Tuesday, April 21, 2009

Investor Optimism Premature?

One might think that 6 quarters into a recession, it would be time for big companies to finally exceed the expectations they feed the Street. Not so. And investors don't seem to care. About the first point, EBR has little comment. About the second point, EBR is concerned that complacency has returned, even with the stock market down in real terms as much as in the 1929-31 period the same number of months from the market peak.

Caterpillar reports sales down 29% year on year and states that it may cut its dividend (see Q16). The stock is selling at 4X tangible book value. It drastically lowered its yearly 2009 sales estimate from about $40 B only 3 months ago- when the worldwide economy also stank- to about $35 B today. The stock is only modestly down, in keeping with another report, wherein Bloomberg reports:

German investor confidence rose to the highest level in almost two years in April after stock markets rallied on government and central bank efforts to revive economic growth.

Since market close yesterday, IBM, Coke and Cat have missed sales projections. To miss sales projections this far into a bear market is disconcerting; yet the stock price, in keeping with the German optimism, are trading the stocks with minor price changes.

Meanwhile, there is no leadership. Amongst the financials, BofA and Citi have suffered huge percentage declines in the past couple of trading days. Perhaps most worrisome is that the banking company with the best chart on a longer-term basis, Northern Trust (NTRS), had a big earnings miss and the stock got crushed. The stock is now decisively below its 50 day and 200 day moving averages; and, the ascending 50 day MA never quite crossed above the descending 200 day MA.

In conjunction with today's earlier post documenting more than a weak straw in the wind that the tide is indeed turning against Big Finance, EBR takes the NTRS news and stock reaction as evidence that more pain probably lies ahead for the stocks of the financials- and with them the real economy given that the dependence of the economy on debt remains excessive.

Structurally strong charts remain with the mutual funds BTTRX, which tracks the long zero coupon Treasury market, and Ginnie Mae funds such as VFIIX and FGMNX. Of them, BTTRX is the safest buy from both a chart and fundamental standpoint, though nothing is optimally safe at present, unfortunately including cash in the bank given that FDIC is essentially bankrupt as a going concern.


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