“Burn the Hands”

Yesterday, stocks recovered a little from last week’s sharp sell-off. A little time over the weekend to reflect on the true potential of the "Volcker Rule"

(the name given to the new banking regulations proposed by the President on Thursday) to become law probably helped. 

Stocks gained slightly even though December home sales dropped a worse than expected 16%. That’s a pretty bad surprise, but stocks shook it off. That suggests to me that last week’s sell off may have been a bit exaggerated.

As an aside, I’m not sure why there was concern that Fed Chief Bernanke wouldn’t be re-confirmed to his post. Sure, Geithner might be on the way out, but that’s no big deal. I see zero percent chance that Congress would let Bernanke go at this point. 

*****Fourth Quarter earnings have been good so far. I read that 70% of companies reporting have beaten expectations. But many of the surprises have been met with selling, like IBM (NYSE:IBM) and Google (Nasdaq:GOOG).  

Re-pricing Banks

It’s clear that investors are re-pricing stocks for the possibility that the proposed restrictions on banks’ trading practices will impact their profits in the future. The UltraShort Financials ETF (SKF) has rallied 11% in 2 days.

Yes, bank stocks are getting hit pretty hard. But Obama’s proposed restrictions aren’t yet law, and there’s plenty of reason to believe he won’t get everything he wants. More about that in a minute…

But first, I want to point out that this situation is how the "buy the rumor, sell the news" dynamic starts. Now, granted, this is a reverse example because investors are selling stock in anticipation of bad news rather than buying ahead of good news. Still it’s a good example of how investors are pricing in a worst case scenario now, before any proposals have become law.

I think we can expect to see bank stocks rally once the reality of ay proposed restrictions is finalized. But as we know, investors don’t like uncertainty.

Can’t Ignore This One

You’ve probably noticed I tend to stay away from political debates. And with good reason. I learned a long time ago that it’s best not to talk politics and religion. And besides, carrying a political bias into your investing and trading will affect how you see things, and make you more prone to mistakes.

For instance, think about all the investors who were up in arms that the dollar would crash because of the amount of debt the government’s been taking on. I haven’t published that Dollar Index chart in a while, let’s have a look…

Federal Department of Goldman Sachs

The Federal Department of Goldman Sachs (NYSE: GS) beat earnings
expectations with a $4.79 billion profit for the 4th quarter. Goldman
has strong gains in its investment banking division, which handles
stock and bond underwriting deals. Go figure. With companies selling
debt and stock like crazy to pay off TARP money and improve their
balance sheets, it’s no wonder Goldman did well.

Goldman earned
$13.4 billion for the year. But I haven’t seen if this figure includes
the $25 billion in funneled TARP money it received from AIG (NYSE: AIG)
to pay off credit default obligations (CDOs).

As you know I’ve
criticized Treasury Secretary Geithner for handling the banks with kid
gloves. And the fact that his office attempted to suppress the
transaction that had AIG paying Goldman off with bailout money is more
than just a black eye for him, in my opinion.
President Obama was wrong to nominate him. But you have to wonder how
much choice he had. After all, the Federal Department of Goldman Sachs
is pretty powerful.

Today is the Day

On the surface, earnings from IBM (NYSE: IBM) appeared excellent. The technology bellweather posted $3.59 a share in 4th Quarter earnings. That beat analysts’ expectations of $3.47 a share. IBM also beat slightly on revenues.
IBM also said 1st quarter revenues would be higher and even went so far as to raise earnings estimates for all of 2010. So why is the stock down?
Because IBM’s business services division, which includes consulting, reported a 2.8% drop in revenues. Obviously, strength in other divisions more than made up for it. But investors seem fixated on the negative.
Yes, the drumbeat of the skeptics rolls on…

Bearish on Oil? Don’t Be…

The AP article starts off: Oil prices fell below $78 a barrel Tuesday amid the strengthening dollar and continued doubts about global demand for crude.
If "doubts about global demand for crude" only succeeds in taking oil prices down a couple of dollars per barrel, I have to wonder why the financial media continues to take a bearish stance toward oil. Oil prices have been climbing the proverbial "Wall of Worry". Inventories rise, and yet so do oil prices.
Oil is becoming a "store of value." Buy it, store it and sell it at higher prices seems to be the consensus. That doesn’t bode well for the oil bears, unless another cash crunch forces traders to liquidate positions. I expect oil and energy prices to remain strong.
*****Earnings may not have recovered to pre-crisis levels, but cash flow has. Bloomberg reports that the 2010 P/E for the S&P 500 is 14, based on company estimates. The trailing P/E sits at 25. Both imply stocks are fairly valued at best, and may even be overvalued.
But if we look at cash flow, defined as earnings plus the cost of depreciation and asset write-downs, stock valuations look much better. Bloomberg reports that valuations based on cash flow are 37% lower than its 12-year average and 50% lower than in 2007.
Bloomberg goes on to say that the discrepancy between earnings and cash flow is because companies are still grappling with expenses related to the financial crisis. Just today, Citigroup (NYSE:C) reported a $7.6 billion quarterly loss because of TARP repayment expenses. Another example would be companies that have laid off workers will also be subject to severance expenses.

China Must Play Ball

Yesterday’s Daily Profit about Google’s (Nasdaq:GOOG) experience in China has raised some questions. Ray G. writes:
Anytime a government like the one China has can do whatever it pleases with any company in its country, the playing field is too much of a mine field to be attractive to me.
It is difficult enough for the individual investor to make money in any market but to try to do it in a country where one doesn’t understand the playing rules is sheer madness.
Good luck because you will need it.

I believe this question reveals a common misconception about China’s government. The simple fact is that China’s government can’t simply do "whatever it pleases". China has an export economy. It is dependent on countries like the U.S. Without foreign support, China can’t provide jobs to its people. It fails and collapses. In other words, China has to play ball.
In exactly the same way, China is dependent on foreign investment in the country. It must gain both the capital and the innovation of the West. Without that, again, China collapses. China must play ball.
And this is why Google’s stance on China’s attempts to "control" the Internet is so significant. I wrote yesterday that Google needs China more than China needs Google. But that’s not entirely true. If Google actually leaves China, it will be very embarrassing to China. And that’s more important than you might think…

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.