Rob Parenteau (The Daily Reckoning):
The U.S. consumer is bound to play only a lackluster role in this recovery. But this has not mattered to buyers of consumer discretionary stocks who are intent on using the typical business cycle recovery playbook in a recovery that is anything but typical.

The year-over-year growth rate of October retail sales ex-gas is nearly flat from a year ago, while the overall retail sales momentum is still just shy of closing that gap. With comparisons so easy against a year ago, when the global economy was in free fall, this is not a terribly inspiring result. Excluding autos, the sequential gain in October came up short of expectations, with only a 0.2% advance… Caution is still ruling, and for good reason.

Perhaps the dollar levels of retail sales tell the story more clearly. So far, we at best have a shallow recovery in overall retail sales, while furniture and electrical appliance stores are barely scraping out a trough.

Click here for the rest of Mr. Parenteau’s article at The Daily Reckoning.

Yet the stocks of real estate investment trusts (REITs), which are popular among income-oriented retail investors, are still trading at high enough levels that discount just a garden-variety recession in commercial real estate. REITs were designed to invest in portfolios of rental properties, and generally pay no corporate income taxes if they distribute at least 90% of their profits as dividends to their shareholders.

REITs were designed to thrive in an environment of steadily rising property values and rents. But in this ice age for commercial real estate, the REIT business model will cease to function properly; a REIT’s tax-free status doesn’t allow it to retain much excess capital during lean times. Since REITs pay out all their earnings, they cannot grow without taking on more debt. During the boom, a REIT strategy encompassing growth, leverage, and acquisitions was a virtuous cycle that led to juicy dividends and soaring stocks. But in this bust phase, the REIT business model has morphed into a vicious cycle of dividend cuts, dilutive equity offerings, debt offerings at double-digit interest rates, and bankruptcies.

The REITs that levered up and grew too fast at the peak will go to zero in bankruptcy. Others could fall into the low single digits by year-end as the market anticipates that creditors will take title to many properties in 2009 and 2010. These developments would push the value of the REIT Index dramatically lower.

The REIT sector is woefully undercapitalized — just as the big banks were last year. If you mark the value of commercial real estate to market, it tells you that REIT debt in all its forms — commercial mortgages, unsecured notes, secured lines of credit – is much too burdensome. Equity cushions that seemed adequate at the commercial property market peak are now thin. REITs don’t have to mark their assets to market each quarter like investment banks. But you can be sure that before committing a single penny to a secondary offering of REIT stock, institutional investors will mark property portfolios to market.

Marking property to market will result in many underwater commercial properties. This is critically important because the combination of underwater properties (insolvency) and imminent debt maturities (illiquidity) tends to wipe out equity. The maturities over the next five years are staggering, and these debts were sloppily underwritten near the peak of the credit bubble. According to Goldman Sachs research, roughly $1.6 trillion in commercial real estate debt is coming due 2009-2013.

Lenders will not be willing to refinance mortgages in situations where mortgage debt exceeds the value of the property — so-called “underwater” properties. In order for all of these $1.6 trillion in loans to qualify for refinancing, hundreds of billions in new equity will need to be injected into properties. This much new equity capital dedicated to commercial property ownership will not exist in the investing environment of 2009-2013. So many of these loans will default.

In a scenario of paying off staggering debt loads under stress, the claims of common shareholders are either diluted or wiped out completely. This is the scenario facing General Growth Properties, for example, and shareholders will be lucky to recover anything. You can find shades of the General Growth saga throughout the REIT space.

Bulls argue that REIT stocks are cheap enough to buy. After all, they’ve declined to the point that you’d be buying ownership stakes in commercial real estate at prices well below peak values. Also, the high dividend yields already reflect plenty of pessimism.

What is the credit market’s response to REIT bulls? Creditors will take title to many properties in bankruptcy, and dividends will be paid mostly in new shares of REIT stock, rather than cash. I side with the credit markets.

