Greater China Fund (GCH), the Asia Pacific Fund (APB), Taiwan iShares (EWT), the Japanese ETF (EWJ), the Japan Smaller Capitalization Fund (JOF), the Morgan Stanley India Fund (IIF), the Turkish Fund (TKF), and the MSCI Emerging Market ETF (EEM).

In the US, late last year we recommended buying the iShares iBox Investment Grade Corporate Bond (LQD) and Nicholas Applegate Convertible & Income Fund (NCV), while earlier this year we recommended the accumulation of stocks of high-tech companies such as Cisco (CSCO), Intel (INTL), Oracle (ORCL), and Yahoo (YHOO). More recently, we recommended beaten-down insurance companies and financials as rebound candidates, including Leucadia National (LUK) and CNA Financial (CNA), Citigroup (C), the BKX, the Financial Bull 3x Shares (FAS), and the Financials Select Sector SPDR.

The market’s advance had been broadening and that more and more groups such as airlines (AMR), homebuilders (TOL, CTX, HOV), and cyclicals such as Dow Chemical (DOW), International Paper (IP), and Alcoa (AA) are showing signs of having bottomed out. Among commodities, I am particularly intrigued by natural gas. There are natural gas ETFs (UNG, GAZ), but costs are high. A better way is probably just to buy future contracts, or Pioneer Natural Resources (PXD) or the First Trust ISE Revere Natural Gas Index Fund (FCG).

Source: What to Buy…or Not Buy