Ending Censorship?

Google (Nasdaq:GOOG) has been attacked. According to the New York Times, last week somebody hacked into its systems, and may have stolen corporate data and source codes. Google is blaming China.
As many as 34 companies may have been attacked by China’s Internet police last week, and Google is threatening to stop censoring its search results and exit the country altogether.
This is a time when we are reminded about the differences – and difficulties – of doing business in China.
Google and Yahoo! (Nasdaq:YHOO) both entered the Chinese market in 2006. They both had to agree to strict rules from the Chinese government. For all the progress China has made in opening up its economy, it still clings to the belief that it can control what the Chinese people see, read and believe.
So Google and Yahoo! had to agree to “censor” the Internet because certain search results will vividly show evidence of things that the Chinese government would rather pretend didn’t exist – like Tiananmen Square. A search for Tiananmen Square leads the Chinese Internet user to a blank page. At least it did…

Alcoa Misses

Alcoa (NYSE:AA) didn’t beat earnings expectations. It came in with a $0.01 profit after charges, instead of the $0.05 that analysts were expecting. That’s a big miss, and I’m surprised, especially since reported revenues ($5.43 billion) were better than expected ($4.86 billion).
Alcoa CFO complained that the company was hit with $65 million in power costs and currency losses and another $250 million in acquisition related charges. Even so, Alcoa was never going to meet earnings on the expected revenues. Given that revenues showed healthy improvement due to increased demand and prices for aluminum, I can’t help but wonder of Alcoa’s miss is its own fault.

 

Bullish on Earnings

*****Oil is pushing past $83 a barrel after China reported a 21% increase in oil imports during the fourth quarter. That’s a huge jump, and serves as a perfect counter-point to the analysts who have been saying that supply and demand fundamentals don’t support the current price for oil.
The problem seems to be that some analysts only look at the supply and demand numbers for the U.S. And even then, they seem to be fixated on inventory numbers. That’s simply not enough information.
Oil is a global commodity. And while the U.S. may be the biggest user, the most growth in oil consumption comes from emerging markets, like China. If you simply ignore China and the fact that global production is falling, it’s easy to come to the mistaken conclusion that oil prices should be lower.
*****As oil prices rise, it makes other energy sources more valuable, too. Alternative energy stocks rise with oil prices. And we’ve seen natural gas prices rally from an important bottom in recent weeks.
Coal is another energy source that’s becoming more valuable as oil prices rise.
With carbon emission caps looming in the U.S. and a global debate on curbing carbon emissions that most recently landed in Copenhagen, many investors have turned their back on coal. But that could be a mistake.

Earnings Season Outlook

So far today stocks are shrugging off the somewhat disappointing non-farm payrolls number. The U.S. lost another 85,000 jobs in December. The employment picture remains bleak, but there is reason to believe that we are at least reaching a point of equilibrium.
Of course that’s little comfort if you are one of the 7.2 million Americans without work.
Some analysts are concerned over the employment number. They worry that the stock market has priced in a strong economic recovery and the jobs numbers continue to say that the recovery will be slow. That would leave stock prices vulnerable to lower earnings.
I’m not so sure. Investors have certainly bid stocks up to some fairly lofty valuations. But so far, investors have been right. It’s been the analysts who have remained too pessimistic about earnings.
It will be interesting to see how the coming earnings season plays out. It’s hard to imagine that companies will beat Fourth Quarter earnings expectations as soundly as they did in the Third Quarter. I suspect we’ll see a majority of companies reporting "in line" with expectations. That should be considered good, but don’t expect investors to be forgiving. We’ll also need to hear some positive guidance.
*****If you want a reason to be optimistic about the coming earnings reports, have a look at financials. Banks have rallied strongly over the last few days, and even Meredith Whitney’s downgrade of Goldman Sachs (NYSE: GS) hasn’t slowed the sector’s rise.
It’s a common belief that financials lead the stock market. And even though we still can’t call the financial sector healthy, the strength we’re seeing ahead of earnings is a good sign.

Earnings Season

I heard there’s a new slogan making the rounds in corporate accounting departments. "Flat is the new up." I have to admit, that got a chuckle out of me. But it’s true, flat really is the new up when it comes to sales volume, revenues, and even earnings to an extent.
And that maxim will be put to the test next week as we head into earnings season for the Fourth Quarter of 2009.
It’s the weirdest thing, but I’m always a little surprised by Q4 earnings. It just seems to sneak up as I’m easing back into full work mode right after the holiday season. I don’t think I’m alone here either, because I haven’t seen any mention of Q4 earnings in the media.
OK, that’s not exactly true. Meredith Whitney did offer up an earnings estimate cut for Goldman Sachs (NYSE:GS) earlier in the week. Ever since Whitney started her own firm, she’s seemed a bit more eager to make a splash in the headlines. I imagine her as a task master in her office: punctual, driven, strict, and humorless. Kind of like Dwight from The Office (yes, I catch that show on occasion).
*****Still, Whitney’s is the first recognition that earnings season starts with Alcoa (NYSE:AA) on Monday. It should also be noted that the market ignored Whitney’s Goldman earnings cut (the parallels with Dwight continue). Truly, flat is the new up.
Of course, investors will be looking for earnings growth. But I suspect if revenues come in flat and companies can give a somewhat encouraging outlook for 2010, stocks will hold current valuation, and may even move higher…
 

What’s Next?

