Saturday, 12 January 2008

The earnings season kicks off next week

The U.S. markets closed on the sour note on Friday, weighted down by growing worries about the U.S. economy and uncertainty about the upcoming earnings season results. Meanwhile, the S&P/TSX index is kept afloat lately by gold mining and oil stocks.

The next-week announcements that may have an impact on the markets include:
  • Jan 15, Tuesday: Retail sales for December. The number should be relatively flat, but not too bad due to holiday shopping unless there are unreasonable expectations. Canadian cross-border shoppers probably helped improving the numbers by a notch or two. It sounds like every other third or fourth adult resident in GTA has done at least one shopping trip south of the border during December. I did not since I was saving my money. :-);

  • Jan 16, Wednesday: CPI, industrial production and capacity uitlization stats for December. The numbers will probably be creatively adjusted again by US government statisticians-magicians. I personally have low trust in most of these reported numbers because there is so much room for manipulation. However, the markets do take them into account, at least in the very short run; therefore, we unfortunately should pay attention to these fairy tales told us by Uncle Sam, the guy with stained historical reputation;

  • Jan 17, Thursday: Housing starts and building permits in December. If the numbers are too bad, the builders and real estate stocks are going to dip once again to new lows.

A pretty large group of banks is reporting next week, with the notable cases of Citicorp (C) and US Bancorp (USB) on Tuesday, Dec 15; Wells Fargo (WFC) on Wednesday, Dec 16; and Washington Mutual (WM) on Thursday, Jan 17. I am thinking whether I should sell or keep WFC before the announcement. There is a chance that the actual decrease in reported earnings is going to be smaller than analysts' estimates (the $1.4B reserves announcement has been already taken into account), which will allow the stock to bounce up. I will decide on Monday-Tuesday and then act accordingly. As I mentioned in my previous post, my third option is to keep the stock in the long run - it is a very good candidate for a value-investor portfolio.

Wells Fargo is lately being named as one of those candidates for buying one of several beaten down mortgage companies. It is unlikely that highly troubled large financial companies will be alowed into bankruptcy or restructuring. Most likely they either will be bought by large US or foreign banks or will be bailed out by foreign investors (of course, at the very high price which will hurt current shareholders in the longer run). After the talks on CFC and WM, SPF is the next rumor target.

SPF actually looks as one of those highly speculative stock plays that can be bought in anticipation of a buyout. Note my words "highly speculative" which means "high risk." Look at what happened to CFC last week - those who had the stock could have made 50-80% in a day. Those who bought afterwards, got burned. Had the buyout not happened, the stock would have continued its journey into insolvency, which was the high risk of buying it around $4.50. There are always risks associated with highly profitable plays on beaten down former stars, and a speculator who is willing to gamble in such situations should be prepared to lose most or all of his/her money.

Where do we go from there? Small pullbacks are possible next week for a few individual stocks, but the markets in general will likely continue moving into the lower territory. Whenever the markets calm down a bit and are ready to bounce a bit, somebody releases some bad smelling poop news/rumors and down we go again. This coming week there will be plenty of such information as banks report their earnings (many analysts are expecting a disaster) and the government publishes some important statistical numbers.

Well, this is the situation we have right now, and we will have to live through it. These are good times for picking up good stocks at sale prices. Good times to make quick profits on short-term breakouts when the stock bounces back after being heavily oversold on some bad news. Good times for experienced short-sellers. That's how it works - when somebody loses, then there is somebody who gains. If you are smart, you can gain in every situation by anticipating reversals and timely switching your positions or just by patiently waiting. This last thing is something that I still have to master.

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