A review of the aggregate REIT balance sheet — and the delusional commercial real estate purchases during the 2006-2007 peak — will tell you that this won’t be a garden-variety bear market in REITs. Supply of retail, office, hotel, and industrial space will greatly exceed demand for several years. In most cases, tenants will have the upper hand in lease renegotiations. This bear market, which is still in its early stages, will go down as the worst REIT bear market in history.

So will the TALF come to the rescue? Wasn’t the Federal Reserve’s “term asset-backed securities loan facility” (TALF) designed in part to mitigate the systemic damage from the time bombs ticking inside of CMBS? A primary reason for the recent rally in REIT shares is hope that the TALF will help restore value to equity of the most-indebted REITs by loosening up lending for commercial mortgages. The Dow Jones U.S. real estate index rallied from an intraday low of 80 in early March to a recent 130. But this REIT rally is based on hope, rather than strong fundamental evidence.

The Fed does not restore equity value to leveraged financial companies sitting on toxic assets; it merely tries to prevent stressed borrowers from unwinding positions too quickly. Look at how little equity value the Fed’s unprecedented lending facilities salvaged for Citigroup shareholders. TALF will do little to preserve equity value for highly indebted REITs. The Fed did not eat the losses on Lehman Bros.’ garbage securities, nor will the Fed or the Treasury eat losses that must be first absorbed by shareholders of overleveraged REITs.

Plus, potential limits on executive pay could limit interest in TALF participation. Special Inspector General Neil Barofsky said in a recently published report that executives involved with the TALF program “could be subject to the executive compensation restrictions.” Whether or not compensation restrictions are enacted as part of TALF, the mere threat of capricious rule changes and taxes imposed by Congress and the administration will scare many potential managers away from TALF.

While there are certainly opportunities to be had in this market, as I see it, REITs aren’t one of them.

Source: Sell REITs, Part II

When I was a child I could never sit still on a long road journey. I was always asking, “Are we there yet? Are we there yet? ARE WE THERE YET???” My father would always reply “Nearly, son… Nearly,” even though we were still miles from our destination.

This is exactly how the financial markets seem to me right now. It’s been more than two years since the credit crisis kicked off, and I’m getting itchy in my seat: I want to be back out there playing with the other financial (whizz) kids. But it feels like the end of this current rocky road is still on the distant horizon.

Wall Street wants you to believe things improving… that we are on the road to recovery… and that “green shoots” are starting to appear in the economy. Call me a cynic, but I’m just not convinced.

Wednesday’s central bank actions on both sides of the pond signal that we are NOT there yet. In the US, the Fed left its interest rates on hold… and dangerously close to the zero bound. And it announced that it expected economic activity to remain weak for “some time.” The Fed is also continuing with the $300 billion Treasury repurchase plan (its massive and highly experimental money printing operation).

Meanwhile, the European Central Bank launched its first ever 12-month loan auction (at the 1% benchmark rate). This will pump a whopping €442 billion into the banking system.

With the credit markets still broken, the European banks snapped up the funds. Over 1,000 banks took part. It’s no wonder. Who would say no to a 12-month loan at just 1% when you can lend to Joe Public at over 10%? There’s an arbitrage trade I’d like a piece of… in any market.

To be a true contrarian there has to be a consensus view. And at the moment, market participants are all pulling in different directions. The ‘experts’ are busy trying to call the end to the slowdown. And they’re hoping it sticks. Meanwhile, the the Fed and the Treasury continue to hose the economy down with extra liquidity. This is a brave new world. And an extremely dangerous one for rookie investors or investors reaching retirement or who are already retired – one false move in this type of market could prove fatal.

The Fed’s recent policy message should have resulted in a stock market rally. Bernanke & Co hinted at the much anticipated return to inflation (“the prices of energy and commodities have risen of late”) but then washed all the momentum out of this trade by saying “the Committee expects that inflation will remain subdued for some time”.

