The Earnings Shell Game

I've been putting bits and pieces of passing news in my rather short term memory bank, but the trend is something that my long term memory bank remembers pretty well.

So AA is kicking off earnings season, but how many of us remember what has happened running up to earnings season?

Remember the song, "What have you done for me lately"? Earnings are about expectations, the entire market is about expectations or you might call it sentiment. So is a beat really a beat when the bar is lowered significantly enough for a step to look like a high hurdle?

As of last Friday, 130 of the 500 S&P companies pre-announced among a back drop of analysts lowering expectations. Of the 130 S&P companies, 99 of them, almost 20% of the S&P came out with negative pre-announcements, only 30 were positive.

Thompson-Reuters did some simple math and added some historical perspective. The ratio of negative to positive pre-announcements is 3.3 (99 divided by 30) thus far. As for the historical perspective, 3.3 is the largest Negative/Positive ratio since Q4 of 2008 during the midst of the recession.

The thing is, many unsophisticated investors are headline scanners only, they see a beat and they buy, but did they remember the lowering of guidance several weeks earlier?

It should be an interesting earnings season as Wall Street plays the shell game.

Since AA is in the commodity space, lets look at the trend there.

It's not looking good for the 4th quarter, especially on a year over year basis, but can they spin this in to something positive?

As for AA, they should have reported by now, let's see what they came out with....

A fourth Quarter loss of $193 million. Last year AA's Q4 was $258 million in profits, that's a turnaround y.o.y of $451 million!

Revenue however was up this quarter 6% to $5.99 billion vs a year ago at $5.65 billion. That's 6% and below the double digit returns the S&P s normally expected to produce.

Consensus was for a loss of $.02 a share on revenue of $5.72 billion, they came in at a loss of $.03 per share (missed there) but beat on revenue at $5.99 billion and what everyone wants to hear at least until it's lowered several weeks before the next report, they expect a rise in demand of 7%.

The shell game part is kind of neat..

AA on a operational basis, meaning no accounting gimmicks, lost $.18 a share and that on higher revenue! That's called a margin squeeze, but to make sure no one other then a PhD in Wall Street accounting can really figure out what to make of this report, Alcoa added $232 million in restructuring charges and extra costs for this quarter alone. Hmmm.

Based on Cap-Ex, Alcoa spent cash this quarter, maybe I'll take back the part about a margin squeeze, it's a bit worse then that when they're burning through cash to keep the smelters running.

One curious bit caught my attention, they are forecasting 7% demand growth and a GLOBAL aluminum supply deficit in 2012.

Kleinfeld the chairman/CEO said, “For 2012, we expect global aluminum demand to grow 7 percent and are forecasting a global deficit in primary aluminum supply.”


The 7% demand is above AA's 6.5% demand that is needed to justify AA's forecast of a doubling of global demand between 2010-2020. Sounds pretty good then right?


I wonder why AA announced yesterday that they'll be shutting down smelters?


Here are some more being shut down.


AA is pretty much flat in after hours, which may explian why I couldn't find any real earnings edge in 3C before the close.

Reminder...

Alcoa kicks off earnings season after the bell

NFLX Chart Request

I was asked about this chart in an email today and thought I'd share it with everyone as there are some interesting things on the chart we can learn from.

 On the daily chart, NFLX (which in my opinion is a horrible service- there are several services I access through my PS3 that have much better movies and I'm willing to pay more for them, even the RedBox and BlockBuster Kiosks have better titles and they are reasonable) is clearly in trouble. At the first red box is a genuine breakaway gap, it is not filled and this is the most bearish gap you will see, there's actually another earlier in July and another in August. The more slender (second) red box is typical of an exhaustion gap on the biggest 1-day volume, it is also called capitulation or a massive shakeout of longs. Typically this is the end of the downtrend, but price almost always drifts lower. At the white arrow volume drops way off and the price trend is lateral, this is accumulation breeding ground which in a 4 stage cycle (accumulation, mark up, distribution/top and decline) would be considered stage 1 accumulation and it is apparently on foreknowledge of a possible buyout that only came to light later. After stage 1 accumulation is complete, Wall Street finally wants to draw attention to the stock, this probably came on news of a buyout rumor although I haven't checked when that news hit. So no we are in stage 2 mark up. The big green volume IS NOT institutional money buying, they did that in the quiet of the white arrow area. It's hard to say how long stage 2 mark up will last, but most technical traders mistake the large green volume as institutional buying, they don't buy in to rising prices, they sell in to them, it's all supply and demand and they buy in to supply and sell in to demand.

