Yesterday was very light volume and flat for the most part – a couple indices up and a coupe down. These are critical times if the confidence can return and push us up through that resistance levels. The earnings are come in with two different stories – those with LARGE global exposure and those without. The financials last week came in with MORE billion dollar write-downs and the market ripped up. Yesterday and this morning several companies beating expectations and the market doesn’t move. It is clear that the market has disconnected with reality – it is opportunistic perception and restored confidence that will send this market higher.
We are living in a time of a huge shift in economic balance and history is forever repeating itself. The Sun did set on the English Empire at the turn of the last century. They were the world’s super power, controlled the seas, had colonies around the world, and the pound sterling WAS the currency. That had shifted and the U.S. took that torched and dominated – companies expanded and wealth was created. It seems now we are passing that torch again – to the emerging markets China, Brazil, India. These countries with vast populations, a new consumer vertical market, are going through several revolutions simultaneously, manufacturing, service, and technology. It is apparent from the earnings coming in – that the companies that have moved the majority of their resources into these economies are doing fantastically well – while the U.S. suffers a mass consumer fall out and ramping inflation. Coke, IBM, CAT, McDonalds, and others have moved a majority of their operations, marketing, sales, manufacturing, and focus off our shores and are now reaping those rewards. The weak dollar has also helped these companies – McDonald’s reported that $.05 of their earnings increase was from repatriating the dollar as their sales rocket in the Middle East, China, and elsewhere. We are in a global economy – don’t fight it – look for opportunity. Do make your investments on Patriotism, but rather opportunity. Leave politics aside – investing in the market is about making money – simple.
However, it is the U.S. consumer – unless invested in these companies – that is seeing the hardship – higher prices, job losses, housing slump. While companies exposed to overseas expansion will do well – we in the U.S. need to get ready to ride the storm out.
_________________________________________________________
McDonald’s profit beats!
McDonald’s who has been expanding rapidly in emerging markets as well as Europe has benefited in both expansion but also the weak dollar. Europe sales increase but a large boost came from the weak dollar against the Euro. Combined currencies gave an added boost of $.05 to the number – that is a huge profit – just from the falling dollar. Interesting to note that sales in the U.S. were “slightly negative”, according to the CEO Skinner. Clearly showing that it is a Global company.
McDonald’s U.S. sales were unchanged in December, the worst report in 5 years. However, sales rose in the U.S. in the first quarter. Some economist are reflecting the slight increase sales in Jan. and Feb. in the U.S. reflects a shift in spending – as consumers lower their standard of living. As job losses mount, consumers are tapped in their credit lines, and inflation rising – looking for savings anywhere is going to reflect in these discount companies. We saw similar results in Wal-mart sales figure as people are downgrading their spending habits.
_________________________________________________________
SunBUST – more money, please?
If you had been reading the Market Preview for any length of time or have talked to me about SunBust – you know how negative I have been on this company. They are seriously exposed to 2nd mortgages in the state of Florida. They had ramped their 2nd mortgages in 2006 and 2007 – only to have it bite them seriously in the A$$. They already started selling their OWN real-estate in lease-back options to raise cash.
SunTrust income dropped 45% to $.81 a share down from $1.44. They said the real estate slump in Florida has forced them to boost reserves for bad debt. The problem again is the write-downs on the 2nd mortgages – even writing them down by 30-50% doesn’t help that at foreclosure auctions in Florida – most 2nd mortgage holders are lucky to even get $.10 on the dollar, most are getting NOTHING. That means that write down should be ZERO and not 50%. They raised its provision for long losses 10x to over $500 million as they expect MORE defaults on mortgages and home equity lines.SunTrust announced 2,400 job cuts or 7% of their work force to shore up losses and reduce overheads as they continue to ride this storm out. The stock is down 4-5% in the pre-market.
I continue to hear rumors that more problems are to come to this bank as they went ALL-IN on mortgage writing in 2007 – how those 2nds looking now?
