On Friday, the 18th, we got a good report from GE and I said "Maybe things aren't so bad."
Here we are less than two weeks later and now Disney, another mega-corp is telling us things look pretty good in the Magic Kingdom as well. LVS just let us know that the China growth story is not overblown as their Asian operations beat all cash-flow expectations, even as the US gaming market came in weak. This week we've had beats from AHCI, BEAV, CLX and HUM, APC, BSX, EFX, RCII, SGTL, SOHU and YUM on Monday, AVP, CME, DUK, TYC, WHR (huge beat!), AMX, CNET, JDSU, NBR and RENT yesterday and this morning, in addition to DIS, we are already getting good results from LNT, BIIB, DVN, PXD, SLE, TWC and TEL
What kind of recession is this??? SHOW ME THE MISSES!
While a recession makes great news fodder, if we're having one it's pretty darn mild so far and, if you stop to consider the total disaster in the Financial industry that's dragging down everything we do and the bursting commodity bubble that's been long in coming then all we are really left with is a nice, orderly rotation out of those two sectors and into – everything else…
As I mentioned in yesterday's post (ahead of the massive drop in the energy sector, thank you very much) oil is on it's last legs and there is nothing that OPEC or Shell's Nigerian rebels are going to be able to do about it as the surplus production capacity is now well over 5% of global consumption and that consumption is declining, recession or no recession. You can manipulate a market all you want but one day, that nasty old supply and demand equation catches up with you and you'd better not be left holding the bag when someone finally opens your closet (or checks tanker traffic reports) and finds an extra Billion barrels of oil sitting around.
We still have over $4Tn trapped in the energy sector roach motel and it's getting a little crowded in there and this recession talk has got to have people who have been paying incredible p/e's for companies like UPL (52), SWN (51), HK (32), EOG (22) as if they were tech darlings just a little bit nervous – especially considering how poorly the tech darlings have been treated lately!
O&G equipment and services have a AVERAGE p/e of 22, just a bit better than the software sector's average of 27 and more than double the average p/e in the financial sector of just 10.72. As money moves out of the markets and itself becomes a scarce commodity, all investors need to pay close attention to the real returns (the price/earnings ratio) of their holdings versus the relative safety of the bond market. I have been saying for some time that if you were to plot an overly that tracked the XLE to the XHB, you'll get a pretty good look at the future path of the energy sector, who are also selling an overly inflated commodity fueled by irrational speculation and easy money policies. Even though the money policies are still easy – without the speculation, the decline of oil may make housing look like a picnic.
As expected, it was no picnic in Asia as the Hang Seng and the Nikkei both tested the 5% rule for the day and ended up right back where they were at last Wednesday's close. As Sage pointed out in yesterday's comments, that's a 10% round trip in 5 days – I wonder what their VIX looks like?!? The Hang Seng was so exhausted from all that action that they are taking a vacation for the rest of the week (Chinese New Year) so imagine having your cash tied up over there today… We got a good report from TM that was met with investor scorn yesterday and Mazda just put in solid earnings with 7.1% growth so again, I have to say, show me the recession!
Europe is fairly flat ahead of our open and their service sector also had a rotten month with retail sales falling 2% in December vs. the prior year. Yes, surprisingly even European consumers have to eat food and cook it with gas or electricity and turn on some lights and drive to work and all that stuff WAS FREAKIN' EXPENSIVE in December and may have altered global consumer spending habits because the $15 rise in oil from Dec 1st to Dec 31st cost global consumers over $50Bn (refined) THAT MONTH ALONE. With home equity lines shut off and housing prices in decline the only thing I find shocking about the decline in consumer spending is the shock expressed by the analysts who didn't see this coming.
Other than SHLD (who got too cheap) and WMT (who we love in a recession) we did not have one, NOT ONE retail stock in our virtual portfolios at the close of the year. Did we really have to wait for results to see that shoppers would be under pressure this year? Again, this does not necessarily point to a recession the same way that a hurricane can't wipe out a city (unless the national guard is away fighting a pointless war and the President fails to muster the resources necessary to rebuild the ctiy before the infrastructure collapses and jobs fail and the economy spirals out of control and people are forced to leave to find work).
All it takes is a little leadership and we can get through this economic crisis. I laid out my plan to save the housing market last week and I'm actaully starting to have a few meetings to see if we can mobilize private industry to do what our government can nor, or will not do to help the 7,000 families a day that are being thrown out of their homes. Where is the mainstream media on this? Why are we allowing Congresspeople to put their heads on their own pillows at night without images of these people being the last thing they see on the news each and every night until it starts to bother them? The press used to be the conscience of the nation – but that was before it became nothing more than a vehicle for selling "male enhancement" products and various happy pills!
Anyway, TWX just gave us evidence that Yahoo isn't the only loser in the Internet wars as AOL dragged down the whole company's earnings. Productivity numbers were down in Q4 (also Duh) but costs were contained and that's very important. Let's not get too excited about a "rally" that doesn't at least recapture half of yesterday's losses so we'll be looking for 12,450 on the Dow, otherwise it's going to be cover and cash as we celebrate the Chinese New Year.