Stage 3 would be distribution. Where ever their average accumulated price is, they are definitely at a profit now, they need to let out distribution a little at a time as to not kill rising prices.

 Here's the accumulation area seen clearly on a 30 min chart, it was strongly leading before price ever moved up.

 Short term we can see distribution, I would think these are smaller block trades as they let go of some of the accumulated shares. They have a huge long position and they need demand and rising prices to continue to sell in to it. If they tried to dump large blocks they would send price lower.

The 15 min chart is just starting to show some distribution, but I would say that they are not done. I would expect a pullback as they don't want a overbought condition to sink prices either, then the next leg up I would expect more distribution. When this 15 min chart starts leading negative and other timeframes align, that may be the time to look for a short opportunity, it is not now though unless you are looking for a swing counter trend pullback play which is dangerous here.

I would think a pullback won't break below the hourly trend channel yet. Subsequent pullbacks should be deeper and may move toward the 10 and then 22 day moving averages, it may even be a buying opportunity for a swing long. I just don't see this as being ready for any short set up, although there is evidence that distribution has begun.

CONTEXT & Credit/Risk basket

 CONTEXT is showing ES pretty significantly rich to the model, which is based on risk assets that usually rally with ES including Credit and other asset classes. I have my own layout breaking these down to see the particulars.

 High Yield Credit in general has sold off today as the market moves higher recently due to a Euro/USD correlation, this isn't bullish for the market when credit fails to confirm ES as Credit generally leads being a much bigger market.

 The bigger picture shows a dislocation between Credit and ES, these dislocations usually revert to credit and often are good short entry points and also give us a read on the vitality of the move in equities, here it is an unconfirmed move as the credit markets refuse to participate in the rally shown here.

 Earlier the Euro headed down before equities, the correlation between the two brought equities down in the morning, since the European market has closed, the Euro is bouncing slightly which is lifting equities as well as most commodities which have the same positive correlation.

 Longer term the correlation is severely dislocated, part of this may be due to the investor (in my opinion myth) that the US can decouple from the global economy. I think this will be shown to be untrue and what we are seeing is a lag in the US rather then decoupling. As I said last week, if the global economy goes down the toilet, who does the US export to? The US?

 Rates/Yields act like a magnet for equities, they have also recently been selling off as the market remans largely lateral.


 On a larger scale, you can see the relationship, although 3C anticipated the October rally, so did yields as they were trending up while the market was making its low. Since then there have been numerous smaller examples of yields dropping first only to be followed by a drop in equities at each of the red arrows. We are building a much larger longer term dislocation that (if it follows the pattern) would suggest a major adjustment to equity prices.

 Here's the recent trend in Corporate Credit, an obvious downtrend while equities remain lateral, it looks very much like a large short position in equities is being put together as risk in other assets is in the risk off mode and de-leveraging.

Interestingly today (recently over the last week financials have stayed in sync with the market or led it) Financial momentum on this custom indicator is VERY flat and not participating in the equity intraday bounce.

USO Update

USO is moving up a bit, but it doesn't seem out of the recent norm, which is hard to track with the trend channel this early so I'm using a moving average.

 1 min 3C USO positive divergences in white

15 min USO chart with a 50 bar m.a. The recent trend of lower lows and lower highs is what should be watched, USO made a lower low today so it's only normal for it to make what should be a lower high. There's a small gap in yellow from today's open.

As you can see it is clearly a FX correlation based move as the Euro is represented in red.

EDIT

I mistakenly said UniCredit lost about 50% since the start of 2011, I meant since the start of 2012.

Italian Banks Being Ravaged

I rarely post charts that aren't my own, but being I don't have a Bloomberg terminal, I can't show you what you should see.

Here is Italy's UniCredit which has lost about 50% since the start of 2011. Today UniCredit has been halted from trading 8 times due to the declines.

And this is where the ECB's LTRO "Carry Trade" Idea was just as silly and predictable as anything that has come out of the EU. UniCredit actually succeeded in raising $7.5 bn Euros, amazingly and the stock  is cut in half. UniCredit still needs $115 bn more. Maybe out Italian member can find out if and how much ECB LTRO cash UniCredit may have received?