Markets hate nothing more than uncertainty. And until we have a more harmonious voice either direction from governments and policymakers this turmoil is going to continue. So I’m burying that impatient kid in me for now and sticking to the safe stuff. And so should you: stick to cash, gold and investment grade fixed income for now.

Wait…scratch that…make it negative 2.9%.

Somebody must have slipped a few Rude pages to the honchos over at The World Bank. It seems the Washington-based lender is hedging its bets. A 2.9% contraction in the global economy this year is a far cry from its March estimate of 1.7%. But growth will be back to 2% next year, the bank assures us, slightly down from the 2.3% they originally expected.

What went wrong during the springtime, we wonder? Didn’t unprecedented levels of stimulus flow from government taps around the world? Weren’t Bernanke and Geithner manning the pumps? Didn’t the global media confirm sightings of green shoots? Or were they recovery saplings? Your editors were too busy “calling B.S.” to keep up with all those flowery euphemisms for delusion. Still, shouldn’t we be smelling the turnaround tulips by now, on our way back towards bull market springs?

Not just yet, says the bank of the world. The following adjustments must be made to the March forecast:

• Output in the U.S. will drop by 3%…not 2.4%,
• Japan’s gross domestic product will shrink 6.8%…not 5.3%.
• The Eurozone will have it a bit tougher too, contracting 4.5%…not 2.7%.
• And the globe as a whole? Uh…eh…it won’t decline 6.1%, as predicted. Better expect closer to 9.7%.

The lender also called for “bold” actions to hasten a rebound (an urgency upgrade from “tough” actions) and said the prospects for securing aid for the poorest countries were “bleak” (adjective upgraded from “slim”).

Does that mean the “delude-a-bulls” are spent? Is the sucker’s rally over? Insiders seem to reckon so. Bloomberg reports that, “Executives at U.S. companies are taking advantage of the biggest stock-market rally in 71 years to sell their shares at the fastest pace since credit markets started to seize up two years ago.”

Worldwide markets did enjoy a pretty nice rally over the past couple of months. Perhaps that’s the end of the first suckers’ rally. Maybe last week’s 3% mini-selloff on Wall Street was only a harbinger of things to come.

Personally, we wouldn’t expect any hope of a sustainable turnaround until The World Bank downgrades its forecast from “bleak” to at least “apocalyptic.”

Joel’s Note: Our annual Agora Financial Investment Symposium in Vancouver, British Columbia is rapidly approaching…and this year marks the 10th anniversary of The Daily Reckoning. So, this July, the Symposium will be focused around a “Decade of Reckoning”…four days that will help you to gain greater insight on how to turn investment ideas into the profit opportunities of the next decade.

So, will we be seeing you there? This event is already 70% sold out, so you’ll want to be nimble. Click below for all the info:

The Agora Financial Investment Symposium: July 21-24

Source: World Bank: Whoops!

So far, American taxpayers have shoveled out almost $600 billion in Troubled Asset Relief Program (TARP) funding to prime the economic pump and get the banks lending – and people spending – again.

Yet a report by The Wall Street Journal shows the banks are lending less money than they did five months ago. And further research shows no matter how much TARP money the government pumps into the U.S. banking system, American consumers may just not be ready to drink from the trough – a sobering reality that could doom the chances of a quick economic rebound.

Meanwhile, the banks’ perceived reluctance to lend – coupled with their lavish spending on bonuses and management perks, has the the Obama administration on the defensive, sensitive to skepticism about the government’s ability to revitalize the banking system.

Bank Lending Still Anemic

Despite government pronouncements to the contrary, pumping billions of dollars into the financial sector has not had the desired result, meaning lending hasn’t accelerated. In fact, according to the recent Wall Street Journal analysis, initial loans and refinancing outlays at the nation’s big banks dropped by 23% from October to February.