Corporate America seems to be asking "What’s next?" The U.S. economy has reached a point where demand is returning. Enough people are buying things again so corporate layoffs have hit their lowest level since March of 2008 (Recall that was the month Bear Stearns went under).
Even though the 84,000 job cuts announced in December was more than economists expected, it should be obvious that we are hitting something of a balance between production and consumption.
Does that mean that growth is ahead? Can we expect companies to start hiring in the near future? Not necessarily. Companies will be hesitant to add workers until they are simply overwhelmed with demand. It’s logical to think that companies will opt to make do with what they have rather than take on new expenses.
*****From the Labor Department’s report, 52,000 construction workers lost their job in December. That’s the 35th consecutive monthly decline for construction. Given the state of the housing market, commercial real estate market, and credit markets, it’s difficult to imagine a surge in demand for new construction that would suddenly result in construction workers getting re-hired.
That suggests there is, and will remain, a large percentage of unemployed who will stay that way for some time.
On the other hand, however, we have to wonder how much companies overshot when they started laying people off. Remember, it is human nature to over-shoot, both in the upside and the downside. It is these over-reactions that create buying and selling opportunities in the financial markets.

Massive Oil Find

Ben Bernanke needs to be careful. Over the weekend, the Fed Chairman gave a speech where he essentially said loose monetary policy between 2001 and 2005 was not to blame for the housing bubble that sank the stock market and nearly crushed the U.S. economy.

Instead, Bernanke says it was the proliferation of "exotic" mortgages and a general belief that housing prices could only go up that were to blame.
Sure, there was a lot of hubris, deception, and outright fraud by lenders and borrowers that were the hallmarks of the bubble itself. It’s also true that stricter regulation and oversight would have prevented some of the specific abuses, as Bernanke insists. But when Bernanke denies that low interest rates were a pre-condition for the housing bubble, he is simply ducking any responsibility.
In the words of Morgan Stanley’s Stephen Roach: "I think it’s ludicrous to think that monetary policy didn’t play any role in causing the so-called subprime crisis…I think we need to take a very careful look at monetary policy and central bankers who do not believe that interest rates played a role in this crisis…I think that view is dead wrong."
There’s simply no doubt that Alan Greenspan’s monetary policy laid the foundation for the housing bubble. Interest rates are like a risk assessment. When they are low, the Fed is inviting investors borrow, or take on risk. When interest rates are high, risk (borrowing) is discouraged by higher costs. It’s as simple as that.
Bernanke has done a lot to help the U.S. economy recover. But he’s now risking all credibility by aligning himself with Greenspan’s failed beliefs about monetary policy.

Most Lucrative Trend for 2010

Here it is – the first trading day of 2010. And we’re already seeing what will be one of the most important (and lucrative) trends for this year. Oil prices are pushing past $81 a barrel.
$80 has been an important resistance level for oil prices as traders continue to believe that high inventories and weak demand don’t warrant higher prices. In the words of Olivier Jakob of Switzerland’s oil analysis firm Petromatrix, "We do not think that the fundamental picture and the price structure will allow for the current crude oil prices to be sustained in 2010."
I beg to differ. Oil’s current price is not being driven solely by demand. If it were, prices would be lower. There is an "expectation premium" built into oil prices. Demand will return. And there is a limit on production capacity of approximately 94 million barrels a day. The days of $147 a barrel are not as far off as some may think.

Adios 2009

It’s hard to believe that we are about to put 2009 in the books. We would be hard pressed to single out a more, um, interesting year for investors. We had outright panic early in 2009 as stocks sank to 20-year lows. Then we saw the strongest rebound in history. And the ironic thing is, most investors are still unsure of what the economy and the stock market’s next move will be.
It seems clear that we’ve gotten through the worst of the fallout from the financial crisis. Housing prices are improving, unemployment seems to be bottoming, industrial activity is expanding, and the Fed is mulling how to reverse the stimulus that helped avert financial disaster.
But will unemployment actually improve in 2010? Will the housing market continue to improve after the Homebuyer Credit is removed? Can the stock market survive an interest rate hike? We’ll get the answers to these questions in the months ahead.

Thin Trading?

"We continue to be of the opinion that the real driver of the oil market last week and this week is the lack of trading volume in the futures market and not really the lack of oil supplies," said Olivier Jakob of Petromatrix in Switzerland. 
This is yet another example of the bearish sentiment toward oil prices that’s rampant in the analyst community. Nobody wants to admit that the current supply and demand relationship is temporary. Nobody wants to acknowledge that the world faces some tough decisions in the months and years to come regarding energy supplies. 
The era of cheap oil is over. Sure, we could maybe see oil in the $60’s again. But it’s pure folly to expect that oil prices might remain there for any length of time…