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

__________________________________

What do you think about this post? 

Let us know in the comments 

__________________________________ 

The Markets Are Alive With the Sound of Manipulation

23 June 2010 / Issue #50
Andrew Packer

My dad may be the one who taught me all I needed to know about finance, but my mom taught me how to gracefully handle being self-conscious. You see, like many parents, she has a knack for telling friends embarrassing stories about me.

For example, growing up she’d often tell my friends about how I watched the movie The Sound of Music every day when I was five years old. This was a bigger embarrassment when I was a teenager, but as an adult, it still throws me off guard.

Now, I really don’t want to contradict my mother... nor do I want to confirm anything embarrassing she has to say about me.

But what I AM going to say is that one particular scene from that movie has been stuck in my mind lately. Why? Well, on Monday, the market opened up huge — but gave back all the gains later in the day and closed pretty flat. A smaller version of this erratic market happened again yesterday... The day opened with a rally but fell apart, sending stocks below their 200 day moving average (the technical trigger traders refer to as bear market territory). And with such little trading volume, it’s apparent to most major players that 'quants’ (the folks who program and run computerized trading programs at major firms) are clearly in charge.

Seeing the attempts to continue manipulating the market upwards reminded me of one particular movie scene... ...only without the merriment.

It doesn’t take much to manipulate a market in this low-volume environment. And I can prove it to you. If I really wanted to, I could drive the price of Citigroup up 50%. And it would only set me back around $600. It’s currently trading at $4.00 per share, so if I put in an order to buy 100 shares at $6.00, I’m sure there would be plenty of shareholders willing to sell at that price. Of course, it’s silly to waste money like that.

But in theory, buying at that price may mislead others into thinking Citigroup is a worthy investment. Who knows, by the act of overpaying for those shares, the perception of increased value may result in that higher price sticking! And when perception is reality, it’s best to be wary of markets. That’s when the manipulation is the worst.

And it happens! Just last week, the new 'circuit breakers’ in the stock market kicked in when a few trades in the Washington Post Company (WPO) came in at more than double the prior price of the shares.

__________________________________

What do you think about this post? 

Let us know in the comments 

__________________________________ 

* If you enjoyed this post why not subscribe to the RSS Feed or email?