4Q08.4 EARNINGS – STIMULUS MALFUNCTION, BUY GOLD

“In this present crisis, government is not the solution to our problem; government is the problem. From time to time we've been tempted to believe that society has become too complex to be managed by self-rule, that government by an elite group is superior to government for, by, and of the people. Well, if no one among us is capable of governing himself, then who among us has the capacity to govern someone else? All of us together, in and out of government, must bear the burden. The solutions we seek must be equitable, with no one group singled out to pay a higher price.” -Ronald Reagan, Inaugural Address, January 20, 1981

Rightly or wrongly one needn’t sing the praises of Reaganomics other than in the privacy of one’s home for at least the next four years. Under Barack Obama’s administration the new speed limit for Wall Street is 25 MPH: no more autobahn; yield to all pedestrians. Accepting the spirit of this new world order, along with short term trading/risk management is the only constructive way to navigate the markets right now as the stability of our global economic infrastructure remains in jeopardy. The irony of this situation is that the clarion call of populism is being heeded when it’s least needed. The financial gulf between the middle class from the elite has taken a sharp reversal, and everybody is in a terrible bind; worrying about the top 1% is not constructive in this discussion, and they were the predominant victims of Madoff anyway.

A bigger message could not have been sent last Thursday when Obama declared that Wall Street’s behavior was “shameful” with an hour still remaining in the trading day; how about all the calls to cap "bonuses." Needless to say the market sold off heavily into the close as any number of his advisors could have predicted for him beforehand. Clearly, when it comes to strengthening the Mind, Body, and Spirit of our overall domestic economy, our largest most innovative industry, financial services, is going to suffer at least a few lashes for past sins. This is not to say profits (and bonuses) formerly inflated by financial engineering was an ideal foundation of growth, but an entire generation of our best and brightest (or at least most ambitious) has been disrupted, and probably forced to reinvent themselves. This may be a blessing in the long-run, but how does this possibly help expedite recovery in the short run? How does a TARP-funded firm like Goldman Sachs (GS) sustain its legendary reputation that driven by its risk/reward-loving culture? 

To me the only short term remedies that should be funded are based on the principals of providing food and mortgage workouts of existing homeowners. Obama may intellectually understand that our banking system requires emergency surgery, but he's still insisting on bootstrappin more entitlement spending. How original to waste political capital on repaying your political allies. Considering the prospect of requiring more funds (preferably smart infrastructure related) down the road, we've got to preserve the health of our Treasury market as long as possible. His own prominent economic advisors (of note Larry Summers) preached a prescription of Timely, Targeted & Temporary measures, which earned him the trust of financial conservatives. To the credit of every Republican and about a dozen Democrats who voted against the House version of the Stimulus bill, a loud message was sent to Mr. Post-Partisan, and provided the necessary fodder for the Senate to fulfill its traditional role of breathing in some prudence to the process. As of late Sunday it seems that the Democrats won't be able to bully there way just yet.

Buy Gold.  As was the case last week, there may be earning reports galore to ponder, but all eyes need to be fixed on Washington. However, “selling on the news” is not as straightforward proposition as it was for our anticipated Aggregator/Bad Bank rally (ended at 2:15 last Wednesday after the Fed held rates steady). This week it’s anyone’s guess what new plan Treasury Secretary Tim Geithner will unveil. There is a large risk that the Aggregator Bank idea may be rejected because it would require more taxpayer money to purchase illiquid, toxic assets. Under this administration, the nationalization route (wiping out equity shareholders) as was adopted by Sweden in the early 90’s may be prescribed for the likes of Citigroup (C) and Bank of America (BAC). After all, the Resolution Trust Corporation created to unwind troubled assets from the S&L crisis in the 1980’s was a Republican solution. The lack of policy consensus, the continuation of poor corporate and economic results around the globe, and especially the rapid deterioration of all non USD or JPY currencies (most recently the Mexican peso) suggests the conditions are ripe for a major rally in Gold (GLD) and other precious metals (e.g. SLV, PTM) is ahead of us. I will add this doesn't automatically suggests its time to short Treasuries: there's still plenty of demand for capital presercation, and the U.S. won't hesitate to meet it. However, Obama will soon learn that there is a limit to everything which is why Senate Republicans must find a may to hold the line on social entitlement dollars masquerading as stimulus.

Disclosure: No positions.

4Q08.3 EARNINGS – STIMULUS, WHERE ART THOU?

All eyes will be on the U.S. this week as the East celebrates Lunar New Year for the week (or so) as of yesterday.

