Technicals Calling For a Market Top...

[pedro01]

Market Sees What It Wants to See

And away we go... Alcoa's (AA) earnings report last night ceremoniously kicked off the third quarter reporting period. At the same time, it kicked more than a few short sellers in the mouth as the aluminum maker said mostly all the right things.
Alcoa topped earnings estimates, said it is seeing signs of stabilization in key markets, indicated aluminum consumption should be up 11% in the second half of the year, and added that its cash on hand was $1.1 billion versus $762 million at the end of 2008.

The one item that didn't show up in its headlines was that revenues were down 33.8% year-over-year. We did get a sense, though, of how companies are likely to craft their press releases this season. It will be about burying the lead.
Don't call attention to the fact that demand is still nowhere what it used to be. Instead, emphasize that there is growth now from a very depressed base. Alcoa did just that, highlighting the relatively encouraging point that revenues were up 9% on a sequential basis.

It is a clever strategy, particularly since most companies should be able to highlight actual year-over-year growth in the fourth quarter and first quarter given the easy comparisons.

Focusing on sequential comparisons this reporting period, then, will buy companies more time to keep investors interested in their turnaround stories.
It is a necessary strategy if the early returns are any indication. Briefing.com's earnings calendar shows 19 companies have reported earnings results this week. Out of that total, only four have reported year-over-year revenue growth.
Moving on, a number of retailers are reporting better-than-expected same-store sales for September. That's not to say they are strong results. It simply means analysts' expectations were too low.


The majority of reports thus far still have a minus sign in front of the monthly same-store sales number. Nonetheless, positive surprises in any form are typically viewed as a bullish catalyst by traders.

Patrick J O'Hare - Briefing.com

 

[Black Swan]

Patrick J O'Hare - Briefing.com

Pedro, you have to take on board (but under no circumstances accept) the huge lobbying power the top accountancy/consultancy firms in the US and UK have and use in order to alter the facts. The misdirection contained in the average set of top level accounts would have had auditors arrested and convicted for fraud 15-20 years ago...

 

[pedro01]

Black Swan - I agree wid ya. Right now, I run 2 subsidiaries of a pretty large publicly traded company, so I'm pretty aware of what is done to massage the numbers. Right now, one of the subsidiaries isn't doing well but will book a profit or marginal loss this quarter because we are moving a few numbers around. Nothing illegal, auditors already agree. Job done. The company in question will go from a large loss to a break-even BUT we can't do this every quarter, as you know, we are 'using up' the opportunities to manipulate the numbers by moving stuff around.

I don't actually have an issue with this because it's not that hard to see, as long as you look at more than just the P&L.

I don't see the problem being that bad. We have guidelines & we follow them but for sure, there are things that we do that do somewhat fly in the face of reality.

This is why I say that revenues are the key in the numbers being reported as earnings are ridiculously simple to fudge - but you can't fudge it every quarter. Same with cost cuttings, you can't continually cut costs quarter on quarter because you run out of things to cut.

 

[ezreddy]

Pedro, understand all of your points and agree that long term, the fundamentals will either support the prices or they will fall to a lower level. With that said, however, I don't necessarily agree with the revenue numbers you are utilizing to support your rationale. The revenues you are comparing are year to year revenues; ie, 2008 compared to 2009. I would certainly expect the revenues to be down year to year without being able to use this as a valid argument that the market is overpriced. If you want to compare a year to year revenue, then you should compare it to a year to year average market price.

I am certainly interested in a comparison of quarterly earnings to same quarter the previous year. This comparison would then make it easy to compare the current market price against the previous quarter market price. As is mentioned previously, this would give an idea of where market price MAY move in the future.

 

[TAjammy]

Sorry about the title... No technicals here...

There is much nervousness in the markets right now - something that doesn't appear on the charts but something that a lot of people you talk to are feeling and something evidenced by a lot of pundits invited to talk on the news. Even Soros is now speaking out about the market being due a pullback.

Against the market pullback is the fact that the US has been printing money, it's created no jobs but ended up propping up the market. Also is the fact that many people consider the market to have overreacted down to the March lows and now the currenct correction is actualy fair value coming back to those instruments that were pounded.

Earnings have been OK but revenues down - a natural effect of cutbacks. How long can this last ? Perhaps the answer is "about 2 weeks".

Next Week - we have 91 companies making announcements. The following week almost 450 companies.

Eyes will be on revenues, not earnings. I really do think that if next week, the 91 companies show overall poor results, then poor results the following week should be enough to push things over the edge.

For sure - it will be an interesting 2 weeks and there should be plenty of opportunities for the well prepared.

Some of the companies announcing next week are in the attached spreadsheet. Make of it what you will.

if you think the market is topping, then why not short it?

