Market Update - July 15th, 2010 - Investor X

MARKET UPDATE 

July 15th, 2010 

Investor X 

Yesterday I ended the Market Update with the following statement: 

“If aluminum is a proxy for the overall health of the economy going foreword, what is the real message being broadcast here? In my opinion, it is showing weakness in the overall economy and that will become apparent by other numbers and statistics as they are reported. Stay tuned; we may be watching a whip saw unfolding here.” 

Today some of those conflicting numbers were reported, which are indicating deflation and a slowing economy ahead: 

NEW YORK (Dow Jones)--U.S. stocks skidded Thursday after a barrage of largely negative economic data stunted enthusiasm over the recent spate of strong corporate earnings. 

NEW YORK (MarketWatch) -- U.S. stocks dropped sharply on Thursday after another economic report, this one on manufacturing in the Philadelphia region, dimmed views of the recovery.... 

Producer prices fell for a third straight month in June...U.S. stock markets headed lower Thursday morning after the Labor Department said producer prices fell 0.5 percent June, signaling a slow economy. 

BEIJING (Dow Jones)--Steel product prices in China are falling close to cost price for producers and only some of the biggest domestic steelmakers will be able to squeeze out a profit on their goods, a senior Chinese steel official said Thursday. 

The above news indicates deflation and a double dip (depression). Lowering estimates before companies report bad earnings is an old trick that has been used by Wall Street for years. It works quite well in a growing economy and a bull market. However, we are in a shrinking economy and a bear market and so my expectation is that these old tricks will not work in this environment, because there are too many statistical tracks that must be covered in order for it to work. We will see – stay tuned for more economic data in the coming weeks. 

Regards,

Investor X

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Market Update - July 14, 2010 - Investor X

MARKET UPDATE 

July 14th, 2010 

Investor X 

The earnings season started off with a big bang yesterday as good news from Alcoa sent the markets rallying. Aluminum and copper use is so widespread and spans so many industries, especially the construction industry, many analysts view Alcoa’s performance as being indicative of the overall health of the economy. So, what was the good news reported from Alcoa? 

Alcoa cut 37,000 jobs, aluminum prices have dropped 20% in just the past three months as demand has dropped off a cliff, China has significantly reduced its purchases of aluminum and analysts estimated that Alcoa’s earnings would be 20 cents a share. Alcoa reported earnings of 13 cents per share or 35% below analyst’s expectations. As a result of this good news, Alcoa’s stock price charged ahead by nearly 4.5% at yesterdays opening. 

You say, “What is so good about that news?” Oh, I forgot to mention that the 20-cent analyst expectation was the expectation reported last month. During the past month however, analysts have been busy reducing their expectations by 40% so by the time Alcoa reported its earnings of 13 cents per share, analysts expectations were 12 cents. This beat analyst’s expectations by a penny and that is the good news that was the catalyst for yesterday’s rally in the markets. This just goes to prove that if you lower the bar far enough, any bad news can become really good news. 

The reduction of analyst expectations before earnings are reported is a game that has been played on Wall Street for years. However, a 40% reduction in one month is a tad much wouldn't you say? If aluminum is a proxy for the overall health of the economy going foreword, what is the real message being broadcast here? In my opinion, it is showing weakness in the overall economy and that will become apparent by other numbers and statistics as they are reported. Stay tuned; we may be watching a whip saw unfolding here. 

Regards, 

Investor X

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