And they're off!
Already we have disappointing earnings from Dow component AA as rising enegy costs outstrip record high aluminium prices (which are temporary due to China production shutdown during winter storms). As I said in last night's post, as well as early on in March, a $50 increase in the price of oil since last Q1 has already done more than enough damage to the global economy – I think earnings of the industrials will hammer home the point that we cannot absorb higher energy costs anymore.
I'm not as concerned about AMD, who sees Q1 revenues down 15% from Q4 because, like GM, they are a pointless company who the markets have passed by quite some time ago. Cramer calls them "zombie corporations," the walking dead of the stock market. With a $3.4Bn loss in 2007, less than $4Bn in tangible assets and $5Bn in debt, I don't think news that AMD is having trouble justifying a $3.8Bn market cap (down from $26Bn in early '06) is going to be a big shocker…
Also on tap this week (that we care about) are earnings from ZZ today (discretionary consumer item), CC, MTG, PGR and SGR tomorrow morning and BBBY tomorrow night. Thursday we have RAD and CBSH in the morning and DNA after hours with the big Kahuna, GE, reporting Friday morning, making everything else sort of meaningless. Next week is much more exciting but let's get through this one first!
On the data side, today we get FOMC minutes at 2pm and pending home sales at 10. Tomorrow we get Wholesale Inventories and Crude Inventories and Thursday we see the usual jobless claims (which have not been rising as fast as unemployment) along with the Trade Imbalance and the Treasury Budget (or lack thereof). Friday finishes the week with the very potentially scary Import and Export Pricing figures along with the Michigan Consumer Sentiment numbers, which are pretty unlikely to go up along with the 10% increase in gasoline prices they got hit with in March.
So it's going to be a tough week and next week is options expiration so buckle up kids, it's going to be a bumpy ride! We had plenty of thrills and chills yesterday and thank goodness we weren't buying that "rally" or that sell-off might have hurt but we were not only well covered but well-poised for the dip. I am sitll long-term bullish but that doesn't mean we don't have some rough waters ahead before we get to the scenic part of our tour. Earnings are like rocks under the rapids, you never really know how much each one is going to hurt until you run right over it.
Asian markets pulled back about a point this morning on the AA and AMD news with the tech sector getting hit very hard. The Yen's strength continues to hammer exporters, including our beloved TM and SNE, who no one seems to love but I am warming up to. SNE, like TM, makes a nice recovery play on the dollar and they shouldn't have a hard time beating the loss they took last Q1 when they report (date unknown). I'm going to initiate the 2010 $40s for $9.85 (hopefully less) and this will be the first pick in the Stock Club Virtual Portfolio, which launches today. Generally we will not be announcing these postions to non-Stock Club members but it's also a good play for the LTP in general but we are legging in slowly and selling 1/2 the May $40s, now $3.75 as immediate cover.
Europe is also down 1% ahead of our open (7:30) with Tom-Tom Navigation dropping 11% after warning on revenues and margins, something which could hit GRMN hard as well. GRMN is already down over 50% from their October highs so their 4/30 earnings will be very interesting as GPS systems are certainly discretionary electronics.
England was no hope with home prices dropping 2.5% in March, the worst decline since 1992. British economists were predicting a 0.4% decrease so they are just as clueless as our economists are when making forecasts. This is quite the acelleration from the 0.4% decrease in February and does have the silver lining of giving the BOE an excuse to cut rates on Thursday and boost the dollar.
Less than 1/3 of UK business owners think it's a good time to be running a business and our own National Federation of Independent Business' Optimism Survey dropped from 92.9 in March to 89.6, down from120 last year. Still, keep in mind our goal for the year is to simply suck less than other places where investors might put their money – we don't have to win, we just have to lose with style!
My favorite thing about our current energy crisis is that it's a completely false one, created by a combination of government demand and speculation that has nothing to do with long-term fundamentals. Much like tulips in Holland or $1M condos in Maimi, these scams ultimately fall apart under their own weight once they have sucked up all the suckers' money. You can hear the drums banging in the media and CNBC has, in fact, now started telling their viewers to start prospecting for gold – hardly a smart career choice for their demographic group…
Meanwhile, my alma mater published a nice paper on sustainable biofuels and has been making steady progress on what is called "green gasoline," fuel that is very similar to gasoline that is easily distilled from sustainable biomass. We can see from the great run the solar industry had this week that money is pouring into that sector and these are wheels that have been set in motion that will not be easily stopped.
In addition to the development of alternate energy sources we are finally approaching the end of the supply-side energy administration, that has been operating under the theory that the more money we throw at OPEC the better, we have a very good chance of replacing this administration with a full Democracy in the House, the Senate and the White House that will hopefully pass some very simple consumption taxes that can very quickly knock 1-2M barrels a day off US demand. Add that to a refusal to fill the SPR and a scaling down of the 400,000 barrels of oil a day consumed by our military and we could be heading into a massive supply glut of oil as early as next summer.
So think of $100 oil as an option that is expiring in 12 months, a scam that cannot sustain itself with over $2Tn of speculative money keeping it afloat beyond all fundamental logic. Much like the $1M Miami condo, you know it's a ridiculous price to pay but you pay it as long as you think there is an even bigger idiot that you waiting to pay $1.2M for it when you sell. At some point, a little boy in the crowd (perhaps some financial blogger) points his finger and laughs because, very clearly, the emperor has no clothes and once the crowd discovers the charade there is nothing a leader can do to get the public to accept the illusion again.
We've been shorting energy stocks into the rallies and it's going to be a long, hard road to ride out the shenanigans but, from a year-long investing horizon, I am very pleased to call a top here for energy. It's over, they have bled the people dry and they have nothing more to give, they can spike the prices here or there but the tides are moving against them and soon the people will realize there is more money to be made on the downside than the upside in the energy markets.
