TB’s Quote of the Day: “The market will continue to go up until it doesn’t.” – Dennis Gartman, who shorted stocks last week, on Bloomberg this morning…TB also said this!
…last week’s sharp rally of course being round one, the second straight up week following four consecutive down weeks, and taking the Dow almost exactly to where it was on January 6…the peak of that mini-rally before we plunged to the March lows. Ah, but it is different this time…isn’t it? After all we just had all those great earnings reports. True…but where did the positive earnings surprises come from, you ask? Cost cutting! Revenues for the most part were sorely lacking yet the companies raised their earnings forecast or affirmed…does this mean another round of layoffs are coming? Does this mean that all that excess capacity we have heard about is a myth? Does that mean that CIT who has been the lifeline of small businesses as well as heavy equipment and aircraft leasing can fail and all those companies who couldn’t have gotten a loan elsewhere last week will all be able to miraculously borrow from the banks? (Alternatively, was it a conspiracy to not lend to companies and small business that relied on CIT to keep the pressure on them so the IF and when they fail the banks can swoop in for the kill?)
Not only was there a diversion in earnings between Goldman Sachs (“sustained rally”and Morgan Stanley (“a rally to sell into”), their strategists are at odds….naturally Goldie being the bull. But the funny thing is the boost in 2010 earnings estimates provided by Goldman was to $75 from, $72 according to Abelson in Barron’s. Remember these are ‘top down’ estimates meaning they are an aggregate of the weightings in the S&P 500 whereas money managers use ‘bottom up’ estimates by looking at individual stocks earnings. This is significant when you realize how the S&P is skewed to the biggest companies…so that is why TB has been saying the market will rally until it doesn’t and Gartman found out the expensive way by shorting it.
But what does it all mean? To TB it means that when one cuts costs more than revenue declines, earnings will go up. It also means that if the stock rallies the p/e ratio may still actually decline but that can be illusory…especially if revenues don’t pick up sharply which TB doubts they can…of course we have a ‘green shoot’ coming on Friday and TB doesn’t mean open season on environmentalists! That is in the form of our first peek at GDP for the second quarter and it is expected to improve from -5.5% in Q1 to -1.5% and will be subject to revision when we get the preliminary and final numbers over the next month or so. But think about this…if you were short $5,500 in paying your bills but you improved to just being short $1,500 would you be down at the local gin mill buying the boys a drink? Yet stocks will go ga-ga over this and rally as the light surely must be at the end of the tunnel…isn’t it?
They also love to tout the sharp rise in the market which is just back to the Jan. 6 levels which if you recall was when it peaked…but why do they insist on telling us how much we are up from the highs rather than where we are over the past 1, 3, 5, and 10 years? Because nobody would be buying and that means Wall Street wouldn’t be selling! Frankly, little would be going on at all if it weren’t for those pesky ‘high frequency trades and the fact that BofA, Citi, and CIT and a few others subbing for one of the three continue to equal 60% or more of the volume on the entire NYSE (of course their volume is combined with the ETN trading that is high frequency). Why do the insist on reporting on a $50 stock that fell to $1 and is now $3 as up 300%? How many of you wish you had bought BofA or Citi at the lows…and how many of you bought AIG thinking it had a fighting chance? Ok, so you missed them…BofA and Citi NOT AIG…but how much would you have seriously put down on them…even at $1? $1,000? $2,000? Yet if you bought a $30 stock and it is now $33 you made more…true, on a bigger ‘investment’ but you were investing – not speculating.
Let’s look at two stocks last week that had mixed results: Caterpillar (CAT) that gapped up on earnings and closed at the high for the week…despite the fact that the company may not do so well for the rest of the year…but who cares, it was up 23% on the news…yet is still -37.6% over the past 12 months even with dividends (4%), re-invested. Then there is Microsoft (MSFT) which rallied for 7 days into the earnings, only to gap down on Friday when they disappointed taking out the 40 day and nearly the 50 day m/a. Microsoft I one of those companies like GE that trades in ranges and it stalled at resistance Thursday, (high $25.72), then fell thru the top of the next range $25 as well as closing the gap it created on the way up that began the rally. It closed Friday at $23.45.
Be careful and before you criticize yourself or your manager for underperforming look how Barron’s reported some of the sectors: Energy +1.6% YTD…since 3.9 +26.2%; Financials -0.5%; +100.6%; Tech 36.3%; 58.3%; Industrials -1.7%; +53.3%; Telecom -5.0%; +20.5%…and TB’s favorite Consumer Discretionary +16.4% AND +58.8%…it takes a lot of green shoots to believe in that one!
Lastly, Barron’s once again is plugging Master Limited Partnerships….which is all well and good but they never tell you that they aren’t IRA/401(k) eligible…meaning you can buy them but you have to fill out the tax form and if it the gain is above a certain level pay tax on it…even while you hold it. Seems they should tell you that, right? They don’t!
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TB frankly about fell out of his chair in Obama’s ‘health care’ press conference last week when the prez felt obliged to answer the reporters question on the Gates arrest. First, he said Gates was a friend, and then compounded his lack of ‘objectivity’ by saying the police acted ‘stupidly.’ He had no idea what happened yet he turned an event into a racial one…this from a president who was supposed to stop this type of thing. He has divided blacks against whites and lost a lot of support from law enforcement. This not only derailed his message on health care which was vague at the least, and prompted a special press conference to explain how he may have made some wrong comments. Stupidly is stupidly no matter how you phrase it…it was not just a poor choice of words, it was stupid! He would have done well to own up to it and would do well in the future not to answer stupid questions from the press. That cost him a lot of points not just to TB but overall…we already had one uniter who disappointed (Bush)…will we have it again?
Frankly, he is taking on far too much when as James Carville would say: it’s the economy, stupid! TB is starting to lose patience…even with a president he supported.
Have a great week!
TB
Trader Bill thinks it is clear to anyone reading these missives that they are merely commentaries…as he sees it…and do not necessarily reflect the views of anyone other than his own. Information is gathered from sources he has found reliable, but no guarantees of accuracy are implied. These are merely observations of events in the marketplace offering in an attempt to offer a non-mainstream viewpoint. Hope you find it useful. Copyright TBD Capital LLC, © July 27, 2009.