We are now entering the teeth of earnings season for the cyclical industries including coal, steel, machinery, energy exploration & production, and paper/packaging. Since current conditions are punk, and the outlook is impossible to discern without added clarity from Washington, anything that contributes to sharpening our forecasting confidence will be deemed as a positive, albeit very short-term. Ultimately, we will have to rationalize a much lower “fair value” for the S&P 500 as 2009 and 2010 operating earnings continue to ratchet down; then there’s always the question of a proper P/E multiplier.

In the meantime, bad company results will be viewed as a positive since it will help ensure the expedient passage of the Stimulus package. As we saw with drillers Noble (NE) and Schlumberger (SLB) last week, it will therefore be hard to disappoint investors in the aforementioned industries. As long as a company doesn’t have short-term solvency issues I expect lots of pops.  Missing consensus EPS estimates, suspending revenue forecasts, cutting dividends, anything short of declaring bankruptcy may be swept under the table. Collectively, none of the above violates the great (false) hope of a 2H recovery. That being said more listening versus acting is warranted this week.

Wednesday afternoon’s FOMC rate cut announcement may be a wildcard even though the 0-0.25% rate range is expected to be reiterated. In a speech in London couple weeks ago Chairman Bernanke expounded on the differences of the current situation in the U.S. with the Japanese quantitative easing policy of 2001-2006; ours is much worse and he favored calling our current tactics “credit easing.” In light of the growing support for creating an Aggregator Bank, I see a high probability that financials can enjoy a big relief rally if Bernanke reveals further support for purchasing toxic assets.  You want to own the garbage for this trade: C, BAC, and STT.

Gaming the Indices.  The Dow Jones Industrial Average (DJIA) index of 30 price-weighted stocks utilizes a dubiouus methodology as it is, and now a Bianco Research finding makes it apparent to me that it needs to be reconstituted post-haste. Better yet some traditions need to simply die - it's an absolute failure as useful market barometer.

For those who insist on relying on passive investing and want stock market exposure, I recommend going long of QQQQ. The “Qs”  gains exposure of the top-100 non-financial Nasdaq stocks.

Disclosure: No positions.

4Q08.2 EARNINGS - ALL ABOUT OBAMA HALO

As investors anticipate the coming week, I daresay US market participants will enjoy a welcome, albeit temporary, boost in optimism. The fervor in DC for Obama's inauguration should be palpable to the rest of us watching it on television. Recalling the heroics of a pilot called Sully will help as well. The third factor, as corny as it sounds, is that the woebegone Arizona Cardinals franchise has just earned its first Super Bowl appearance. If they can go on to win it all, perhaps it could be a sign that our economic outlook is not beyond despair after all. As the late Louis Rukeyser noted ahead of Superbowl 36 when heavily favored (14 points) St. Louis "Greatest Show on Turf" faced New England, who else could win but a team named "Patriots" in the aftermath of the 9/11 WTC attacks?! Ironically, Kurt Warner will be a starting QB this year for the underdog Cardinals as he was seven years ago for the "mortal lock" Rams.

MONDAY. Federal holiday: MLK birthday.

TUESDAY. Is IBM going to be beat EPS estimates for the 15th straight Q? Probably. Excellent snapshot of the health of corporate costumers; JNJ is the orphan-and-widows type stock that is supposedly ideal in this environment, but its rich 1.3 PEG ratio has me wary. Can only grow via large acquisition so that should temper LT enthusiasm as well considering "cheapness" is abundant. Update: No surprises

WEDNESDAY. AAPL numbers should report strong numbers, but I suspect the focus on CEO Jobs' future to dominate the earnings call and lead to a renewed sell-off. There is no reason to anticiapte that management will handle this issue any better than they have until the stock gets hammered; EBAY will get lots of press coverage, but this is a company still trying to fix its business even despite Meg Whitman's departure last year. I see minimal value of extrapolating EBAY news too heavily. The charts of both companies looks terrible. Avoid. Update: No surprises. AAPL bulls looking past CEO health. EBAY was a disaster.

THURSDAY. GOOG analyst call may be filled with as much discussion of cost control as growth prospects, despite its dominant position, which means it's hard to see the stock hitting $400 any time soon. That being said I expect EPS to handlily exceed consensus on aggressive cost cutting. We'll see if investors discriminate the quality of earnings or just be temporarily happy with a "beat;" Is MSFT monopolistic Windows cash cow showing any sign of obsolescence? Despite the recent good news of Xbox sales outpacing Playstation 3, MSFT is dead money until there is a major non-economic catalyst that can be identified. Update: No surprises. MSFT announced major job cuts, and stock opened down nearly 9%.

