Wednesday, October 07, 2009

Let's Get Ready To Rumble

Alright, let's get ready to rumble. After a few months of "liquidity" being the only fundamental that appear to matter, equities at last start getting some other types of signal as earnings season kicks off with Aloca tonight.

But first, the undercard. Although the story first circulated yesterday afternoon, it's only this morning that the situation in Latvia has started to receive much attention. Essentially, the government is mulling plans to make it easier for homeowners to "DK" their mortgage payments and remove some of the lenders' power of recourse to evict delinquent mortgagees.

This is being interpreted in some quarters as paving the way for a LVL deval; the SEK is modestly weaker as a result. The great irony, of course, is that the bone-crushing recession which has hampered homeowners' ability to finance their mortgages has, at the same time, vastly improved Latvia's current account balance, pictured below. On the face of it, that would appear to forestall the need to devalue in the first place!Other than a little rally in EUR/SEK and Latvian CDS, however, markets have largely shrugged off the Latvian story. The real main event is earnings season, which kicks off after tonight's close when Aloca releases Q3 earnings.

Regular readers may recall that Macro Man threw a hissy fit after the Q2 report, in which Alcoa's accounting department gave their income statement a world-class shiatsu to deliver better than expected operating earnings (while generating worse-than-expected GAAP earnings.) Analysts appear to expect some chance of a return to the massage parlour; according the Bloomberg consensus, GAAP earnings are pegged at -$96 mio while operating earnings are at -$82 mio. (Strangely, GAAP EPS is -0.05 while operating EPS is -0.09. WTF?)

What's more interesting to Macro Man than the lying clever accounting is the expectations management performed by all comapnies in the run-up to their earnings releases. You can clearly see this for Q2; the chart in the upper right hand corner shows how the consensus forecast for AA fell in the few weeks before earnigns were released in July- and this despite a rallying equity markets and green shoots fever!
This quarter might be a bit more of a challenge; as the chart below demonstrates, the consensus has ticked higher over the past several weeks.
Now, Macro Man doesn't know if that holds true for the SPX in aggregate; given the uptick in 2010 earnings estimates, however, he suspects that it does. In that case, Q3 earnings face a substantially higher hurdle than the apparently massaged-lower Q2 consensus.

The naturally bearish conclusion is that disappointment is therefore more likely. By the same token, however, if Q3 earnings do exceed consensus by a comfortable margin, it could set the stage for a slingshot higher into year-end. Macro Man plans on staying nimble and playing the data as it comes.

In any event, we'll know more in 11 hours or so when Alcoa kicks off round one.

Paging Michael Buffer...

23 comments:

Anonymous said...

Ugh. The price action in equity indices seem to be tracing out a broadening formation, which implies greater volatility and a certain degree of instability. Tough tape...I can see arguments for (i) stocks doing a moon shot through the recent highs (ii) stocks making resistance near the previous highs and breaking down.

Anonymous said...

I can see “the FED being independent” debate coming to an end. Don’t know which end, though...

Anonymous said...

We'll most likely get some sort of parabolic rise into and beyond "mania" status, before the whole house of cards comes crashing down again like it did last year.

Don't fight the Fed?

Nemo Incognito said...

Nos are going to be good. Check of MBALUMIN Index. The primary metal biz is coming back nicely, that's why Alumina is up so much. Downstream stuff has had so many costs ripped out its probably going to be okish too.

Ponzi me up baby.

Anonymous said...

Are there really so few European readers/commenters? Seems all the comments appear in the US morning!

Is there a geographical breakdown of readership? Just curious.

PPM said...

Let's just assume that the gold bubble really starts to inflate. Anyone care to offer some valuation metrics, or technical indicators that can be used to determine when to sell into the rally? I'm thinking that the best "fundamental" metrics (a difficult term to use with gold) is price in units of other commodities, such as barrels of oil, tons of wheat, copper etc.

PPM

Gregor Samsa said...

anon 1:31, nothing of intereset happens in Europe until the US markets open. They might as well shut down the exchanges.

Crisis Management said...

Another leaked story from inside the Pentagon, this time an ABC story about a "gargantuan bunker-busting bomb called the Massive Ordnance Penetrator (MOP)." The department requesting this device has "responsibility for Iran and North Korea."

US/UK/Israeli governments are leaking like a sieve. Appears that the intel guys are deliberately putting these stories out.

Steve said...

Gregor is your favorite economist Steven Roach?

Nemo Incognito said...
This comment has been removed by the author.
Nemo Incognito said...

MOP? ante up

Crisis Management said...

Someone is sure ante'ing up on the long end today and in yen as well.

Nemo Incognito said...

I'm cutting and running - its been a fun 2 weeks but post Alcoa the risk on trade doesn't look so hot. Also getting way too close to my anticipated trade fight in December. Sitting on my behind in November is looking really good.

Gregor Samsa said...

@Steve, you mean the Stephen "economic armageddon" Roach? Well, if someone had bothered to ask me fifteen years ago, I might have come up with the same prediction. If I had already been changed into a monstrous gold bug back then, it might have saved me some trouble.

Skippy said...

Do any equity specialists have a view on Alco's result?

Anonymous said...

http://www.youtube.com/watch?v=1bLWrPenD4A

Anonymous said...

I´m not specialist but looks to me that Alcoa had some good factors to the profits. Had good prices in energy costs, cuted employee costs, rose margins and made operational profit even with falling revenues.

The stocks have one thing in commom these days. They are improving on the fact that costs reduction are getting a good effect in margins. Especially wages and employee compensations.

The unemployment and the falling wages are benefiting the public companys. Even with a general fall in sales and revenues.

In my opinion, that crisis is very hazard to the medium and samll companies. Not to the big, public listed and good companies. Because they aren´t getting crushed as suggests the fall in earnings. Some survivors will be cash cows in close future.

Let me share one thing. Crisis are good to the long term investor who focus in value and not in macroeconomic variables and data. Macroeconomic data and variables are noise to the real equities investor. Thats why a lot of macroeconomic speculators and investors loose in the long run when they work with equities. Because they focus in the wrong data to be profitable. Except in special times.

In my opinion Alcoa results were good and can be a short term boost to others stocks in the same sector.

Anonymous said...

I forgot one thing. I dont have any shares of Alcoa or others in the same sector. I dont sell advice or I try to sell. I`m not specialist and all my opinions are simple that: opinions. Not more, not less.

I invest and trade stocks for living. Just that. And I never follow others opinions so I expect the others do the same. I think who invest, trade and speculate with others opinions are loosers in the long term.

Thanks in advence.

Anonymous said...

Any chance that the collective "we" might get more focused on revenue and not slash and burn cost cutting this reporting period.

Alcoa proved they can make a profit - just fire 18,000 people.

Skippy said...

Thanks for the opinions on Alcoa

How about those commodity currencies again this morning. The DGDF crowd must be very excited?

Nemo Incognito said...

And whaddya know, the primary aluminum/alumina biz did a 360 and we're back off to the races.

The Oracle said...

I am thinking that with the carry trade no longer the gift that keeps on giving to devalue the yen, the main instrument left is to purchase US Treasuries. Could the dollar devaluation be continuing to bring the Japanese industrialists into a world of pain until they resume large scale US debt purchases?

Anonymous said...

And weak dollar ,off we go again