I thought I might pop in with a few fundamental views in the spate of the current euphoria/confusion/despair experienced by everyone depending on your positions.
I closed all my positions mid week this week, because I did not understand the market behaviour and have dipped my toe back in on the short side.
I have looked at the earnings reports that has flowed through the US recently, only the big names.
Alcoa, Goldman Sachs, JP Morgan, Google, Nokia, Harley Davidson, Intel, IBM and Yum Brands.
Of the above, Nokia, Johnson and Johnson, Harley Davidson and Google had somewhat disappointed the market, whereas the rest beat the market handily.
It's my belief that the market is about to experience a jolt of reality. Notice the companies that have failed to beat expectations are related to more consumer spending, as opposed to banks who reported big trading profits, or the benefit of government spending in infrastructure and communication (Alcoa, Intel, IBM). Yum Brands houses fast food and cheaper food retails, which is justifiable as less people choose to spend more money on quality food and resort to the likes of KFC and the rest. Johnson and Johnson did beat, and beat handily so no arguments there.
So drilling down.
I'll attempt to second guess the upcoming results, and of course just because this is my view and mine alone, take it with a pinch of salt. I'll start with Dow components that I'm familiar with, and a few bigger names.
Bank of America - I expect to come in line with expectations, but the real problem is going to be the Merril Lynch results embedded in. If the earnings generated by Merrils (or losses) do not tally with the 40 billion spent, the market could mark this one down.
Citigroup - I expect this one to also disappoint. The loss of staff and defections to other banks (ironically Goldmans and JPM) will hamper their recovery. Not to mention Citigroup is severely diluted and their EPS forecasts are under threat.
General Electric - The financial arm of GE will be the bulwark of its earnings. It is under severe pressure to seperate its business, and I expect the consumer side of things (whitegoods, jet engines, industrial manufacturing) to disappoint.
Boeing - The delay of the delivery of their planes, plus the reduction of new orders will hamper this one, and probably cause them to reduce forecast. Disappointment is almost a certainty.
Caterpillar - Infrastructure spending by governments will see this buoyed. This will beat expectations, but it depends again on their outlook, if they can progress and grow WITHOUT government spending
Disney - I expect this one to disappoint. It's a consumer and media stock, and while there have been some blockbusters in the cinemas, the recession in California (Hollywood) will affect this in some way. Their theme parks will definately suffer. DVD sales would be slower too.
Verizon and AT&T - Telecommunications are usually a recession proof industry, and expect them to meet expectations with standard growth outlook. No surprises there.
American Express - Another wildcard. Quite possibly with JPM's comments on credit card debts spiralling out of control, could be a catalyst for a renewed negative outlook on credit markets, depending on their comments and results. In October last year, when everthing was doom and gloom, I actually thought they would be the next to go under. Conversion to a holding company has somewhat saved them, but they would be under similar pressure that is facing JPM's credit division.
Chevron and Exxon - The weaker dollar will be a factor, but higher oil prices will also bolster. The real question is the expectations. I can't see how they are going to beat expectations when oil prices this time last year were above 100.00. Having said that, the sweet spot for all oil companies are around 70-80 dollars a barrel, where everyone but the consumer makes more money. The onflow of green technology in cars and the lack of consumption in SUVs and big guzzlers could affect petrol consumption.
Walmart, Home Depot, Coca Cola, 3M, Amazon, Bed Bath and Beyond - Consumer and retail. In line with what we've seen in Nokia, I expect the retail slowdown to affect these companies. The expectations are set low, and they SHOULD beat them. But there in lies the wildcard, if they disappoint, these are the real heavyweights and will drag on the likes of JC Penny, Abercrombie, Office Depot, and other retail heavyweights on the S&P.
MacDonalds and Kraft - I'm expecting them to surprise on the upside. Using Yum Brands as a guidance, I think food consumption will be largely unaffected, especially MacDonalds who should record higher sales in Asia and throughout Europe, as people turn to fast food instead of gourmet meals.