 

[pedro01]

Pedro, understand all of your points and agree that long term, the fundamentals will either support the prices or they will fall to a lower level. With that said, however, I don't necessarily agree with the revenue numbers you are utilizing to support your rationale. The revenues you are comparing are year to year revenues; ie, 2008 compared to 2009. I would certainly expect the revenues to be down year to year without being able to use this as a valid argument that the market is overpriced. If you want to compare a year to year revenue, then you should compare it to a year to year average market price.

I am certainly interested in a comparison of quarterly earnings to same quarter the previous year. This comparison would then make it easy to compare the current market price against the previous quarter market price. As is mentioned previously, this would give an idea of where market price MAY move in the future.

Good points - I'm not sure which is more relevant right now. This quarter vs last quarter OR this quarter vs same quarter last year.

Most of the companies I have looked at are down in both respects. Alcoa :

Q1 2008 -> Q1 2009 -40%
Q2 2008 -> Q2 2009 -41.4%
Q3 2008 -> Q3 2009 -33%

So - do we look on this as an improvement because instead of being 40% down we are only 33% down ?

Pepsi revenues
Q1 2008 -> Q1 2009 -0.8%
Q2 2008 -> Q2 2009 -3.2%
Q3 2008 -> Q3 2009 -1.5%

Marriot
Q1 2008 -> Q1 2009 -14.8%
Q2 2008 -> Q2 2009 -19.2%
Q3 2008 -> Q3 2009 -16.6%

Costco
Q1 2008 -> Q1 2009 -0.7%
Q2 2008 -> Q2 2009 -4.9%
Q3 2008 -> Q3 2009 -3.1%

Anyway - you get the picture. In terms of price - which comparison is most relevant ? Comparing todays price with that of 12 months ago which says the price is still well down compared the the fall in revenues OR the price 6 months ago which says the price has gone up way in excess of the increase (if any) in revenues ?

Whichever side you take, it shows one thing - the market valued the stocks incorrectly either 12 months ago or 6 months ago...

 

[pedro01]

if you think the market is topping, then why not short it?

Life isn't that simple is it ?

If you read what I have posted in this thread, all I am saying is that the next few weeks are worth watching as we may see the earnings take the wind out of this markets sails.

The market is not a sane, rational beast. I personally think the market has gotten ahead of itself. The consumer is dead and credit is dead. Money has been printed, not a single job created in the US but instead that money found its way into the markets. Cash is the one place you wouldn't want your money right now. The recovery in the markets is not a recovery in the businesses listed on them.

Basically, it pretty well fits the definition of a bubble.

The best thing you can do in my opinion is watch and wait to see how the market reacts. We have cause, if we see effect, then there will be time to make money if it does turn.

Calling tops is way out of my league but expecting them and going with them when they happen - I'll put money on that.

 

[TAjammy]

Life isn't that simple is it ?

If you read what I have posted in this thread, all I am saying is that the next few weeks are worth watching as we may see the earnings take the wind out of this markets sails.

The market is not a sane, rational beast. I personally think the market has gotten ahead of itself. The consumer is dead and credit is dead. Money has been printed, not a single job created in the US but instead that money found its way into the markets. Cash is the one place you wouldn't want your money right now. The recovery in the markets is not a recovery in the businesses listed on them.

Basically, it pretty well fits the definition of a bubble.

The best thing you can do in my opinion is watch and wait to see how the market reacts. We have cause, if we see effect, then there will be time to make money if it does turn.

Calling tops is way out of my league but expecting them and going with them when they happen - I'll put money on that.

haha, the bubble, but didn't it just plough on ahead through many 'tops'? what's to say this isn't the same ?

 

[pedro01]

haha, the bubble, but didn't it just plough on ahead through many 'tops'? what's to say this isn't the same ?

hahaha ??? You need to learn to add a little more to the argument than that, young man. For a start - show some evidence of thinking things through a bit.


I know you are quite young and so have not lived through many bubbles yet. Would you even know what a bubble is ? Actually, that is probably unfair. Just like my 7 year old son, you have lived through bubbles but not really been affected by them. this is not a poke at you but it is a fact.


Since the early-mid 2000's I was subscribed to a free newsletter called "The Daily Reckoning". Their opinion and rightly so, was that the US consumer was consuming off debt based on continuously extending their mortgages. As someone that spends a few months a year in the US, I saw this first hand. In the early 2000's all the talk of my American friends/colleagues was of their remortgages/purchases and Audi-TT car leases.

At the same time, the US was outsourcing every job that didn't require physical contact. I know - I'm in Asia taking the work.

The .com bubble was my first bubble as an investor. It was an education I would have preferred not to have got through experience. It was a good lesson though.