________________________________________________________
INFLATION – Oil, Dollar, Gold, Food
As earnings come in for the multi-nationals beating estimates and domestic reliant companies suffer, along with the financials – the U.S. consumer is stilling feeling the inflation heat as Oil hits new highs daily and the Dollar flirts with breaking the dreaded $1.60 mark against the Euro. While many companies are benefiting from the weak dollar it is the consumer that is going to continue to feel the pinch.
Food prices are hitting new highs – Wheat is up almost 150% in one year, Rice has made some of the biggest jumps on record, and Oil is above $117 heading into the driving season. The question is how does this affect the consumer – but also the stock market.
Here is the problem I see with the commodities heading higher and impacting the consumer. The stock market – no doubt – moves on perception – but NEEDS money to fuel any and all rallies. As prices heat up in the commodities market they drain capital on the sidelines that could enter the market. The problem with commodities is that they are expendable assets – or a constant sink hole – you don’t profit from eating food or filling up your gas tank. You just HAVE to spend that money. As the prices increase the money that goes into investing starts to dwindle.
If money is being drained on the sideline or WORST people need to get liquid cash because other costs are rising they MAY BE forced to sell even SOLID fundamental companies to realize the liquid cash. This is when fundamental decouple and the flight to cash is needed to off-set rising prices. Now this may not be a large amount of the sideline money or current invested money – but couple that with the deleveraging going on and the already tapped credit (margin) lines and it could keep any rally from getting solid legs.
At the end of the day – cash is king – and if you NEED cash you might even sell that company that has solid fundamentals and doing very well in the global market – because at the end of the day you NEED money to transact your daily business. The market – therefore is in an interesting state – that EVEN WITH better than expected earnings you could see some of these companies fail to rally or even fall off as cash is sucked out because of inflation pressure.
Take the time and do your own inflation check. How much does it cost to fill up your tank NOW compared to a year ago at 50% less? How much is your grocery bill as compared to a year ago – with prices rallying as much as 50%? Add that to the fact you CD is now paying 3% instead of 6% and your return of money can’t even keep pace with inflation.
_________________________________________________________
Futures Pre-Market
The futures are getting hit after some better than expected earnings – other than SunBust – but the economic landscape has NOT changed for the US Consumer or the rate of inflation (which is higher than what the CPI would have us think.). The futures are front running the cash by about 3 points – so expect pressure on the basket at the opening.
________________________________________________________
Support / Resistance
We had light volume and went NO WHERE yesterday – do we break out or go down – the longer it takes the higher the odds we retreat – in my book. 70/30 downside is my bet from the resistance.
INDU 12500 / 13000 (We could visit 12750 today – but that is not a support to get long at all. I would of thought with a couple of the Dow components reporting better than expected we might of hit the 13000 number – but the futures are not showing that story.)
NDX 1850 / 1900 (We are above 1900 – but I am still saying 1900 is resistance – the problem with this index it only takes one or two heavy weights that are over 1:1 ratio to drive this index up or down greater than it’s whole. It’s volatile for sure – but I expect a retracement to the downside.)
SPX 1350 / 1400 (We pulled off 1390/1400 area the resistance – it seems very hard to get up and through that number. If we can build some momentum and confidence we could – but even with better than expected earnings we are not getting off the mat?)
RUT 680 / 720 (We pull off a little from the resistance – it did rip through it – have we lost momentum – keep an eye on the close.)
_________________________________________________________
Conclusion
We are in going through an economic evolutionary (or creative design) change. The tipping point in alternative energy and the global expansion with the shrinking U.S. consumer market is a catalyst for a massive shift of economic power. It will be great for some and very difficult for others. The average U.S. consumer will feel the pain no doubt. Prices are rising faster than the CPI is reflecting and the consumer is tapped out of credit lines. The financials have not found a bottom to the credit problem.
But the picture is not that bleak – if you are in the multi-nationals, commodities, and foreign currency you have been making money this year. Additionally – if you are NOT a bottom picker but play from the short side you are also benefiting.
Expect MORE volatility – tonight may see the Democrat leader – but I doubt it and it will drag on into June.
No comments:
Post a Comment