Alcoa (NYSE:AA) Earnings Meet Whisper, CSX Tops (NYSE:CSX)

First reports out, NYSE:AA and NYSE:CSX top estimates

The Shanghai Composite was down overnight after ministry officials quashed speculation that it would loosen its residential lending curbs sending the SE Comp down 1.6%. Yet optimism rebounded strongly in the European session with London, Paris and Frankfurt all up nearly 2%. US futures are trading up over 1% pre-market.

Aloca (NYSE:AA) kicked off earnings season last night hitting the whisper numbers of EPS of $0.13 per share and besting analyst estimates for $0.12. Notably, the top line beat as well with revenues of $5.2 billion versus $5.0 bilion expected. CEO, Klaus Kleinfeld, said "The top and bottom line growth was driven by higher volumes from stronger end markets and continued gains from our productivity programs." This statement is consistent with companies that continue to enhance efficiencies coupled with a recovering economy. Kleinfeld therefore raised their "projection for aluminum consumption from 10% to 12% this year." The first announcement out and earnings impress. NYSE:AA is trading up 4.4% pre-market.

CSX Corporation (NYSE:CSX) handily topped bottom-line estimates reporting $1.07 per share versus expectations for $0.98 and even beat on the top-line with $2.7 billion versus $2.6 billion expected. From the conference call, CEO, Michael J. Ward, notes that the "Q3 volume and revenue outlook is favorable" and "productivity gains are helping to deliver margin expansion, cost efficiency". He expects "growth in merchandise volumes in all markets". Another report reiterating the same story: the most under-appreciated aspect of this recovery: productivity gains.

Buying puts on the indexes to hedge, shorting Tesla Motors (NASDAQ:TSLA)

While these initial reports have been very positive, the market is on its 5th day positive in a row. I still think we are still in a bear trend lower. I am unconvinced that the 16% correction is enough after the 80%+ rally we saw since May 2009. Summer months are typically poor times for performance and the 10 days of nasty selling we saw to end June seem unlikely to simply end in this fashion. Last week was a great rally and worthy of a trade to the long side but I started hedging my longs yesterday with puts on the S&P 500 (through NYSE:SPY) and the Russell 2000 (through NYSE:IWM). I am also looking at the VIX which seems to be finding support at 24%. I may look to be long volatility through NYSE:VXX should we rollover at some point.

Another short position I am looking at is Tesla Motors (NASDAQ:TSLA). Telsa had its initial public offering two weeks ago to much fanfare and enthusiasm. The stock jumped over 100% in the first two days of trading before fading aggressively falling over 50% back below the $17 IPO price. After bouncing back from $15, TSLA found some selling at $18 and is now trying to hold the $17 level. I am short against $18 and looking for much lower prices. There seems to be a ton of sellers in this stock. The company is valued at $1.6 billion at current prices yet has never turned a profit! While there has been some enthusiasm that Tesla may work with Toyota (NSYE:TM) to create some prototypes, TSLA has a long way to go until it sees profitability. I am unconvinced after selling 1,000 of its electric sport cars for $109,000 each that Telsa can rapidly adjust its production to affordable sedans that will sell. (As a side note, for some traders, I do think a pair trade of long AONE, short TSLA is a very interesting play on the electric car recent IPO space.)


Disclosure: Long puts on SPY, IWM. Short TSLA. Long AONE.

Markets Quiet Ahead Ahead of AA Report

Quiet start to the new week as earning season begins

After gaining 5% last week the markets are relatively tame to start earnings season. Tokyo closed down 39 basis points while London is up 20 bps and S&P futures are down 40 bps. Alcoa kicks off 2nd quarter earnings season (NYSE:AA) reporting after the close today with earnings of $0.12 expected while whisper numbers are targeting a report of $0.13 per share.

For the week ahead we see:

Tuesday ATC Intel (NASDAQ:INTC)
Thursday BTO JP Morgan (NYSE:JPM)
Thursday ATC Google (NASDAQ:GOOG)
Friday BTO Citigroup (NYSE:C)
Friday BTO Bank of America (NYSE:BAC)
Friday BTO General Electric (NYSE:GE)

The S&P 500 gained 5.4% last week with a three-day string of gains to end the week challenging the 1,080 level. The VIX dropped markedly back below 25% to close the week. The market continues to trade on one-way streets. The S&P fell for 10 days losing 10%, spent a couple days consolidating and then surged 5% last week in a straight up rally. Volatility remains high and the start to earnings season this week will begin to paint a picture of the recovery relative to all our recent worries.

Spain takes the World Cup 1-0, deservedly

In a sloppy game filled with an excessive number of yellow cards, the Netherlands and Spain battled for 116 minutes before Iniesta finally found himself with plenty of time and expertly placed a full volley to the back post past the keeper. Overall I think Spain was the better team in the match even though it was difficult to chose given the lack of beauty for either side's play.

I give a strong vote for David Villa as the World Cup MVP. While he couldn't find the net in yesterday's game, he scored 5 of Spain's 8 total goals in the Cup and was a constant play-maker throughout the tournament. He was simply a complete pain to defend and consistently created opportunities.


Disclosure: Long SPY with protective puts.

Austerians Winning Deficits Battle, Equities Dropping

Austerity, restoring confidence or killing the patient?

The heightened talk of austerity measures throughout the world is certainly a motivating factor behind the selling in equity markets. The Keynesians are furious that governments are contracting fiscal stimulus too soon arguing that previous measures will be wasted if we pull the plug now. The economy is still on life support they argue and we have not overcome the deflationary forces at work. The worries of financial distress are exaggerated particularly in the United States where interest rates on our debt are at the low end of historical ranges.