The rest of the Italian financials are down 12-20% for 2012 alone. Here's the Bloomberg chart:

The EU regulators told the EU banks to rase tier 1 capital, since August they have been selling everything not nailed down in an effort to do so, some of you might remember how it bullishly effected the Euro as $USD denominated assets were sold (for example the PrimeX mortgage indices or the F_E_D's custodial account for US treasuries) and Euros were bought to bring them back to the EU banks and the market took this weakening dollar as bullish when in reality what was happening was bearish. The algo's can't think for themselves!

In any case, while these banks are so massively underfunded, I have focussed in on two examples that show what banks are really doing and how it portends toward the future. The first example is the total failure of the ECB's 3 year LTRO which they "thought" would be used by the banks to buy sovereign debt in a carry trade (borrow euro's from the ECB for 3 years at 1% interest and buy Italian 10-year BTPs yielding 7% and keep 6% as profit), instead the banks put the money right back in the ECB's deposit facility, willing to accept a loss just to keep the money out of the market (Euro's borrowed at 1% and sent to the ECB's deposit facility for a .75% interest return= negative .25% just to keep the money safe and shore up their capital requirements). Remember, as of today, the ECB's deposit facility saw a new record of funds on deposit from banks.

The second and less noticed issue was here in the US when we auctioned off 4 week notes with 9 times more bidders then notes available for auction. The interest rate the buyers earned? ZERO PERCENT. The buyers/banks were willing to have their money making 0% just to get it out of the market, but the scary thing is that t was a 4 week note, the money is only safe there for 4 weeks. This happened a few weeks ago, so just what are the banks so afraid of in the near term that they are willing to accept 0% or -.25% rates of return?

At the EU close of trade, Italian 10 year BTPs closed at 7.16% and 533 basis points wider then German Bunds, the second widest spread ever! Just imagine what the BTP's would look like if the ECB hadn't been (and still is) aggressively buying them in the secondary market and perhaps even in the Primary market as there were some anomalies in recent auctions late last year which would suggest the ECB did intervene in the Primary market in which they are banned from buying (via lending to some banks to do the buying for them). The last I heard, the ECB's insane expansion of their balance sheet was 30x leveraged and that was well over a month ago and also at the same amount of leverage that Lehman was at when they failed.

And in some of the oddest news of the day, Greece who may or may not get the latest tranche of troika money to pay maturing debts around March, has spent bail out money on weapons!

From an article at Zeit online:

 "If Greece get paid in March the next tranche of funding of € 80 billion is expected, there is a real opportunity to conclude new arms contracts."

Included in the contracts:

60 Fighter Aircraft

$4 bn Euros in French Frigates

$400 million Euros in French Patrol Boats

Ammunition for Leopard tanks

(2) American Apache Attack Helicopters

$2 bn Euros in German U-Boats

According to the story, after a released arms report, Greece is second to PORTUGAL in being the largest buyer of German weapons.

Remember last week Sarkozy made some statement that was very similar to Angela Merkel's in saying, "Don't take 50 years of peace on the continent for granted" (paraphrased).

AAPL follow up

Unfortunately it takes some time to capture, annote, and post charts. During the time I was posting the AAPL thin ice post (you can see by my screen shots it had not moved at that point), AAPL has made a move below intraday support on some increasing volume.

For those interested in a short entry, I certainly wouldn't be dissuaded by the recent move today, AAPL still remains dangerously in the red zone. Any intraday strength though would make for a better entry, at this point I just don't see it coming.

For everyone else who may not be specifically interested in AAPL as a position, it should certainly be noted as it is a good barometer for the NASDAQ 100 and thus the market being the most heavily weighted stock on the NASDAQ 100.

AAPL on thin ice

Lets just get to the charts on this one...

AAPL's move looked pretty good in the green area, it was advancing, pulling back to wring out overbought excesses and moving higher. In the yellow zone, those pullbacks which believe it or not (they aren't always fun to sit through) are actually healthy for the longer term trend, started to fade away and AAPL started to look wedgie. The Red area is where I consider it to be in a real danger zone fueled most probably only by short squeezes.

 Around the white box, I wrote AAPL looked ready for a bounce. AAPL had a breakaway gap, which is the most bearish gap you will see in the market, although the market has been filling these gaps left and right due to extreme volatility among other reasons, it looked a little out of reach, but last week it became apparent it would fill that gap area and it has done so. Today's momentum is very poor creating what is so far an evening star doji, although price looks healthy, price alone doesn't represent the move, this evening star leaves AAPL very exposed and vulnerable here for a reversal.


