Tuesday, September 1, 2009

Are Your Hopes for a Recovery Based on This?

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September 1, 2009  

How long can this rally last on aggressive cost-cutting and crappy – but "better-than-expected" – earnings?

Last week, we pointed out that the market is rising on progressively lower volume. And the weakest companies are leading the way. But it's the lack of revenues that should worry you the most.

The rally since March has been based on improved earnings. That would be great if the improvements were the result of sales increases. But most companies have improved bottom line numbers by reducing inventory, firing workers, and cutting back on advertising.

Very few companies are showing sales increases. Goldman Sachs reports that 46% of companies beat earnings expectations by a wide margin in the second quarter. But only 23% reported better than expected revenues.

Sales for companies listed in the S&P 500 fell 16% in the second quarter, compared to last year. That follows a decline of 14% in the first quarter.

Of course, most analysts haven't focused on that. All they seem to care about is that profit margins are improving. So what if a company's customers have stopped buying. So what if the company has sacked half its workers. So what if we are burning the family furniture to keep the house warm.

You're smarter than that. You can look down the road and see the bigger picture. And the big picture is that earnings are likely to turn ugly again over the next several quarters.

Aggressive cost-cutting could still boost third quarter numbers. And fourth quarter comparisons against a cataclysmic quarter last year might look downright rosy. But for stocks to sustain their advance beyond the next two quarters, companies must increase sales. And that is going to be a challenge.

Andrew Gordon has been warning the subscribers of INCOME about this for a while. "The majority of cost-cutting is over," he says. "If companies don't show an increase in sales, you can kiss the stock market bubble goodbye."

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And sales are not going to improve while job losses continue to mount.

The last employment report shows that even the government is cutting jobs. The government is usually the last bastion against falling employment. But with falling tax receipts and swollen budgets, even they have succumbed to the economy.

And don't base your hopes for an improving market on slowdown in the rate of job losses. Of course job losses are slowing. There are fewer and fewer easy cuts to be made. But a loss of jobs is still a loss.

Sometimes it's hard to tell which way the wind is blowing in the alternative energy world.

Just as quickly as $130-a-barrel oil sparked interest in breaking our dependency on oil, $40-a-barrel oil squashed it.

But it looks like Wall Street is ready for round two. In the last month, Morgan Stanley and Citigroup have each spent at least $100 million to finance wind farms.

The investments were spurred by a new government program that gives a 30% cash rebate on the cost to construct a renewable energy facility. The program also provides a valuable tax break through accelerated depreciation.

The Wall Street banks expect annual returns on these projects between 9% and 15% annually. But the companies that develop and operate these wind farms could do even better.

Andrew Gordon recently recommended one of these companies to the subscribers of INCOME. The company is one of the leading power generation utilities in the U.S. And it is also the biggest generator of renewable energy.

Andrew calls this company "the ExxonMobil of wind energy." They have virtually no competition that matches their size and experience. He expects shares to appreciate more than 60% in the next two years – not to mention four generous income checks every year.

You can receive a full year of Andrew's research for less than $9 a month. Click here to learn more about INCOME.

Now It's Your Turn to Grab Some Gains for Yourself Eric Goldstein of Montclair, NJ wrote in to say. "Ted knows how to make money on options when the markets are going up or down. I followed his advice and tripled my money buying call options on frontline, and I made 50% in only 1 day buying puts on the housing market index. "Let Ted show you exactly how to zero in on the options with explosive profit potential.

The Fed may be audited… finally...

Ron Paul's efforts to audit the Federal Reserve are finally gaining some traction. But let's hope Barney Frank doesn't screw it up first.

The Federal Reserve operates with virtually no accountability. No one outside a select few knows who the Fed lends money to. This includes loans to banks, individual firms, foreign governments, and foreign banks. It's like the Wizard of Oz. Until the curtain is pulled back, we don't know the whole story.

The bill proposed by Ron Paul would subject the Fed to a complete audit. The bank would have to account for all the money it controls. But Barney Frank, chairman of the House Financial Services committee, is working on his own regulatory bill. And it could water down the full audit that Paul wants.

This has Paul very concerned. If his proposal is added to a more comprehensive bill, it could lose its bite. He is worried that it would be added just to pacify the "angry masses" without instituting any real changes.

Rusty McDougal agrees. I asked him about this yesterday. Here's what he had to say:

"I don't believe the Fed could survive a TRUE audit. A true audit would expose such a level of fraud by the banks, AIG, Fannie, Freddie, etc. that there would be no credibility left in the system. We would get a peek at the few remaining gold nuggets in Ft. Knox (or Ft. Empty, if you prefer).

"Our centrally-planned markets couldn't hold up under real scrutiny. The dollar and our debt would crumble. They rely on the naiveté of foreigners. That would be no more. A war or some other form of DISTRACTION would quickly ensue.

"With that being said, I seriously doubt a TRUE audit will transpire. The hooks are in too deep. What is more likely is that the financial and monetary fraud that has been perpetrated on America will take on an even larger global presence."

Let's hope this bill doesn't get neutered. The machinations of this foreign financial power need to be exposed for what they are.

Truckers shooting straight from the hip about the economy…

When the real estate market had just begun to sour, the National Association of Realtors issued statement after statement that the worst was behind us. Nearly three years later we still haven't found a bottom.

So it's refreshing to hear an honest assessment about the economy from an association that doesn't just serve as shills for their industry.

The American Trucking Association recently announced that the July Truck Tonnage Index rose by 2.1%. This was also the best year-over-year reading since February. This is a positive sign, but it's still just a blip.

ATA Chief Economist Bob Costello said, "While I am optimistic that the worst is behind us, I just don't see anything on the economic horizon that suggests freight tonnage is about to rise significantly or consistently."

Trucking represents 69% of all U.S. domestic freight transportation. That makes it one of the best leading indicators for the economy. If there aren't more trucks on the road, it's a sure sign that spending hasn't picked up.

Three to four months of increasing freight would be a meaningful improvement, especially going into the holiday season. On the other hand, low trucking numbers could be an early indication that we're headed for a disastrous holiday shopping season.

Stay tuned. We'll keep our eye on the Truck Tonnage Index and report the news.

Good Investing,

Bob Irish
Investment Director
Investor's Daily Edge

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Market Window

Bob Irish - Investment Director
Andy Gordon - Editorial Contributor
Jon Herring - Editorial Director
Ted Peroulakis - Editorial Contributor
Christian Hill - Managing Editor
Dr. Russell McDougal - Editorial Contributor
Steve McDonald - Editorial Contributor
Michael Masterson - Consulting Editor


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