Monday, July 27, 2009

7/21/09 (CAT the Dow Jones rock star!)


Pushing higher on good news, optimism, and short covering. It is certainly a mixed rally and that means there are some good bullish plays, some that need to be hedged, and some to avoid. What really makes this rally a mixed message is that oil and commodities are rallying strong and foreign currencies are climbing strongly against the dollar (as it becomes weaker). We are also seeing interest rates move higher as money flows out of bonds sending them lower. So where is the smart play? In equities it is a case-by-case sector or issue – that’s for sure. Reading the fine print hasn’t been more important. Just because you beat estimates is not always a sign of positive growth, one must remember that companies in 2009 had significantly lowered their guidance to very conservative levels, so beating an estimate was no big hurdle. On the other hand several companies have VERY good story to tell in this economic down turn. One thing is for sure – there is a huge difference between the market and economic conditions – which continues to widen.

CAT – the Dow Jones rock star.

I had mentioned in the past on several occasions that CAT has been a recession survivor. It has a awesome international presence, which made up for a lack of domestic sales. It is interesting to note that they had called the recession months before it happened and have been fairly accurate with their corporate forecasts. If there was one Dow component to be long CAT would be it. They are a big player in China’s massive infrastructure rebuild as well as many emerging markets – that will most certainly pick up the slack for any domestic short falls.

Well – their earnings were a big surprise and reported profits that exceeded estimates. The CEO (Jim Owens) is a straight shooter and made some interesting observations. His company is seeing strong demands abroad and especially in China where the stimulus is going right to the bottom line (building 1,000s of miles of roads, building, sea ports, damns, etc.), however on the domestic front it has slowed and it seems to remain slow. He notices that while world credit markets have eased, they are seeing problems on the domestic front as payment delinquencies have increased. He expects that 3rd and 4th quarter to be mixed and thus while they have raised the full-year forecast to $1.15 to $2.25 (a VERY wide estimate) – it accounts for the HUGE uncertainty in the 3rd and 4th quarter.

He has taken command of his company as he had pushed the U.S. government for favorable tax and trade policies that help boost sales and he also cut more than 24,000 jobs. Realizing that international sales is the strong option he needed to make sure that they could see strong profits without government entanglements.

The company has a great story and domestically it will most likely stay in this country. Building their equipment is a lot more demanding than the typical auto assembly lines. Most equipment is hand built and most employees are truly engineers or mechanics. Relocating a company like that is not even in the cards – so the company will continue to push the government for favorable tax, trade, and domestic issues.

All in all – CAT is a great American story and a recession survivalist. The wide forecast (1.15 to 2.25) for the year (remember that is only the next two quarters) means that even the CEO (and company) is still very unsure about the domestic front and IF we will see a bottom to this domestic recession. However, abroad – sales and business is going very well. Domestic revenue was down and doesn’t look to improve. The one other variable is the possibility of a dividend cut, which will most likely be determined by the earnings in the 3rd quarter and if the 2.25 is still a realistic view of the full-year returns.

As I mentioned before – it is time to start putting companies into two categories (strong international and domestic only). CAT falls in the Strong International – and should see profits as the emerging markets recover, while the West continues to suffer.

CAT up strong in the pre-market up $4 - sending the INDU futures up hard.

COKE – another great story

COKE is it! Coke has been kicking Pepsi’s ass in the international market, mainly in China. Coke has realized that not everyone loves their core fizzy bubbly drink and has quickly moved into none carbonated products including water. Earlier Coke made a huge move in China to acquire their largest juice producer – but China blocked that (it is still up in the air and could happen). However, Coke is expanding their own line there and has made significant ground, leaving Pepsi to figure it out.

Coke had a fairly good story, but revenue was down and lower than expected – even though they did beat estimates. The question is Coke still a value play at these levels? I think it might be a little difficult to see a big rally from these levels – it has made a great run and unlike CAT didn’t see any big retracements coming out of the hole in March.
Coke is slightly down in the pre-market, still a great story with growth internationally.