According to the data, 19 financial institutions made or refinanced a total of $226.3 billion worth of loans in October. That figure plummeted to $174.2 billion for February, The Journal reported.  In fact, the total dollar amount of new loans declined in three of the four months the U.S. government has reported the data, and all but three of the 19 largest TARP recipients originated fewer loans in February than they did in October.

For its part, government officials say the current situation could have been a whole lot worse without TARP funding.

Just last week, the U.S. Treasury Department praised “the relatively steady overall lending levels.” Without those capital injections, “lending would have suffered a far smaller total volume of loan originations in February than January,” the Treasury Department said.

But bank executives defended their lending levels by saying the reason behind a decline in new loans, refinancing deals and modifications of troubled loans is the lack of demand from consumers and businesses – and not the banks’ willingness to lend.

JPMorgan Chase & Co. (JPM) showed one of the biggest lending declines, dropping from $61.2 billion in October to $39.7 billion in February – a drop of 35%.  But JP Morgan executives explained the bank made more than $151 million in loans in the first quarter, “despite the fact that loan demand has dropped dramatically.”

Commercial lending slid by about 40% and may have been depressed by a partial thawing of the bond markets, where some corporations raise money instead of borrowing it from banks. About $70 billion of corporate bonds were issued in February, up from $21.4 billion in October, according to Thomson Reuters.

The figures show that consumer loans, especially mortgage refinancings, account for a large portion of bank lending. Nearly half of February’s lending went to consumers, up from about one-quarter in October.

But excluding mortgage refinancings, consumer lending dropped by about one-third between October and February. And because the United States has accounted for one-third of total growth in global consumption since 1990, any change in U.S. consumer behavior has profound implications, not just for the United States, but for the worldwide economy.

Increased Savings Rate Could Slow Rebound

Consumer spending is the engine of the U.S. economy, accounting for about 70% of gross domestic product (GDP). And in the go-go days of the early 21st century, U.S. consumer spending was in full swing.

U.S. households nearly doubled their outstanding debt to $13.8 trillion between 2000 and 2007, according to the McKinsey Institute. During that unprecedented period, personal consumption accounted for 77% of real U.S. GDP growth and personal liabilities reached an astounding 138% of disposable income.

But a shift occurred as the global financial crisis worsened at the end of 2008: U.S. households reduced their outstanding debt for the first time since World War II by curtailing spending and reducing borrowing.

In fact, recently released U.S. Federal Reserve data shows that outstanding consumer credit dropped from $2.95 trillion to $2.56 trillion in January.

But as consumer spending and borrowing plunged in recent months, the saving rate has rebounded, reaching 5% in January. And each extra point in the savings rate means more than $100 billion less in spending a year, according to a recent McKinsey study.

In fact, the study found that if consumers continue to reduce debt, the increased savings rate would result in $535 billion less consumption a year, a potentially serious drag on a nascent economic recovery.

Banks and Obama Still Not Out of the Woods

Looming over all this is the possibility that banks may need more government assistance in the near future in order to keep lending – even at the current depressed levels.

JPMorgan analyst Matthew Jozoff predicts banks could suffer another $400 billion in losses as a result of continuing credit deterioration, which could force policymakers to deploy yet another round of capital infusions.

Obama administration officials acknowledge that they may still have to ask Congress for more money in the future. Beyond the 19 big banks, which are defined as those with more than $100 billion in assets, the Treasury has also injected capital into hundreds of regional and community banks.

The most immediate expense may come in the next several weeks, when federal bank regulators complete “stress tests” on the nation’s 19 largest banks.  The tests are expected to show that at least several major institutions will need to increase their capital cushions by billions of dollars.

That could include Bank of America Corp. (BAC), a bank that many experts say probably should have been liquidated long ago.

In order to avoid another capital infusion, the government might elect to take equity in return for previous loans.  Converting the loans into common stock would increase the capital of big banks by more than $100 billion and give the government a large equity stake in return.

