Monthly Archives: July 2012

Alcoa (AA) and the 2Q12 earnings season

July 10, 2012 By in Current Market Thoughts, earnings conference calls, Recent Market Action, Stock ideas Tags: , , , , , , , Leave a comment

the results

AA reported 2Q12 earnings results last night.  The company earned profits of $61 million, or $.06 per share, for the quarter, on revenue of $6 billion.  The result exceeded the consensus of 18 professional analysts covering AA by $.01 per share.

is AA a bellwether?

AA is the first major US company whose accounts run on a calendar year to report results each quarter.  Its end products, alumina and aluminum, are key industrial raw materials.  As a result, Wall Street looks will special interest to what AA will say.

In my view, AA’s results vs. the analyst consensus aren’t that important, unless the reported numbers are hugely different from the estimates.  AA is a highly complex global company with very sophisticated management.  It has many possible suppliers of its inputs, all of which can have complicated–and different–contractual arrangements.  Some have equity ownership interests by AA, which vary by supplier.  I think no outsider has much of a chance, even after years of trying, of creating a financial model of AA’s operations that would predict earnings per share with a high degree of accuracy.

I think there are implications for the rest of Wall Street in the earnings figures themselves.  It says something if AA makes a lot of money in a given quarter, or a little, or makes a loss.

what is important from AA

If you’re a shareholder, you’d focus on the continuing ability of the company to generate cash flow, and to increase the efficiency of its operations, in almost any economic environment.  That’s been a constant for years and years.

If, like me, you’re not. you’ll pay more attention to what AA says about the world economy.

What jumps out to me from yesterday’s conference call is:

–the global aerospace business continues to be very strong

–automotive is good, especially in the US, where AA is revising its expectations up

–there are early signs of a pickup in the US cans/packaging business

–the main macroeconomic area–no surprise here–is Europe.

My overall takeaway: most of the world is in roughly the same shape that the consensus believes, but that the US may be a little bit better.

 

Hong Kong stocks–trying to turn up?

July 9, 2012 By in Asian economic development, China, economics, emerging markets, Hong Kong, Property/housing, Recent Market Action, Strategy Tags: , , , , , , , , , Leave a comment

early signs from Hong Kong

Over the past couple of weeks, property stocks in Hong Kong are up sharply.  What makes this interesting is that in that market, property stocks and trading conglomerates (the successors to the old British opium companies) are the main ways of playing a cyclical upturn there.

economic policy stances

Describing the present situation in world markets in the most basic terms, we might say that the US and the EU are trying to deal with structural problems that are being made somewhat worse by a cyclical downturn in trade with emerging markets.

China, on the other hand, is dealing with a cyclical domestic downturn induced by government policy, which also is being made somewhat worse by the structural issues its Western trading partners are facing.

The US adopted an accommodative money policy years ago to address its problems, but appears unable so far to make any supportive fiscal changes.  The EU is very belatedly beginning to move on both fiscal and monetary fronts.

China has recently begun to reverse its restrictive interest rate regime, as its economy has begun to slow markedly.

China’s moves already making a positive difference?

That’s what the stocks of Hong Kong property developers appear to be saying.  It’s possible that property stocks are only moving in anticipation of future economic growth and not in reaction to the first stirrings of that growth itself.  My hunch is that the latter is the case, because I don’t read any world markets as being confident enough to act on policy changes alone.

Nevertheless, it’s still early days–too early for all but the most aggressive investors to act.  But the property stock movement does bear watching.  If Beijing’s policy efforts are already beginning to kindle even a mild cyclical upswing in the Chinese economy, there are two positive implications for equity investors.

–Hong Kong stocks, and especially pro-cyclical, China-related sectors like property, would continue their recent outperformance for a considerable time to come, and

–companies listed in other markets which have important China exposure and which have been languishing recently–luxury goods makers, for example–would likely become attractive investments again.

the June 2012 Employment Situation report

July 6, 2012 By in economics Tags: , , , , , , Leave a comment

the Employment Situation

The Bureau of Labor Statistics of the Labor Department released its June Employment Situation report before the opening of equity trading in New York this morning.  According to the BLS, the US economy added a net of 80,000 new jobs last month.  This marks the third month in a row that the economy has failed to generate enough work even to absorb potential new entrants into the labor force, and making no dent in the several million workers left unemployed as a result of the Great Recession.

the details

The private sector added 84,000 new jobs, its worst showing in a long while.  The overall numbers would have been (mildly) worse had state and local government layoffs not shrunk to 4,000 workers.

The result is below the consensus economists’ estimate of +90,000 jobs.  I don’t think there’s any particular informed analysis in the 90,000 number.  My impression is that economists are basically at sea and are just extrapolating forward the trend of the past couple of months.

the revisions

No big changes this month.  The April figures, originally reported as +115,000 new jobs and revised down last month to +77,000, shrank again in their final revision to +68,000.  The May numbers, first estimated at +69,000 new positions, were revised up to +77,000.  The net change from revisions, then, is -1,000 jobs.

a negative reaction in early trading

As I’m writing this, the S&P 500 is down about a percent.