Wells Fargo - Interesting one. Back Buffet on this.
Ebay - this will surprise on the upside, due to more and more people looking online for bargains, as opposed to hitting the stores and paying top dollar.
Peabody, Freeport, Vale - This will be interesting. Commodities have rebounded last quarter, and should provide these companies with better earnings. But I have a sneaky suspicion that the expectations might have been revised to a higher bar, and more importantly the accompanying statements of these companies as to what they see commodity forecasts going forward will be key.
This bit is interesting:
"Of the 33 S&P 500 companies who have reported, 67% beat estimates, 9% were in-line, and 24% were below estimates. The blended earnings growth rate for the S&P 500 for Q2 2009, combining actual numbers for companies that have reported, and estimates for companies yet to report, fell to -35.7% from -35.5%.
Since the start of the quarter, the decrease in the Q2 growth rate from -31.7% to -35.7% can be attributed to downward revisions in estimates across a few sectors partially offset by the removal of GM from the S&P 500. (Data provided by Thomson Reuters)"
In short, I expect the financials to beat handily, as the bar has been set too low. However, its their going forward outlook that has me interested and bearish. I have a feeling we've seen two of the best in Goldmans and JPM, and going forward the market is more likely to be disappointed with the likes of Citi, Wells, BoA, Bank of New York Mellon, Bancorp and Amex. I expect the consumer staples and retail to disappoint, as the direct correlation of unemployment and retail spending cannot be ignored. I expect commodities to miss forecast, due to over estimated expectations and the volatility of commodity prices is too highly dependent on China's continued sustenance. Telecommunications and Technology seem to be the standout to surprise on the upside both on results and growth outlooks, primarily due to government spending and corporate overhaul (reduction of manpower and increase of technology - cost savings).
Few wildcards yet to play out.
a) CIT. 4th largest bankruptcy in the US history is emminent. This has a wider reach than the market is currently factoring in. Companies like Dunkin Donuts, Saks, and a host of SMEs count on CIT to provide funding. The fact that the Fed is willing to let this fail speaks volumes on the confidence of the market to absorb this. Is this confidence misplaced? Or are they simply of the opinion that they can't afford another bailout?
b) California. October 2nd is the due date for its IOUs. Let's see what happens if they default. They are already trading this IOUs on Ebay at 80 cents to the dollar. This is Californian State Government Debt, trading at a 20% discount to par, on the internet. Scary stuff.
c) China's sudden aggressive stance. Rio debacle, cancellation of coal shipments and ship deliveries in recent days begins to smell like they are flexing their financial muscle. They could possibly be feeling they are feeling pressured to be in a situation where they are asked to save the world, but yet, are not allowed to be price setters in the commodities. There is a real threat they could just decide to pull the pin and send the world into recession, and pick up the pieces later.
d)Paulson's confessions. Implicates Bernanke in some skulldudgery, and if things are pursued further, could cause some anguish in the rejig and removal of senior Fed management. This does not bode well for markets, if uncertainty begins to creep in.
I am firmly in the bearish camp. I think the market is in for a rude rude shock. But, the biggest problem is, there is a massive momentum play here, which will see the shorters get carried out. As always, the hardest bit is to try and ignore the noise, and maintain your views. I'm terrified of shorting, as the market seems to want to go higher and higher. When it ends, and reality sets in, it will turn on a pin and careen of the cliff. The problem then becomes, will you be short enough then? And if you are not, are you prepared to jump on the bandwagon?
So make of my analysis on the markets what you will. I've decided to take a shorter term view to see if these turn dates everyone is talking about bears some fruit. I have a low tolerance for this market, and any upswing I will be covering and sitting out. But I will not be putting fresh money in for the longer term, as I think a market that can put 5 to 10% in one week on low volume based on comments by an analyst is 100% short covering and nothing more.
(20min delay)