Earnings & Reactions: CostCo versus Alcoa

We’ve been watching the firm bid under the market with detached amusement. The liquidity-driven rally is now firmly detached from the fundamentals, and will likely continue that until the Mid-Term elections are over.

A reader suggests that recent market headlines remind him of the Chicago Cubs:

Ace Pitcher Prior Strikes Out 18! 

But then you read further down into the article: But Cubs still lose 2-1. (If Cubs fans can wait for over 50 years, then we can only guess how long the markets will stay irrational for).

Let’s look at the earnings picture more closely: Dow component Alcoa missing badly on softening demand for metals (Gee, what might that mean to the economy?), markets looked past a miss by a major bellwhether and a key economic indicator to focus on Pepsi and CostCo.

Consider: Pepsi 3Q Profit Rises was the headlines; But deeper into the report, we learn that the profit increase was in comparison with last year’s results, depressed by a large tax charge. Similarly,  Domino’s Earnings Rose 21% headline was primarily based on European  growth; In the U.S., the company saw a decline in sales, with same store sales off 3.1%. (What slow down?)

Meanwhile, despite all the hoopla over technology and semiconductors, Chip companies have been warning left and right. Both Intel and AMD expect revenues to be down 14% from a year ago.  On the warnings, the SMHs have been rallying.

But the biggest earnings goof was Costco — earnings rose a paltry 1% in Q4. The headlines trumpeted the beat ("Costco earnings up unexpectedly") — but then we read on: The company only recently lowered expectation for Q3 & 4, as sales have softened. Their unexpected beat-the-number was based on 3 items 1) a one time tax benefit; 2) lower-than-expected worker’s compensation costs; and (my favorite) 3) Unexpectedly profitible gasoline sales in the last week of the quarter

I am not at all suggesting that earnings are god-awful — they still look to be up double digits on a year-over-year basis. But this quarter saw more preannouncements, more misses, more reduced guidance than prior quarters. Its exactly what you should expect for a slowing economy.

There is not a whole lot of room for any misses. The S&P500 trades
at 18 times trailing earnings; The Russell 2000 is 35 times.
Bellwhether General Electric (reporting soon after I write this) trades
at nearly 23 times earnings. Even if earnings come in as consensus,
this market ain’t cheap

If you think earnings are the basis for this rally, then you have not been paying attention. The rally we are witnessing is not fundamentally driven, nor is it forecasting an economic soft landing. It is a liquidity driven effort that I do not expect to last until year’s end.

Happy Friday the 13th . . .


Next week, we will hear from Intel, IBM and Yahoo on Tuesday;  Apple, eBay and JPMorgan on Wednesday,  Honeywell on Thursday, and 3M on Friday.


UPDATE: October 13, 2006 7:12am

I am trying to get a handle on GE’s earnings today (49 cents share consensus), which has been reported as 48 cents, a one penny miss. But the original headline I saw said 49 cents.

The WSJ writes:

The Fairfield, Conn., conglomerate posted third-quarter net income of $4.96 billion, or 48 cents a share, from $4.68 billion, or 44 cents a share, in the year-earlier period.

CNN is reporting 49 cents per share:

The diversified conglomerate, the No. 2 company in the world in market value, earned net income of $5.1 billion, or 49 cents a share, in the period, up from $4.6 billion, or 43 cents a share, in the year-earlier period. Analysts surveyed by earnings tracker First Call had forecast earnings per share of 49 cents.

I haven’t drilled down yet, and I will be away from the screen for a while, so if anyone can clarify this, please do so in comments.

Category: Earnings

Blog Spotlight: Capital Spectator

Another edition of our new series:  Blog Spotlight.

We put together a short list of excellent but somewhat overlooked
blog that deserves a greater audience. Expect to see a post from a
different featured blogger here every Tuesday and Thursday evening,
around 7pm.

Next up in our Blogger Spotlight:  James Picerno is the editor of The Capital Spectator (capitalspectator.com), a blog focused on economics and investment
strategy. He is also a senior writer for Wealth Manager, a trade
magazine for financial advisers to wealthy individuals. He has been a
financial journalist since the late-1980s.




Today’s focus commentary looks at:



The head of the self-proclaimed "authority on bonds" says the rate hikes are history. PIMCO’s Bill Gross wrote in his October Investment Outlook that "the Fed is done and ultimately will have to lower interest rates in order to restimulate an asset based/housing led economy that has been its primary growth hormone in recent years."