As an initial short-term trading reaction this is understandable.  The S&P is at toward the upper end of its trading range.  The number is below the consensus.  And it’s far, far less than the +176,000 jobs the unofficial–and quirky–ADP employment report said yesterday.

I don’t think this is so important.  In fact, it will be interesting to see whether the market rallies from the current lows as the day progresses.  The best explanation for daily market movements is white noise, but a rally would be in keeping with recent market behavior.

The more fundamental issue that the ES highlights is the possibility of political uncertainty over the coming months.  Short-term interest rates are currently at zero.  The monetary taps are wide open.  There’s little more that Mr. Bernanke and company can do.  On the other hand, the second tool of economic policy, fiscal stimulus, remains basically unused–something that Mr. Bernanke points out politely, but consistently, whenever he visits Congress.

The more obvious observation made by pundits is that presidents are never reelected when unemployment is high.

The possibility with much more unpredictable consequences is that a continuing weak employment situation could create strong enough anti-incumbent sentiment to substantially reshuffle the power structure in Congress.  It’s hard to know whether that would be good or bad.  If investors began to worry about this possibility–and I see no sign Wall Street is now–uncertainty would likely mean stock prices that would be lower than otherwise.

Shaping a Portfolio for 2012: mid-year review

July 5, 2012 By in Getting financial advice, Portfolio management, Shaping a portfolio for 2012, Strategy Tags: , , , , , , , Leave a comment

2012 strategy

The year is half over.  It’s time to look at the basic portfolio strategy put in place on January 1st, see how well it did and make mid-course corrections.

The relevant Strategy posts are:  Shaping a Portfolio for 2012:  general, and putting the pieces together.

In brief, I thought:

–plus 10% for the year would be a good performance for the S&P 500

–volatility would be high, caused by the evolution of the EU financial/identity crisis, with Europe possibly following Japan down the road to ultimate economic and stock market irrelevance

–emphasis should be on the US, where broadening and deepening of economic recovery would make it important to emphasize technology, domestically-oriented companies and WMT customers rather than TIF clients.

results?

How has that worked out so far?

Overall the strategy has been a reasonable guide.  Through July 3rd, the S&P is up 9%, making it a star among world equity markets.  WMT is up 18%; TIF is down 19%.

where I was wrong

Volatility has been greater than I’d expected.  I would have preferred daily fluctuations around a more or less steadily rising trend.  Whe we got instead was a sharp advance through March, an equally sharp fall through early June, and then a bounceback.

The EU may not be such a lost cause as I had expected.  In January I thought that the EU-as-the-new-Japan was both the most prudent course to plan for and the most likely outcome, given the immense power of the status quo.  I now think there’s hope for a better future for the EU, although decline-into-irrelevance is probably still the most prudent planning stance.  The difference?  I’m tempted to add one or two more EU-listed stocks to complement the IHG I already own.  I haven’t started looking yet, so I have no idea which names.  The general idea, however, would be to have companies domiciled in the EU but with much of their business elsewhere.

Emerging markets in general, and China in particular, have been weaker than I’d expected. Emerging markets are normally boom or bust affairs.  This time around, it’s taking these economies longer than I’d thought to reach an even keel after the boom of a couple of years ago.  Their next day in the sun may not dawn until 2013.  The result may be weaker commodities prices until then.  Another plus for consumers worldwide.

The effects of GDP weakness elsewhere has taken a greater toll on US industrial growth than I had figured.  The current slowdown in the US has to be the most important development I didn’t anticipate.

where to from here?

My thoughts are more in the category of fine-tuning rather than a complete overhaul.

–the S&P 500 has already achieved my admittedly conservative objective for the full year.  I think this means it’s time to become somewhat more defensive.  To move significantly higher from here, investors have to be able to envision reasonable earnings growth coming in 2013.

For now, the election (no one in Washing ton seem to me to be up for the task of addressing the current economic challenges the US faces–but this is usually the case) and the “fiscal cliff”  (the idea that currently-mandated spending cuts and tax increases will clip 4% from next year’s GDP, sending the country back into recession) stand in the way of imagining a happy outcome.

–This means that beneficiaries of innovation and structural change–traditional growth stocks–will likely be the second-half winners.  I’ve begun to think that the major cellular operators in the US, especially VZ, are particularly interesting.

–dividend-paying stocks continue to look attractive to me, despite their being expensive relative to recent history.  High current yield isn’t enough, however.  Dividend growth is an increasingly important issue, since simple bond-like high yielders have long ago been picked over.

–I’ve also begun to look at REITS that concentrate on major cities in the US, as a supplement to the hotels I’ve been advocating for some time.  The idea is that cities like New York and San Francisco are hubs of tech innovation.  They also draw considerable buying interest from foreigners  And their own economies are on the rise again.  I own SLG.  It has some warts, though–mainly its dependence on the finance industry tenants–so this one has a handle-with-care label on it.