 Short term charts are offering no support today as you can see above and below.

 The longer 5 min chart is leading negative and hasn't been supportive in the red zone, which leads me to believe this is a short covering move, which may make for some nice price gains, but doesn't do anything to build a strong base under the advance and again leaves it vulnerable here.

 The 15 min chart looks as it should for the Green zone, in the yellow zone the accumulation period is quite narrow. In the red zone, the 15 min chart is leading negative, implying short selling in to the price strength, a short squeeze creates demand for the stock which would enable Wall Street to sell short in to that demand at favorable prices.

 Longer term, the hourly chart hasn't been supportive of this move at all, so from this perspective, it does look like a forced gap fill/short squeeze and not underlying strength. The yellow box is meant to represent the red zone seen on the first chart.

 My Custom DM inspired indicator has only given 3 daly sell signals, we are in the middle of one right now. You can see the last two very right on track.

 Even more surprising because MoneyStream rarely gives strong signals, but when it does, they tend to be strong, MS is more or less confirming what the 60 min 3C chart was showing, no support for this most recent move up as MS is also leading negative on the daily chart above and the 60 min chart below as well as the 30 and 15 min.

I've urged patience with AAPL as many members have been looking for an entry, but now is the time to pay attention,

SPY Update

Seems like Mer-Kozy's meetings pre-EU summit are failing to impress the market, even on a short lived sugar rush.

 Here are a series of two price patterns, both suspicious from last week, the ascending wedge that was talked about followed by a ascending triangle which was misplaced to be a true ascending triangle. These are some of the reasons I left my BAC short in the options portfolio open over the weekend, even though I had a 5% 1-day gain. At the white arrow we have another tweezer top which is a candlestick pattern that represents resistance. At the yellow arrow, a slight breakout of the triangle which has thus far failed and certainly didn't get to test resistance, the red arrow is the current move lower which is seeing NYSE TICK readings of -1250 (pretty bearish intraday moves) and the white trendline would be the ascending wedge's base, which would be a first target for the SPY/SPX.

 Niether pop in the SPY this morning was confirmed (both n yellow), in fact they were both at negative divergences / distribution areas.


This 5 min chart is more serious and it's leading negative, this is what ultimately swayed me toward leaving the BAC puts in place, along with numerous other observations.

Let's see if we hit our ascending wedge implied target. If you forgot about the predictions made about the wedge from last week, you should take a look back at that post, all of which have come true. This is not because I'm some guru and it's not a lucky guess, t's based on observation of hundreds of these patterns showing up over the last year and I'd say 80% of the time they play out like this (as was outlined before it even began). Here is the post from last week re: the wedge pattern.

USO Update...

Crude has definitely been a tricky asset to follow, everything you see says crude should be sky-rocketting as far as geo-political tensions go. On a more fundamental basis of growth, the argument can easily be made for lower crude prices (for example, a slow down in China-a major importer of Iranian Crude).

The US has been engaged in what looks like some sabre-rattling with Iran, whether it's to exploit the growing rift between the religious hardliners that ultimately set policy and Ah-MAD-inejad or perhaps to exploit what is being called a lame duck presidency as Ahmadinejad tours South American leftist governments looking for friends, it's hard to say, but there does seem to be an element of antagonism from the US. I'm surprised crude didn't move much this a.m. on the announcement that an American born, Iranian descendent, who is an alleged spy for the US has been condemned to death. 

 USO is stair-stepping lower into the gap. There have been a few head fake moves in yellow, but lower it goes.

 This particular head fake move in yellow also created a candlestick resistance zone I mentioned last week called a 'tweezer top' and it held as resistance.

One side of my brain says, Crude must move higher on escalating tensions, even though the EIA has announced over the weekend that strategic reserves from several countries would be released if there were any disruption in the flow of crude. The other half continues to watch the longer term 60 min trend which just hasn't shaped up to a more bullish position, in fact it's been negative for a while and comparing the current 3C position with price levels that are relevant, USO is actually lading negative on the longer term trend.

A gap fill should give us more information on what USO intends to do. However, even today as escalations were ramped up with the announcement of the execution sentence for an American citizen, Crude just hasn't responded.

Wall Street's Leaky Pipes-INHX Deal

I read about some unusual Call buying action in a small stock, INHB, a bio tech. On Friday apparently the  volume of calls was 11,138 vs 937 puts, a curious day for the small stock's options. It turns out over the weekend, it was announced that BMY bought the small company for $26 a share, it closed Friday at $9.87.