The underlying assumption in his projection is that inflation is "leveling off" and the economic growth rate is "moving towards a 2% real growth rate or less in the next year or so…." As such, the Fed "at some point in 2007 will be forced to cut short rates." Timing and magnitude are yet to be determined, he adds.

In fact, the future may be more complicated than it appears. Economist Robert Dieli of NoSpinForecast.com documents the finer points of this complexity by plotting the history of economic cycles against instances of inverted yield curves. As he illustrates in the chart below (which, alas, we’ve squeezed a bit from the original to fit into the confines of CS), there’s a lengthy history of yield-curve inversions accompanying economic contractions and a drop in the Fed funds rate shortly after the yield inversions arrived. But that doesn’t mean the past is prologue, at least not a prologue that’s clear and obvious.


Read More

Category: Blog Spotlight

Buy Versus Rent Spreadsheet

Category: Consumer Spending, Data Analysis, Real Estate, Web/Tech

Earnings Season Begins with a Miss or 3

Category: Commodities, Earnings, Investing, Markets

Bloggers Take On: Employment

This is another of our new features: Blogger’s Take. It is inspired by — a nice word for stolen — the WSJ’s Economist’s Take, which they post after major economic data releases.

We wanted to do something a bit more informal: Looking at different subjects a bit more in depth, and take in some perspectives from a broad variety of bloggers (as opposed to a narrow slice of Wall Street Dismal Scientists.

Here are our first half dozen responses to the question: "What Up With Employment?"

"A striking characteristic of the US non-farms job data since the trough of 2002 is that recovery growth is the weakest since records began in 1939 (uncertain BLS September revision notwithstanding). Even the brief and frail recovery between the 1980 and 1981 recessions was stronger. It may be that growth has not yet peaked – but that would make this jobs recovery the slowest to pan out on record.

Moreover, the latest non-farm payrolls data paints a picture of deterioration, particularly in construction and related industries. Whilst both the unemployment rate and hourly earnings data stuck out as good news, the fact is they are lagging indicators. The Fed has ammo to hold on this data; but should coming months show job losses (not outlandish) they might still choose to wait on clearer inflation (and BLS) data before contemplating the wisdom of cuts."

- Rawdon, Capital Chronicle

Read More

Category: Blog Spotlight, Employment

10/11/06 upside down is 9/11/01

Category: Data Analysis

Comparos to 1973

Category: Economy, Investing, Markets, Psychology, Technical Analysis

When Does the Fed Cut With the Dow at or near Record Highs?

Category: Economy, Federal Reserve, Markets

Zero Sum Game (ZSG)

Category: Data Analysis, Economy, Taxes and Policy, Wages & Income

Blog Spotlight: Capital Chronicle

Another edition of our new series:  Blog Spotlight.

We put together a short list of excellent but somewhat overlooked
blog that deserves a greater audience. Expect to see a post from a
different featured blogger here every Tuesday and Thursday evening,
around 7pm.

Next up in our Blogger Spotlight: RJH Adams (known as Rawdon) of Capital Chronicle. Rawdon was raised in a tiny emerging economy, and his professional life began as a dogsbody at the UK’s economics and finance ministry, HM Treasury. He subsequently moved to the finance functions of multinationals Xerox (UK) and General Electric (France) learning from the inside what making quarterly numbers really involves. In 2000 he left and co-founded an investment vehicle. He lives in the French Alps splitting most of his time between raising three small occasionally charming children and reading about economic development and investment."


Today’s focus commentary looks at:

How good is the Baltic Dry Index as a proxy for global economic activity?                        

Conclusion: Still worth looking at – but with a proviso since 2006.

China moves in 2006 to being a consistent net exporter of steel its
influence over an important driver of the Baltic Dry Index (BDI) – iron
ore for steel production – grows. But China’s massive growth in steel
output has come in large part though government intervention. This, to
some degree, is distorting the underlying freight rate picture.

what degree is key. The level and volatility of the BDI is influenced
not only by total commodity demand but also by fuel costs, seasonality,
fleet numbers, route bottlenecks and sentiment. These additional
factors should temper conclusions about the relevance of China’s steel
activities on the level of the BDI.

BDI has in the past been helpful to assessing global economic activity.
It is, after all, a reflection of real prices paid to ship production
inputs across the globe. Since March this year the index has been on a
tear, rising 70%, or 1,750 points.

Read More

Category: Blog Spotlight