Of course, converting those loans into common shares would turn the government into the bank’s biggest shareholder – a move some critics see as a back door to nationalization. The move would also serve to further dilute the holdings of existing shareholders.

While the option appears to be a quick and easy way to avoid a confrontation with congressional leaders who are wary of putting more money into the banks, the administration would no doubt be heavily criticized for displaying such “socialist” tendencies.

[Editor's Note: In this second installment of a two-part look at whether the credit crisis continues to crimp financing for companies and consumers, Money Morning takes a look at bank lending. In Part I earlier this week, we studied venture-capital-investment trends.]

Source: A Look at Liquidity: The Real Reason Banks Aren’t Lending

General Growth filed for Chapter 11 seeking protection from creditors after it amassed $27 billion in debt accumulating over 200 shopping mall properties. The filing covers 158 of its U.S. malls, but excludes its joint-venture properties and third-party management business.

The Chicago-based company – the country’s second largest shopping mall owner – owns such valuable properties as Fashion Show in Las Vegas and Faneuil Hall Marketplace in Boston. It listed total assets of $29.56 billion and total debt of $27.29 billion.

“We intend to emerge as a leaner company,” General Growth President Thomas Nolan told Bloomberg News in an interview. “We want to come out as a less leveraged company. Our business model remains strong.”
In the eyes of many observers, the filing brings the U.S. real estate collapse full circle as commercial properties values are now plummeting in concert with the ailing residential housing market. Commercial real estate prices in the U.S. dropped 15% last year, according to Moody’s Investors Service (MCO).

Many commercial real estate companies have been squeezed out by the credit crunch as banks continue to curb lending.

Nolan said General Growth was a victim of “a broken capital market.” No one could have predicted the severity of “the credit markets shutting down,” he said.

Last November, General Growth warned it might have to seek protection from its creditors because it was unable to refinance maturing debt obligations. The company was trying to restructure bonds it floated to finance a $14.3 billion all-stock deal for Rouse Co., a high-end mall dealer it bought in 2004.
“It just tells you that this debt can’t get redone, especially for big properties,” RBC Capital analyst Rich Moore told Reuters.

“General Group has long been the poster child of too much debt,” said Moore.”General Growth has malls, and malls are some of the biggest assets out there.”

Analysts said the bankruptcy might allow competitors to cherry-pick some of General Growth’s more desirable properties, giving Simon Property Group Inc. (SPG) the opportunity to bolster its position as the No. 1 mall operator.

“I think Simon’s going to be able to pick up some of these assets on the cheap,” Dan Fasulo, managing director at real estate research firm Real Capital Analytics, told Bloomberg.

However, Fasulo also called General Growth’s filing “the beginning of the end,” which could lead other companies to fail.
“This bankruptcy will drive down the values of mall assets in the United States. It’s going to put, I believe, more supply on the market than can be absorbed by investors,” he said.

About $814 billion of commercial mortgage debt is expected to mature over the next two years, which will only serve to put more pressure on the market, according to real estate research firm Foresight Analysis.

Meanwhile, the residential market chimed in with its own bad news.  On the same day General Growth filed, the U.S. Department of Commerce said builders broke ground on 10.8% fewer homes in March and new permits fell to a record low, as homebuilders sought to rein in inventory amid rising foreclosures.

“Buyers seem to be more interested in picking up bargain- basement prices in the existing-home market than in the new-home market,” Robert Dye, a senior economist at PNC Financial Services Group Inc. (PNC), in Pittsburgh, told Bloomberg News.

Source: General Growth Files Biggest Real Estate Bankruptcy in U.S. History

Also happening today: President Obama is set to speak on the economy this morning, and Helicopter Ben is delivering a speech on “Four Questions about the Financial Crisis” this afternoon.