The austerians believe government deficits are hurting confidence around the world and reigning in spending will solve these problems. Ultimately, they are more worried about the inflation story and continue to fret that bond vigilantes will attack at some point, drive up interest rates on our debt and we will be unable to fight back. Reducing deficits now they believe will spur investment by the private sector and get ahead of what are inevitably higher interest rates in the future.

While this is a highly complicated issue and I tend not to argue too definitively on either side of the coin, I do lean toward the Keynesian argument. I believe we have an excellent example in the Japanese story as best outlined by Professor Richard Koo. The fears of inflation and higher rates seem overblown as we are still mired in a deflationary storm. Yet, there is a point at which governments must cut spending and 5.9% GDP growth in Q4 2009 followed by 2.7% Q1 2010 growth do not necessarily indicate an economy in desperate need of more Keynesian medicine. Though the 9.3% domestic unemployment rate is not particularly encouraging.

Either way, this debate will be solved by others and I will focus on the effects on financial markets. Lowering deficits will adversely affect equity prices by lowering GDP. The $1.6 trillion budget deficit this year cannot be reduced without negatively affecting GDP at least in the short-term. Contractionary fiscal policy will likely force monetary policy to stay expansionary far longer than otherwise and ultimately this translates to furthered debasement of paper currencies and higher real asset prices.

Gold collapses for 2nd Monday in a row

So much for my post yesterday where I stated I did not see a reason to sell any of my position in NYSE:GLD. Gold rallied early in the day to within $3 of last Monday's all-time highs of $1,266. It based for 30 minutes and then rapidly collapsed $27. Once again, any weak hands in the metal were stopped out in the harsh down move. I have a decent entry price so I continue to hold through the volatility and will only be stopped if prices make a lower low which has yet to happen.

The two moves have definitely shown the perils of chasing new highs in gold. It is also interesting to note the possible impact of NYSE:GLD on the gold futures market. NYSE:GLD made new all-time highs yesterday by a few cents exciting many traders who were only following the ETF and not the futures market. This disconnect could have fueled the early selling as the new high buyers in the ETF dumped their positions at the first sign of weakness.

I expected NYSE:GLD to be a solid risk-aversion holding against equities but it has not yielded much protection in the last week. The long-term looks very promising with gold the only asset class continuing to trade just off all-time highs. If we see a breakdown in the short-term, I will blow out most of my position and return to just a feeler and wait. I expect new highs sooner or later but my timing could be off. For now, I wait.

When you're wrong, stop being wrong

One of the most important aspects of trading is recognizing when you are wrong. The best traders stay very stubborn to a point but then are willing to completely flip their thinking and admit their mistakes. I put together a very nice trade on the long side in early June catching a nice bounce off the $1,040 level.

After making the higher high in the market I began thinking the bottom could be in place. I tried a lot of longs over the last few days and wiped a lot of my gains in short order as the market sliced through buyers like a hot knife through butter. Today, I capitulated off the open and dumped nearly all my remaining long positions to be flat equities. So much for that. The $1,040 level is so closely watched by all technicians, it seems destined to break if only for a short time.


Disclosure: Long GLD.

Gold Sees Selling, China Unpegs Renminbi

Gold

"It was never my thinking that made me money but my sitting tight." ~Jesse Livermore

Yesterday's large drop in gold was somewhat brutal but it did not break down through any of my stop levels. After leaping out to new highs last week, China's revaluation announcement spawned selling in the precious metal. Quite frankly, at this point I'm trying not to think. Gold formed a very bullish formation on all timeframes and broke out to new all-time highs. If history is any guide, the real party has not yet begun. Perhaps this is healthy action as the retracement has filled some downside gaps and stopped out many weak hands that would have created overhead resistance. The technical and fundamental reasons I entered this trade have not changed, only my P&L has. My stop remains in the $118.80 area on NYSE:GLD and we'll see how the market acts this week.

China Revaluation

China's announcement of its plans to gradually revalue the renminbi is a welcome development. Ultimately, this action is in the best interests of China and the rest of the world. While many were hoping for a one-off large appreciation I do not see a more gradual approach as being a poor decision for all parties. Ideally, China would begin spending their capital account surpluses which would greatly help the global economic recovery and reduce trade imbalances. Yet, that is not to be and we'll have to accept what we can get. Now it is all a matter of how much China allows the yuan to appreciate over time. If we only see 3-5% appreciation over this year there will not be significant impacts on global markets but it is a step in the right direction.

Stock Market

While China's announcement fueled a 2.9% jump in the Shanghai Composite and led to pre-market buying in the US, equities in America faded throughout the day and closed in the red yesterday. After an 8% jump off the early June lows, some selling pressure is not unexpected. I would not be surprised by some more downside in the short-term and I will be actively looking for areas to add to my current longs.

Wade Slome over at Investing Caffeine put together a great post comparing equity markets today to 1998.

What many pundits and media mavens fail to recognize is S&P corporate profits have virtually doubled since 1998 (a historically elevated base), despite market prices stuck in quicksand for a dozen years. What does this say about the valuation of the market when prices go nowhere and profits double? Simple math tells us that all stock market inventory is selling for -50% off (the market multiple has been chopped in half). That’s exactly what we have seen – the June 1998 market multiple (valuation) stood around 27x’s earnings and today’s 2010 earnings estimates imply a multiple of about 13.5 x’s projected profits.

This line of thinking is very convincing to me. I cannot believe Apple (NASDAQ:AAPL) can sell for 23 times trailing earnings. Apple is perhaps the most exciting, innovative company in the world boasting $23 billion in cash and no debt. How can the maker of the iPhone and iPad with a 37% 5-year trailing net income growth rate sell for 17 times projected EPS?


Disclosure: Long GLD, FXI.