Like I say - the daily reckoning was calling the collapse of the credit market for 4 or 5 years before it actually happened. It was totally obvious that this house of cards would collapse BUT the market is not a rational beast. You can easily know that things aren't right but if you bet against a rising market for years, you will lose your shirt. the daily reckoning guys turned out to be spot on - just 5 years early. You can't trade that.

Picking tops is a mugs game. No attempt here is being made in picking a top. What we have now is no new jobs in the US (and most of us trade the US markets), we also have massive amounts of currency creation. Growth needs consumers, consumers need jobs. Stock market rising without something substantive behind it is a bubble, just like the debt based consumption was a bubble (debt has to be re-paid at some point). Stock markets generally do move ahead of the economy and if the economy catches up, that's fine. In this case though, I don't see the green shoots.

It's time to make a decision.

- Is the market fairly priced,overpriced or underpriced now ?
- Was the market underpriced, overpriced or fairly priced in March 2009 ?
- Was the market underpriced, overpriced or fairly priced in Nov 2007 ?
- Was the market never at all fairly priced at any of those points because it's driven by emotions anyway ?

My opinion is that there is no fair price for the market. The market CANNOT have been fairly priced in Nov 2007 and March 2009. It is impossible.

Perhaps I am bringing discussions like this to the wrong place.

We have a catalyst in the next 2 weeks which should have us paying attention to the REACTION to that catalyst. This is teh interweb though, so we have to sit through idiotic 1 line posts from people that have no skin in the game... I guess we should stick to discussing the best settings for the MACD....

 

[GladiatorX]

Picking tops is a mugs game. No attempt here is being made in picking a top. What we have now is no new jobs in the US (and most of us trade the US markets), we also have massive amounts of currency creation. Growth needs consumers, consumers need jobs. Stock market rising without something substantive behind it is a bubble, just like the debt based consumption was a bubble (debt has to be re-paid at some point). Stock markets generally do move ahead of the economy and if the economy catches up, that's fine. In this case though, I don't see the green shoots.

It's time to make a decision.

- Is the market fairly priced,overpriced or underpriced now ?
- Was the market underpriced, overpriced or fairly priced in March 2009 ?
- Was the market underpriced, overpriced or fairly priced in Nov 2007 ?
- Was the market never at all fairly priced at any of those points because it's driven by emotions anyway ?

My opinion is that there is no fair price for the market. The market CANNOT have been fairly priced in Nov 2007 and March 2009. It is impossible.

Perhaps I am bringing discussions like this to the wrong place.

We have a catalyst in the next 2 weeks which should have us paying attention to the REACTION to that catalyst. This is teh interweb though, so we have to sit through idiotic 1 line posts from people that have no skin in the game... I guess we should stick to discussing the best settings for the MACD....

I agree with your opinion that the market has no fair price....

Afterall, the 'Current' price in a market is always going to factually be the fair price; Because it is the current equilibrium of supply and demand...

Doesn't matter what individual people THINK the value should be; the CURRENT value shows the exact average of all those people and therefore represents the true real value; Afterall
Something is only worth what someone is willing to pay for it...

Take my 32-inch Samsung; I can try value it based on my own perception but the true value will be decided by how much someone is willing to pay for it.

 

[poborsky]

Take my 32-inch ; I can try value it based on my own perception but the true value will be decided by how much someone is willing to pay for it.

thats very true gladiator. good luck in your new profession

 

[GladiatorX]

thats very true gladiator. good luck in your new profession

Ebay PowerSeller;
My dream job.

Btw; Really appreciated your PM's last night, they were sensational.

 

[montmorencyt2w]

Only slightly relevant but a good yarn:

What's the funniest thing that's happened since you've been on your own at Ospraie?

We were just starting up in 1999 with Tudor and I was over in London at the annual metal producers get-together. I am walking back to my hotel from a late dinner and I see this guy in an orange shirt stmbling around on the street. He is obviously completely loaded, so I go to help him out.

Anderson: "Excuse me sir can I help you?
Orange shirt guy: "Oh you're an American? I'm looking for the entrance to the hotel".
Anderson: "Well you just come around here".
Orange shirt guy: "Oh thank you so much. What do you do?"
Anderson: "I'm starting up a hedge fund".
Orange shirt guy: "Well you've helped me out so now I want to help you out. I work for Soros and I've got something to tell you. Don't be long gold next week. We're going to do something. Just don't be long gold. It's the only advice I can give you".

This was right when Ashanti was blowing up and gold had moved from $250 to $325. We were long gold at the time, so I was thinking that the guy was saving our skin. I was totally expecting that Soros was going to come into the gold market next week and dump a whole bunch. I covered our long position as soon as I could and waited.

