Its All About Earnings This Week

I hope everyone enjoyed their holiday weekend.

Today is a quiet day in the markets. Earnings season begins later this week so I expect things to really get interesting later in the week. We had an early pop this morning. No substantial news behind it. Microsoft showed some renewed interest towards Yahoo which is helping tech. The Financials continue to drop like a rock.

Some of the big industrials report this week, and I am curious to see how rising oil prices and costs on goods due to inflation have affected earnings.

Something tells me their earnings are going to be worse than anyone expected due to these increased costs. The problem many of these companies have is they cannot pass on the costs to the consumer because they are too weak to afford price increases. Wages are falling right now in the US when you include inflation. Something has to give here folks and my guess is it will be lower sales.

I expected some of these larger companies to start fighting back on accepting these price increases and it looks like automotive has had it with th rising cost of steel.

This is from the WSJ:

"In an effort to curb the relentless rise in steel prices and bolster their own frail finances, some auto makers are beginning to push back on price increases, saying they won't pay surcharges on agreed-upon supply contracts.

The resistance is one of the first strong signals to steelmakers that their hardest-hit customers have reached a tipping point and may not be able to withstand higher prices.

Some auto makers are threatening to fight the additional charges in court, saying that financial terms of a contract can't be altered, according to people familiar with the matter."

Quick Take:

Desperate measures need to be taken by the big three if they want to stay alive. The steel mills and automotive have a long past when it comes to fighting over prices. Steel has basically doubled in 6 months between soaring scrap surcharges and higher manufacturing costs due to high oil prices.

If the Fed isn't going to come in and try to control inflation then more companies are going to follow suit and start fighting prices and surcharges. They will be forced to in order to survive. Companies don't last long if they are running at a loss due to soaring costs and the inability to pass it on.

The steel mills will be in big trouble if they lose their pricing power with the big three because it is such a large part of their business. The stock prices of steel stocks have been soaring due to higher profits and these could become nice shorting candidates depending on how the big three do in price negotiations.

The automotive companies have a history of winning these battles because they such a large part of the steel mills business.

This is why the Fed has to reign in inflation. We face a major blowup in the economy if they continue to ignore it and companies start running at a loss.

What are these analysts smoking?

I had to laugh when I read this article. Notice Lehman is one the firms predicting the biggest rally in the S&P in 26 years. These pump monkeys continue to amaze me. I love one of the quotes in here from an analyst that finds this report ridiculous. Of course I do as well. Its always amusing to see what the delusional bulls are thinking so here it is.

"July 7 (Bloomberg) -- Deutsche Bank AG, Lehman Brothers Holdings Inc. and UBS AG say the Standard & Poor's 500 Index will gain the most in 26 years during this year's second half. That isn't going to happen, if history is any guide.

The S&P 500 will rise 18 percent by January, according to the consensus projection of 10 U.S. strategists surveyed by Bloomberg. The forecasts are based partly on estimates that profits will jump 50 percent in the fourth quarter after falling for the past year.
Even if that happens, it may not be enough. In 2001, the last time profits fell as much, they then had to climb for three straight quarters before stocks rebounded. Analysts' earnings estimates for this year still represent a decline from 2006 levels, making the strategists' optimism harder to justify, investors say.

``If they're accurate, I'll give them a big kiss,'' said Randy Bateman, who oversees $15 billion as chief investment officer at Huntington Bancshares Inc. in Columbus, Ohio. ``I don't think those are very realistic figures"

Unrepentant Bull

Strategists at Deutsche Bank, Lehman Brothers and UBS are the most bullish and expect the benchmark for American equities to climb to a record in the second half. Binky Chadha, Deutsche Bank's New York-based chief strategist, says the S&P 500 will end the year at 1,650, up 29 percent from June 30.

Ian Scott, Lehman's global strategist, is predicting an advance of 27 percent to 1,630, while David Bianco at UBS says the index will increase at least 25 percent
.
The S&P 500's rebound ``is going to be one of the greatest roars we've seen,'' Bianco said. ``The market has way too many fears baked into the valuation right now. The fear out there is the earnings are about to collapse and interest rates are about to surge on inflationary fears. Neither is going to happen.''

The Money Quote:

``A monkey with an abacus is probably better at the end of the day,'' said Peter Sorrentino, a Cincinnati-based senior money manager at Huntington Asset Advisors, which oversees $16.7 billion."


Final Take:

If I had to chose one of these clowns to manage my money I would take the monkey with the abacus!! I guess when Rome is burning you will say anything to get things going again. Remember that "generational buy" call on the financials a couple months ago? How did that work out.

That's it for now folks. Things are quiet out there. Have a great Monday!