Hmmm…he should have called our emergency hotline we have set up for Treasury Secretaries and Fedheads. We could have helped him out with some of the answers to those questions…

CNNMoney.com reports that in the prepared remarks for his speech, Bernanke said, “Recently we have seen tentative signs that the sharp decline in economic activity may be slowing.”

The ‘signs’ he is referring to include recent upticks in home sales and new home constructions, as well as improvements in consumer spending, especially new vehicles.

“A leveling out of economic activity is the first step toward recovery,” said Big Ben. “To be sure, we will not have a sustainable recovery without a stabilization of our financial system and credit markets.”

Bernanke may have wanted to wait until the retail numbers were released before preparing those remarks. Nearly every expert that has been surveyed on this topic believed that U.S. retail sales, which count for half of consumer spending, rose in March, mainly due to the auto industry incentives that began last month.

However, it turns out that retail numbers pulled a fast one – and showed a drop in sales for last month.

Two months of gains has boosted hopes that March’s numbers would follow suit, building a rebound in consumer spending.

But, not so much. The Commerce Department showed that March’s retail sales were down for almost every type of store except necessities, such as food and drugs.

MarketWatch reports: “Retail sales in the first quarter were down 1.2%, compared with the fourth quarter of last year, raising the possibility that real consumer spending may have fallen again for the first three months of 2009 after plunging at a 4% annual rate in the final six months of 2008.

“Economist David Rosenberg of (NYSE:BAC) Bank of America’s Merrill Lynch said he expected consumer spending to decline at a 3.7% annual pace in the April through June quarter.”

“The retail sales figures indicated incentives and promotions by car dealers and clothing stores such as Gap Inc. failed to draw customers hurt by a lack of credit and the highest jobless rate in 25 years.”

In other words…outlook not so good for the economy. Americans have clearly been spooked by the high jobless rate. It seems that everyone knows someone who has been laid off, or had hours cut back…and the possibility of it happening to you becomes very real. So you cut back. You make dinner instead of going out…make do with last year’s summer clothes instead of going on a shopping spree. You want to make sure you have cash in the coffer…just in case.

This behavior begins to add up, as these numbers show. It makes you wonder: is it possible we are witnessing the taming of the American consumer? We’ll have to wait and see.

Now, we turn to Addison, with a report on what news has investors in a tizzy:

“The U.S. stock market dodged another bullet yesterday,” writes Addison in today’s issue of The 5 Min. Forecast. “Goldman Sachs (NYSE:GS) announced late in the day that it had pulled off a $1.8 billion profit in the first quarter.

“That’s $3.39 a share, more than twice as much as the market had anticipated.

“Investors are now wildly confident that Goldman Sachs will be one of the best performing financials of 2009.

“The Dow managed to end the day with less than a percent loss. The S&P 500 and NASDAQ both pulled off small gains.

“Curious how the markets work, though, isn’t it?

“In reality, Goldman benefited from a quirk in its new reporting schedule. ‘Its fourth quarter ended in November 2008,’ reports the Financial Times, ‘but after converting to a bank holding company last year, Goldman adopted a calendar-year earnings period starting in 2009. As a result, the company did not have to include December in its first quarter earnings, a month in which it sustained $1.3bn in pre-tax losses.’

“So Goldman actually made $0.5 billion in the first quarter. But who really cares? The investment bank is up 54% year to date!

“And since their stock is so ‘strong,’ Goldman bigwigs confirmed that they would move forward with a $5 billion secondary stock offering… the proceeds of which will be used to pay back TARP loans. Work it.

“Oh boy, ‘buyer beware,’ warns our short side specialist Dan Amoss. ‘The most responsibly managed banks should survive this downturn because cash flow from good loans should roughly offset the losses from souring loans.’

“‘Regulators will probably grant forbearance, meaning that they’ll look the other way while they allow bank capital levels to get dangerously low in 2009 and 2010. But just because many banks will avoid FDIC receivership doesn’t mean the stocks will be good investments.’”

