Gross Goes Short, Earnings Season Starts (AA)
The market moved painfully sideways last week. Volume was dismal and the news was dreadfully boring. But the week ended on a positive note. The market rallied off its lows on Friday to get back to near even for the session. Also, a budget deal was reached, and in the final minutes politicians avoided a complete and quite embarrassing government shutdown. And the news will continue to get more interesting and impactful as this week develops.
Today, earnings season officially begins. Technically, companies reported first quarter earnings beginning last week, but for the institutional money purposes, earnings season begins with Alcoa (NYSE: AA). And for our purposes, Joe’s Jeans also reports this evening. JOEZ is going to make a big move, clearly we believe it will be higher, but one can never know before earnings are announced. I will attempt to see if any front running is taking place today, and we may sell the position ahead of earnings in order to lock in the 40% gain. More on JOEZ in the weekend video here.
And earnings newsflow only increases as the week goes on. In fact, 80% of the biggest companies will report their earnings over the next three weeks. On Wednesday, the banks begin to report and start off with JPMorgan (NYSE: JPM) followed by Bank of America (NYSE: BAC) and Citigroup (NYSE: C) on Friday. On Thursday, Google (Nasdaq: GOOG) leads off technology earnings, which is followed next week by IBM (NYSE: IBM), Apple (Nasdaq: AAPL) and Intel (Nasdaq: INTC).
Of course, those are the headline companies reporting, and there are hundreds of companies that will report financial results in between. But despite the difference in the sizes of those reporting companies, they will share one thing in common when they report: management will be grilled by analysts about margins.
In this quarter, absolutely more than ever, the financial results will be very much dependant on current margins, the trend of margin from past results and margin guidance going forward. Margins, margins, margins will be the talk of the street. And if you do not know what that refers to, take a quick crash course here and here this week before the hoopla begins.
Analysts always pay attention to margins, but they tend to focus on EPS or EBITDA results more intensely that just the margin alone. In this quarter, crude oil price, a major raw material expense, has increased 32% from $84 to $113, and many analysts including myself, wonder how that will impact profitability for business. And not just in the current quarter. We want to know how excessive energy costs will impact the margins down the line for the rest of the second quarter, the full fiscal year 2011 and next year.
And it’s not just the stocks that higher energy prices will impact. The IMF lowered its growth forecast for the U.S. and downgraded its outlook for Japan citing higher commodity prices. Of course, deficit concerns in the United States and a tsunami in Japan likely also played a part in today’s downgrade, but still it goes to show how meaningful a rise in energy and commodity price can be for everyone. I know you feel it at the pump each day.
So margins will be the talk of the street this week. Today though, Bill Gross will likely dominate, at least this morning, many of the headlines. Two months ago, PIMPCO’s bond legend, came out highly bearish on U.S. debt and went as far as to say he sold out of his Treasury holdings. But today, we find out that not only did bond guru Bill Gross sell out from his Treasury allocation, he actually positioned his holdings 3% short bonds. In the near term Treasury prices can move anywhere, but long term investors must be cognizant to the fact that the greatest bond investor in modern history is positioning his bond fund bearish.
