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…

 

 

Russia’s Oil Hostage

*****The Dow Industrial Average made its highest close over 10,500 yet. And it looks as though we’ll see an even higher close before 2009 is over.

Perhaps even more importantly, oil prices have rallied and are pushing to new highs for the year. It’s no coincidence that stocks and oil move in tandem. This is because they both respond to economic growth expectations. And really, oil may even be more sensitive to economic growth than stocks.

That’s because traders know that oil supply has a hard ceiling. And as demand improves, that ceiling looms. Early news reports this morning are looking ahead to inventory data later this week as a catalyst to push oil prices above $80 a barrel. But really, a move above $80 is inevitable, whether it comes this week or next… 

*****Russia is once again holding Eastern Europe hostage to its oil supply, threatening to cut off oil shipments if transportation conflicts aren’t resolved. 
This is important news, and not just for Eastern Europe. State controlled oil supplies are leverage for countries like Russia, Brazil, Mexico and even OPEC. Don’t be surprised at all to see these countries withhold oil to drive prices higher. 
After all, these countries (with the possible exception of Brazil) are dependent on oil to fund government spending. They absolutely will maneuver to keep prices high and supplies tight. And that becomes even more significant when you realize that supplies in countries like Mexico and Russia are falling. It’s imperative that these countries get the most they can for their oil because it won’t be long before they have no oil to sell. Mexico, for instance, could shut off oil exports in the next 2 years…

 

Holiday special for Energy World Profits advisory




*** The holidays are officially here, with lots of time for fun with family and friends!  I want to wish all Daily Profit readers a wonderful – and safe – holiday season. A few days off to spend with family and friends, time to reflect on past year and contemplate the year to come, is just what is needed. 

This year my wife Carrie and I will be spending the holidays on the west coast with our families in Washington and Oregon.  We plan to get out to some of the Willamette Valley vineyards to see what's new in the wine barrel. I'm a big Pinot Noir fan (in fact, we named our Chocolate Lab puppy "Pinot") and love Oregon wine country. 

And speaking of the holidays, I have a holiday gift for my loyal readers. You see, on Friday I’ll be reaching out to everyone with a special offer for my brand new Energy World Profits advisory service. But I want to give loyal Daily Profit readers an advance opportunity to start a trial subscription at a steeply discounted rate. 

Normally, the Energy World Profits service goes for $399 a year, but for this weekend only I’m letting a privileged few sign up for only $199. And because you’re a long time reader of my email newsletter, well, I’m letting you cut in front of the line. 

If you’re interested in profiting from the coming energy transition and you want to grab a limited-time 50% discount, than I invite you find out more when you click here.   

***And speaking of energy prices.  Falling supply and growing demand lead to only one thing in a free market economy – higher prices. Now you can argue that the United States is moving further away from capitalism with every bill to come out of Washington, but don’t tell that to oil traders. Crude oil for February delivery is pushing past the $75.00 level today after the American Petroleum Institute reported that inventories last week fell 1.6 million barrels more than expected. Analysts had expected a drop of 2 million, but the actual drop was 3.7 million.

Don’t focus too closely on history to lay out your investing strategy

The news that U.S. GDP has been revised downward, again, doesn’t seem to phase the market as most major indices are trading slightly higher. Clearly the market is looking to move higher through the end of the year as the economy rises like a phoenix from the ashes of the latest recession. In fact the Russell 2000 small cap index has finally broken above the critical 614 level and looking to move higher. The question for small-cap investors is, how far can the Russell run, and how fast? 
The news that U.S. GDP has been revised downward, again, doesn’t seem to phase the market as most major indices are trading slightly higher. Clearly the market is looking to move higher through the end of the year as the economy rises like a phoenix from the ashes of the latest recession. In fact the Russell 2000 small cap index has finally broken above the critical 614 level and looking to move higher. The question for small-cap investors is, how far can the Russell run, and how fast?

Start Small, But Finish Big with Small Cap Investing

 

Warren Buffet has got to be one of the greatest investors of all time, and he certainly provides some great material for the media. I included the words quoted above as an introduction to the first chapter of my book, The Small-Cap Investor: Secrets to Winning Big with Small-Cap Stocks. They provided a great lead in to a discussion of why small-cap stocks have a place in every investor’s portfolio. 
Last week I discussed the out-performance of small-cap stocks over the long-term. Today we’re talking about why small-cap stocks are such strong performers. Some of this content I’ve included in the first chapter of my book, but I want to bring it to you here today in SmallCapInvestor Daily.    
Almost all great companies start out small. The exceptions are those that are formed as spin-offs from large companies or joint ventures between two big, existing companies. But even many of these start out small. And many of the world’s greatest innovations come from these small, nimble companies. In fact, it is the little guys that have increasingly been investing in research and development in recent decades – and helping to fuel economic growth in the process.  
It is this growth that is the reason small-cap stocks shine since the greatest rate of growth is often during a company’s early days. This is when they are producing new products, launching strategic partnerships, and entering new markets – all while flying under the radar of larger competitors and Wall street analysts and investors. But often these efforts are rewarded once enough investors realize the company’s potential, and if the company continues to perform.