And back to Kate, reporting from a blustery Baltimore:

“I hear that the government’s turn around on tax returns are up this year, which gets money back in the hands of consumers at a faster pace than previous years,” writes our good buddy Chuck Butler in today’s issue of The Daily Pfennig. “And we all know what happens when consumers get money in their hands: they spend it!”

Very true…but will the American consumer have anywhere left to spend their tax return?

A new report shows that strip malls, neighborhood centers and regional malls are losing stores at the fastest clip in over ten years. In addition, consumers are keeping a tighter grip on their wallets, causing retailers to trim down on the amount of merchandise available in the store, in order to stay afloat.

The report, done by New York-based real estate research firm Reis, shows that “In just the first quarter of 2009, retail tenants at these neighborhood centers have vacated 8.7 million square feet of commercial space. This number exceeds the 8.6 million square feet of retail space that was vacated in all of 2008.”

The report goes on to show that “vacancy rates at malls rose 9.5% in the first quarter, outpacing the 8.9% vacancy rate registered in all of 2008, marking the largest single-quarter jump in vacancies since Reis began publishing quarterly figures in 1999.

Are we still surprised at the disappointing March retail figures?

Now back to Goldman Sachs, which managed a major bounce back from its worst quarter since it became a public company in 1999.

Reporting their results a day early, Goldman said yesterday that it earned $1.8 billion, or $3.39 a share, for the quarter ending March 31.

But as Addison pointed out, above, Goldman did benefit from a ‘quirk’ in their new reporting schedule.

“Leave it to the clever boys at Goldman Sachs to turn dross into gold,” says our friend Barry Ritholtz in a post on his blog, The Big Picture today.

“The bulk of their profits had come from AIG transfer payments – the AIG 100% payouts funded via bailout monies that saw Goldie as one of the largest recipients. Floyd Norris notes that most of the AIG effect was in December. ‘For the first quarter, the total A.I.G. effect on earnings was, in round numbers, zero.’”

Wondering how this is possible? Well…that’s where the beneficial ‘quirk’ comes into play…

From the NYT:

“Goldman’s 2008 fiscal year ended Nov. 30. This year the company is switching to a calendar year. The leaves December as an orphan month, one that will be largely ignored. In Goldman’s news release, and in most of the news reports, the quarter ended March 31 is compared to the quarter last year that ending in February.

“The orphan month featured – surprise – lots of write-offs. The pre-tax loss was $1.3 billion, and the after-tax loss was $780 million.

“Would the firm have had a profit if it stuck to its old calendar, and had to include December and exclude March?”

“Truly astounding,” writes Barry, “the word Chutzpah simply does not do it justice.”

Source: U.S. Retail Figures Pull a Fast One

Alcoa (NYSE: AA) had the ominous and unenviable task of being the first of the Dow Industrials to step up to the plate. And like a tubby first baseman who’s spent the winter off-season shoveling down junk food, Alcoa swung and missed. Badly.

Already waddling around with debts of more than $10.5 billion, America’s largest aluminum producer reported further loss of half a billion dollars for the quarter (59 cents per share), as sales plunged by 41%. As a sign of how hard the recession has bitten the company, it compared to net income of $303 million (37 cents per share) in Q1 2008. It was the company’s first consecutive quarterly losses since March 1994.

The news wasn’t a surprise. As the recession squashes aluminum demand, prices have plummeted around 50% over the past year. At current levels, 70% of the aluminum industry is unprofitable, according to Svein Richard Brandtzaeg, CEO of Europe’s second-largest aluminum producer, Norsk Hydro.

And with Alcoa projecting a further 7% drop this year, it’s already laid off 13,500 workers and slashed production by 20% since mid 2008. Just last week, it announced that it will shut down half its out output (120,000 tons worth) at a factory in New York.

So is Alcoa’s news a sign of things to come this earnings season?