Here I was two weeks after the inception of my new fund and I was still very nervous. I had a long gold position and a drunk guy who supposedly works for the biggest macro hedge fund in the world telling me not to be long gold. I was thinking that a good deed was getting rewarded that this was the way life was supposed to work.

Nothing happened. To make matters worse, I had told my partners that the reason we covered our long gold position was the orange shirt guy. Meanwhile gold just continued to go up.

I learned a great lesson, which is to ignore tips and random rumours. It was the last time I did such a thing and was such a perfect way to learn a lesson. To this day we still laugh about the man in the orange shirt. I would love to find that guy. Maybe this interview will help me find him. Mr Orange shirt from Soros - please get in touch with me!

Interview with Dwight Anderson from "Inside the House of Money" by Steven Drobny.

 

[pedro01]

LMAO at that - reminds me of that hot tip I got off the guy puking next to me outside the kebab shop. Apparently Ralphs are doing really well right now...

Anyway - honorable mentions for next week:
Fastenal - supplying the building trade. Currently at $39 and struggled to stay above $40 this year. Interestingly there is roughly 15% short interest. If it does pop up - where will the shorts be looking to cover their positions ? At a technical level ?

Equity Lifestyle Properties - Retirement communities & resorts. Shorts down to 7.6% from 8.5%. Recently upgraded. Way off their September 08 highs but revenues for Q1 & Q2 this year still way above same time last year. Looks fairly strong.

J B Hunt Transport. Trucking company. A pretty hefty 26% short was 23% short 2 weeks ago & is now $2 higher. Looks like they have delayed earnings a week too.... Keep an eye on the shorts this week.

CSX Corp. Railroad company - like J B Hunt, a good indicator of the overall economy, if it's not being shipped, it's not being sold...

ASML Holding. An interesting one, price has recovered very well but earnings appear to be a fifth of last year. Not sure if that's my data or not. Seems like something is driving the price up and it's not their results. This one looks as if it has gotten ahead of itself.

Adtran - mostly the fact it's 10% short, so a pop up may see some covering.

 

[dcraig1]

if you think the market is topping, then why not short it?

I think you are rather missing the point. Short what ? SPY, QQQQ, DIA, ES ?

The potentially huge advantage that a stock trader has over an index trader is that they get to choose their market(s) from in excess of 2000 US stocks with sufficient liquidity for swing trading. This is an advantage not to be sniffed at.

If I'm not mistaken this thread is not just about the broad market but also individual stocks.

 

[pedro01]

Correct - FAST missed by 1c last night and they lost 2.5%. Nothing major to be honest. Revenues down year on year as well as earnings.

They are in the building trade so a fair indicator of the economy:

Reports Q3 (Sep) earnings of $0.32 per share, $0.01 worse than the First Call consensus of $0.33; revenues fell 21.7% year/year to $489.3 mln vs the $489.3 mln consensus. "As we saw in the previous three quarters, the weakened economy continues to have a substantial impact on our business. These impacts continue to negatively affect our sales, particularly related to our industrial production business and, more recently, our non-residential construction business. To place this in perspective -- sales to our manufacturing customers (historically ~50% of sales) contracted approximately 23% in the third quarter versus the same quarter in the prior year. This contraction is less severe in the maintenance portion of our manufacturing sales, but more severe in the production business. Our non-residential construction business (historically 20-25% of sales) contracted approximately 25% vs the prior year. The remaining business is producing better results, but unfortunately, doesn't have enough impact to offset the manufacturing and construction impact. On a sequential basis, our daily average sales to our manufacturing customers has improved each month since May 2009 (with the exception of July 2009 due to the holiday impact) versus the previous month. This trend was the first sequential improvement since September 2008. However, this improvement was offset by continued weakening in our non-residential construction business.

Today pre market we have Johnson & Johnson & Dominoes Pizza with Heartland in the day time.

ELS didn't report on schedule and are 8.5% short so good news could see a pop.

Heartland are a transport company so their results are a good indicator of the economy. Also they are 8% short so a good news, although unlikely may see a pop up.

Medtox revenues haven't been hit much by the recession but their price has. One to keep an eye on if they outperform.

Spartan Stores - price has been hit but revenues haven't - a potential swing play and for sure a buy on any decend dip.

Steel dynamics - expecting first profitable quarter in 3 quarters - should be interesting if they miss it.

CIT Group - wouldn't touch it with a bargepole.

Cypress Semiconductors - another economic bellweather. shorts down to 16% from 18%

Herley industries - earnings are up but only slight price recovery. Maybe nice if they beat...

Lots of these are good for guaging the economy - Harley Davidson, IBM, Knoll, Southwest - all for different reasons. You have to ignore things like Healthcare as they trot on regardless.

Aaah well - this should all be academic by Friday...