I decided to take a look a 3C as I always like to follow these apparent leaks, here's what I found.

 Both charts show strong accumulation since mid-December as the stock traded down, and note the accumulation on two parabolic drops (white boxes around price).

Here's the stock today...

Up nearly 142% in 1 day.

Between the options activity and the 3C charts above, you can make the call. The real question is whether Mary Schapiro will be making any calls, doubtful.

Credit/risk Basket Update

There's still not much that's very exciting yet, here are the only harts in the Credit/Risk layout that have made any moves of any consequence.

 Yields which tend to act like a magnet for equities have continued dropping and hit a new local low this a.m.

High Yield Corporate Credit has been flat on the day, apparently waiting for something to happen.


Other then that, Italian 10-year BTP's are above the red line 7% level again (as a reminder this is the level that sent Greece, Ireland and Portugal all looking for bailouts as the yield on 10 year debt is seen as unsustainable, despite what Italy's Technocratic government has said today about not needing additional measures to reach their budgetary target.

On the Mar-Kozy Meeting

Lets face it, we've seen the play before, the meeting, the grand ideas and then an EU summit where they put as much lipstick as they can on the pig as nothing gets implemented, I think the market probably knew what to expect in most regards from this meeting except one, Greece and the next tranche of aid, which last week was said to be put on hold until March a day after the new Greek "Pap" sad if they don't get the money soon (sounded like he meant this month) that they would not be able to meet their debt obligations coming due around the same time-March.

So far the only interesting news that has come out of the meeting is a reinforcement of what was sad last week regarding the tranche,

It was leaders’ intention that no country leave the euro, Merkel said.

But she also warned that rapid progress must be made on finalizing a second rescue plan for Greece and called for the rapid implementation of a debt writedown for holders of Greek government debt.

Failure to finalize such a package would make it impossible to release Greece’s next round of aid in coming months, Merkel said, while also emphasizing that haircuts for Greek bondholders remain an “exceptional” case that won’t be repeated elsewhere in the euro zone.

Merkel-Sarkozy Set the Tone

The obvious fulcrum event in the market today is the Mer-Kozy meeting, which usually amounts to nothing more then a sugar high as even their best laid plans get nowhere in front of a full Euro-zone conference.

Overnight the Euro traded below $1.27 around 1.2666 before moving up on the Merkozy summit/meeting/waste of time. Currently the Euro has lost momentum and is around $1.2753.

Overnight the Euro hits new lows going back more then a year.

The meeting is addressing everything from closer monetary ties, a subject the UK has objected to without specific measures being included which are unlikely, to unemployment which is a huge issue for Sarkozy who faces a reelection bid in 4 months with French unemployment at 12 year highs. The problem of unemployment across the Euro-zone is being considered as harsh austerity measures have predictably caused a greater unemployment problem.

The Tobin Tax issue is also being discussed, which is a tax on financial transactions and this is the one the UK is resisting as the "City" in London (Financial district) would be hit hard by the tax. The UK position is, unless the tax is applied globally, the UK will Veto any EU ONLY version.

Sarkozy may try to move forward in initiating the tax in France regardless of the EU outcome.

An announcement is expected around 1:30 p.m.

China is set to look for 7% growth in 2012, a percentage lower (8%) that has been the standard for the last 7 years, we were right when we speculated there's big trouble in China upon seeing commodity prices underperform.

As for the US where many are thinking the new 2012 F_O_M_C_ doves that came in to voting rotation (9/10) will initiate a new round of QE shortly, may have seen a set back as the F_E_D_S Bullard has said they probably would not due to encouraging US labour conditions. QE talk was centered around the purchase of MBS, so the QE fans got another disappointment when Dudley said that the US taxpayer and Mortgage Bond investors should shoulder the burden of mortgage principal reductions. Interesting developments there.

Earnings season also kicks off in the US with Alcoa releasing after the bell.

Lastly back t Europe. the almost daily ECB deposit facility news is back with the ECB seeing a new all time high at $464 billion Euros. This is nearly all of the ECB's LTRO 3 year loan money that has come right bak to the ECB on a negative carry trade.

I wouldn't expect too much from the market or take anything too seriously until the conclusion of the Mer-Kozy meeting. Then I would pay close attention to details.