The Current Earnings Season In Context

Let’s set this earnings season in context…

It comes amid a sudden, surprising shift in investor sentiment. Out with the fear and panic that gripped the stock market during its winter of discontent. In with a frenetic four-week bout of buying to relieve oversold conditions. Here’s why…

• The Federal Reserve pumped $1.1 trillion into the credit markets.
• The G20 nations agreed a $1 trillion deal last week and a tripling of lending by the International Monetary Fund to emerging nations.
• The Financial Accounting Standards Board changed mark-to-market accounting rules, which should limit bank losses and boost lending.

Or perhaps Wall Street just has a case of Seasonal Affective Disorder as spring got underway.

Either way, when stocks are oversold, it doesn’t take much good news to trigger a rally. But here’s why you should keep that champagne on ice…

• The rally that has catapulted stocks 25% higher is dangerous, as it comes amid a bear market – often known for producing sharp, surprising rallies that can fool investors. Remember, this rally lifted stocks from 12-year lows and estimates suggest the economy shrank by 4.5% during the last quarter.

And against that backdrop, we’ve got a short-term downward catalyst in the mix…

Earnings season.

Watch For The Earnings Season Domino Effect

As we’ve seen so often over the past few months, investors have very little tolerance for bad news.

So brace yourself for an earnings season that will see S&P 500 companies’ profits slide 37%, according to Thomson Reuters. That would mark the seventh straight quarterly decline.

And if you’re looking to play sector trends, keep in mind that Alcoa’s dismal report could trigger a domino effect of poor earnings in industries that use heavy amounts of aluminum. For example, construction, manufacturing, and transportation industries like autos and aviation.

2 Tips To Combat Earnings Season

Here are a couple of other earnings season tips…

Earnings season is a notoriously difficult time to trade. Volatile price swings higher or lower are much more prevalent as companies release their quarterly reports and the market reacts to the news en masse.

And with the economy in recession, there’s a higher chance of bad macroeconomic data (poor unemployment news, for example) adding to the danger. Whether they occur post-market or pre-market, because these price swings are tough to predict, it’s essential that you’re prepared in advance, as it’s too late once the action is in progress.

Here are a couple of steps you can take to mitigate the risk…

• Position Size: Ensure that your portfolio is position-sized prudently. Don’t invest too much in one or two positions. Ideally, you should invest a similar dollar amount in each position and put no more than 1% or 2% into each position.
• Use Stop-Losses: You should be doing this anyway, but it’s particularly important during earnings season, as they protect you from a shock.

No matter which way your stocks move after earnings are released, the move will either be for valid, specific reasons, or a market overreaction (imagine that!) Make sure you know and understand them.

For example, a huge corporate loss, drug failure, or SEC investigation will hammer a stock. But even when the news is good – such as a big profit, takeover announcement, or strong future guidance – a stock can decline as investors take profits.

Earnings reports are usually short-term catalyst events. But it’s a time when the “herd mentality” can rule – especially when investors are more nervous than usual. Stocks can get rewarded or punished unfairly, so be prepared for price swings and react accordingly, whether that’s cutting your losses or locking in gains.

Martin Denholm

Source: Earnings Season: How to Prepare for Price Swings & React Accordingly

Inflation, a lack of production growth, and a weaker dollar will create justification for rising prices. Frontier Oil (NYSE:FTO) is worth a look.

Oil is slowly regaining the attention of savvy investors. After dropping into profit-erasing territory just two months ago, the value of the world’s most valuable fuel source is slowly and quietly on the rise. Investors watching the action are getting in on some great trading opportunities.

Frontier Oil (NYSE:FTO), with a market cap of just under $1.5 billion, is considered a small fry in an industry dominated by behemoths. But that does not mean it does not offer a huge profit opportunity.

As inflationary fears rise, the nation’s economy returns to growth and the government does its best to bump up the price of any pollution-emitting fuel source, companies like Frontier will see their share prices grow.

Read the full article here at TFN: Frontier Oil: Buy low, sell high