FRIDAY. GE stock is well underwater since Jeffrey Immelt became CEO in 2001. Timing wasn't favorable, but he has also done little to justify anything but a conglomerate discount by repeatedly disappointing Wall Street. GE became a wannabe bank, too, and is suffering accordingly. Avoid. Update: On a mixed day, GE was down almost 11% despite the ostensible relief of not announcing a feared dividend cut. The vehement denial was not confidence inspiring; start poking around $9.

THEME OF THE WEEK: Companies announcing that they are suspending revenue and earnings guidance. Don't expect a major move in the indexes as bad earnings news will be offset by the anticipation that the size of the stimulus may need to be increased [perverse logic, I know]. The view of measures helping consumers pay down debt won't be dismissed as ineffective because that needs to take place before discretionary spending can be justified since credit is still difficult to obtain and job markets continue to deteriorate. 

Disclosure: No positions.

4Q08.1 EARNINGS - ZEP, Bullish: INFY, SCHW, JPM

Last Friday's "sell into the close" call has been timely as SRS was up nearly 12% yesterday, while airlines (~5%) and dry bulk shippers (~10%) sold off in high volume.  AMD continues its death march, and PALM gapped up 10% before finishing with a small loss.  We expect the market to stay negative this week, with CPI, capacity utilization, and consumer sentiment data on FRI collectively punctuating the negative news.  If the selloff is severe enough, however, I am inclined to go long hope/Obama into the long weekend heading into inauguration day.

MONDAY review.  Alcoa (AA) has the undeserved honor of kicking off earnings season.  The reults disappointed as usual, but a poorly managed company is not a good barometer of answering the question: “How bad are things really?”  Zep (ZEP) was spun-out of Acuity Brands (AYI) in Nov/07 and provides cleaning/maintenance products mainly to industrial customers including autobody shops.  The huge earnings miss based on raw material expense and a revenue miss was one thing, but the utter lack of confidence in a short-term outlook caused 25% to be lopped off the stock (closed weak).  The company wasn’t cheap prior, but I expected more benefit from the trend of longer car ownership and DIY maintenance.

TUESDAY.  The premier IT outsourcing company in India, Infosys (INFY), beat on earnings and revenues overnight to provide some relief in the Bombay SENSEX after the Satyam (SAY) accounting scandal rocked the country. With its 0.65 PEG ratio and very solid balance sheet it seems to be a worthy proxy for buying India and will probably be the primary beneficiary of market share gain from the SAY fallout. Worth a trade or start building a LT position as a proxy for the country.

WEDNESDAY.  Judging from last year, Charles Schwab (SCHW) is expected to release earnings and DEC activity this day.  Despite getting knocked down with the rest of the Financial sector lately, I'm expecting a very upbeat call (all things considering). The pool of potential independent advisors grows substantially for SCHW if the “Morg-ue”-Barney j.v. goes through as expected.  Apologies for the cynicism, but a Salomen Smith Barney executive will probably head the j.v. as s/he would know how to cut most effectively.  Meanwhile, as I noted on Jan 7, I expect SCHW's Institutional Services business to continue to drive growth.  In November total assets had only fallen 4% Q/Q while net new assets actually grew by $5.9B (vs. $1.1T total).  SCHW gained 30K new customers in October (+88% y/y).  The new marketing campaign launched last SEP has clearly been resonating with investors. Lastly, I expect mgmt denies any speculation of its interested in buying optionXpress (OXPS) in the aftermath of TD Ameritrade (AMTD) acquiring ThinkOrSwim (SWIM). 

THURSDAY.  I am bullish on JPM (vs its peers) after moving up its earnings six days to get in front of the BAC’s on 1/20.  My interpretation is they want to be able to distinguish its recent Q performance as “acceptably poor” by simply being able to confirm CEO Jaime Dimon’s recent public statements that the Q was terrible.  I only recommend a quick trade as there may be a capital raise in the works this weekend as well.  If you believe Oppenheimer banking analyst Meredith Whitney, it’s actually inevitable.  Meanwhile, the probability of acquisition-happy CEO Ken Lewis of BAC announcing disastrous results seems very high.  How smoothly could the Merrill Lynch integration be going in this market? There are already signs that Charlotte and NYC cultures are incompatible as the head of the Thundering Herd’s financial advisors is leaving to attend Yale law school.

FRIDAY.  All about the aforementioned economic data. Gold and other commodities sell off if deflation fears take hold going into MLK weekend.

Disclosure: No positions.