Other earnings…

Merck’s earnings decline, but the good news is that revenue increased. That is an important driver that most companies are falling flat on. While earnings did decline the profits fell less than expected and as they set to buy rival Schering-Plough the pipeline is probably going to be good going forward. There is domestic concern with drug makers play a key role in healthcare reform and that could inject some volatility in the futures. Merck is up in the pre-market

Regional banks – if you are watching these earnings as they come out daily it is sickening. They continue to hemorrhage money, continue to see losses, continue to have increasing delinquencies, and FDIC continues to close more regional’s. The regional banking sector looks ugly.

Airlines – they did look to do well as fuel prices fell, but as the prices begin to climb again and people have less to spend for travel things don’t look so bright. Could web based communications like “Go-to-Meeting” really be an airline competitor? Maybe if companies continue to trim costs. As Warren Buffet learned the hard way – airlines are a sector to stay away from – margins are rail thin and that is if it can get into the black.

Futures Pre-market

The INDU futures are getting a surge from CAT and up about 50, the rest are flat to slightly up and closer to fair value. No overweight drivers in the other issues. Expect a stronger to mix opening.

Support / Resistance

Break-out is here, but mixed for sure. Keep an eye for quick sector retracements and over weights being a driver.

INDU 8750 (We are getting a good rally in the INDU and CAT is charging it ahead in the pre-market. Expect it to be higher today. – 8750 is support.)

NDX 1500 / 1550 (A few stocks have been the huge driver in this index – AAPL being one of them. Some are getting a little long in the tooth and if we strip out the over-weights in this index it is in the 1510-1515 range. Watch those over-weights they continue to drive it, but if any of them turn around they could pull this back down to or through the 1500 range fast.)

SPX 950 (Unlike the INDU or NDX – both are narrower based and have some key drivers, the SPX has just gotten to its resistance and has not broken through yet. That leaves me skeptical about the INDU and NDX as a couple of key components drive them up. Unless SPX can get the significant break-through, I wonder how strong the NDX and INDU really are. Keep an eye on the SPX strength – let it be the confirmer.)

RUT 540 (Like the SPX the RUT has not confirmed a break-out yet. Unless we can see the broader indices make the same break-out that the NDX and INDU have – this might just be a breakout of a few over-weight rock stars that have left the broader market behind and we could get a contraction in the spread.)

The spread contraction is coming, either the broader market rallies (RUT and SPX) to meet the breakout of the narrower based indices, or the narrower based indices (INDU and NDX) come off a little to meet the broader market indices. Right now the story seems to be a few rock stars.


Earnings surprise, sure – there is some good stories in there. CAT being the rock star of the day, but they remain very skeptical of the domestic economic situation and are concerned about their increase in delinquencies – hence the very wide range of guidance for the year. Regional banks look bad and don’t look to improve any time soon. Drug makers have some good news lately, some mergers, and some better revenue, but are facing some volatility as to the healthcare plan and what role will they play.

The reoccurring story is lower revenue and profits really made by increasing margins, which has meant more layoffs and cost cutting. Fat companies are thinning down to keep profits inline, but revenue shrinks and you can only cut so much. The 3rd and 4th quarter doesn’t seem to be looking great on the domestic front if any companies are relying on domestic sales. That is why it is time to make sure you have some international exposure companies in your portfolio.

Expectations for “Back to School” sales are looking negative and holiday sales following close behind with the job losses this country has suffered is not looking better. It will be companies like CAT and COKE that we will rely on to keep the market up.

Meanwhile, gold, silver, oil, and other commodities rally and the dollar falls. Interest rates are going up as bond’s fall and that also spells more difficulty for mortgages and lenders as rates go up and also means that Bernanke is going to have to buy MORE treasuries if we see too much of a pop in rates it could mean the Bernanke has lost control and we could see a bigger exodus of foreign treasury holders. He should be addressing those questions today. Listen up.

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