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Ugly earnings by Monsanto today say sector selection will count during third quarter reporting season

posted on October 7, 2015 at 7:33 pm

The really ugly earnings report delivered today by Monsanto (MON) should go a long way toward clarifying the debate over calendar third quarter earnings. The company announced a loss of 19 cents a share for its fiscal fourth quarter that ended on August 31 and said that earnings would remain weak through 2016. Analysts had expected a loss of 3 cents a share. The company also reported that it cut 2,600 jobs or about 12% of its total workforce.

What’s that you say—you didn’t know there is a debate over earnings for the calendar third quarter? Earnings per share for the stocks in the Standard & Poor’s 500 are projected by Wall Street analysts to fall by 6.9% in the quarter.

End of debate, no?

Well, no. There’s a good possibility that the projected decline in S&P 500 earnings overstates the weakness in the quarter. The index, in comparison to the actual economy, over-weights the energy sector. Which raises the possibility that overall corporate profits—outside the energy sector–are better than projections for the S&P index indicate.

That side of the debate scores some points in the Federal Reserve’s report “Nonfinancial Corporate Business Profits.” In the calendar second quarter, corporate profits by the Fed’s measure climbed 11% year over year. That’s the most since the fourth quarter of 2012. In contrast the S&P 500 showed a decline in corporate profits of 2%, according to Bloomberg.

Goldman Sachs has an explanation for the disparity. The plunge in oil prices, revenue and earnings that is hammering energy company profits is one side of the positive effects of ultra low interest rates, low energy costs, and restrained wage growth has been good for company profits everywhere outside of the energy sector. Income in the third quarter is projected by S&P to grow by 10% or more in telecommunications, technology, consumer discretionary, and health care.

The big wild card for the overall earnings picture is the strong dollar. How will that affect profits for big U.S. exporters?

From the evidence in Monsanto’s report today, companies with big exposure to the negative effects of a strong dollar, with big exposure to commodities markets, and with big exposure to emerging economies are going to show disappointingly weak earnings.  Monsanto took a hit as a strong dollar damped sales across Latin America and as the company continued to cut prices (although the worst of that seems to be over.) Monsanto continued to face pressure on its Roundup product from generic glyphosate with farmers looking to save money in the face of commodity price pressures. Brazil, where the economy is in recession, added to the decline in profits.

It would be a good strategy to focus on sectors experiencing solid profit growth and stay away from laggards—but if growth at the laggards is bad enough, it can, history says, take the entire market into a downturn.

Very careful and very selective buying would seem to be in order on dips in the stronger sectors of the market.

Update MGM Resorts

posted on October 6, 2015 at 8:18 pm
chinese currency

Update October 6, 2015: With all the other excitement in the stock market over the last couple of weeks, there’s a good chance that you’ve missed the big bump in shares of MGM Resorts International (MGM.) The shares were up 15.1% from September 29 to the close on October 6.

Why? An announcement by Li Gang, director of the Chinese government’s liaison office, that Beijing will intervene to support Macau. Support for the hard-hit gambling destination could include granting more mainland cities the right to issue visas to Macau and the introduction of a new multi-visit visa that would make it easier for visitors to make multiple trips. In addition the local Macau government has said that it is looking for ways to boost tourism to Macau. That effort could be especially important since Beijing has been pressing Macau casino operators to move away from a focus on high-roller VIP gamblers in order to grow mass-market tourist traffic.

The government’s anti-corruption drive has done a good job scaring away those high rollers. Anything that smacks of conspicuous consumption can put an individual in the cross hairs of government investigators. The campaign has led to big declines in sales of luxury cars, Western brands of liquor, Prada and Louis Vuitton fashion goods—and VIP junkets to Macau. Gaming revenue in Macau has fallen about 33% on a year-to-year basis.

MGM is due to open a second Macau casino and resort complex in the city’s hot Cotai peninsula in late 2016. That has put MGM behind the earliest casino operators in the area but the timing looks fortuitous given the shift in the Macau market. That has let MGM fine tune its new casino/resort—about 1 million square feet larger than the company’s first Macau casino—to add more restaurants and more shopping as well as a nightclub, concert and ballroom venue. The VIP gambling rooms have been cut back in size in order to make room for more mass-market tourist attractions.

Macau in general and MGM Macau in particular certainly aren’t out of the woods yet. But the Chinese government has signaled that it’s aware that the anti-corruption campaign has damaged a critical local economy at a time when the national economy needs all the growth it can find.

As of October 6, I’m keeping MGM Resorts International in my Jubak’s Picks portfolio with a target of $25 a share by June 2016. I have a gain of 63.64% in this position since I added it to the portfolio in May 2012.

Sell Greenbrier Companies

posted on October 5, 2015 at 7:54 pm
Oil rigs - land

I’m going to use the current five-day (and counting) weak dollar rally to sell the Greenbrier Companies (GBX) out of my Jubak’s Picks portfolio. The stock is up 14% from September 28 to the close today at $35.18.

Greenbrier has bounced so hard in this rally because the maker of railroad cars is doubly leveraged to the U.S. energy boom. Oil and natural gas liquids from the country’s shale geologies have had, frequently, to travel by rail since these new production areas aren’t well served by the existing pipeline system. That had meant soaring demand for the tank cars that Greenbrier builds (and for the new, safer cars that government regulations are gradually phasing in.) And with the railroads making a very nice dollar from transporting this oil they had placed so many orders for new cars that Greenbrier’s backlog soared.

With a recovery during this rally in oil prices, Greenbrier has felt double upside leverage.

But this same double leverage that led the shares to bounce so strongly in this rally is exactly the double leverage that took Greenbrier down to $30.86 on September 28 from a 52-week high of $67.45. With oil producers in shale regions cutting back on production—even if not significantly until lately—that meant less oil to ship. With those same companies reducing capital spending there was less gear and fewer supplies headed to the oil fields. And with the railroads seeing their own revenue drop, they slowed the pace of capital spending on new cars.

Greenbrier has a huge backlog of orders—even with the slowdown in the pace of new orders—to work through so the company is in no danger of succumbing to financial pressures. And the stock is very cheap on a trailing 12-month basis with a price of earnings ratio of just 6.58 on last year’s earnings.

The problem, though, is that despite the current rally, I don’t see a turn in the company’s business happening nearly as early as some Wall Street analysts do. For 2016 the consensus estimate is now at $6.27, a solid pick up from the $5.79 of 2015 and one reason that the forward multiple is a very low 5.11.

But that consensus estimate hides a huge disagreement about earnings for 2016. The high estimate for that year is $6.95 per share, but the low estimate us just $4.91. That’s a $2.00 a share swing and the trend in the consensus estimate for 2016 has been downward, going from $6.32 90 days ago to $6.20 seven days ago (before a rebound to $6.27 in the current rally.)

I think what we’re seeing is a gradual coming to terms by Wall Street that the energy bear in U.S. share regions is deeper and longer than many forecasts still project.

I’d like to revisit Greenbrier once those lower estimates are in the Wall Street forecast. But right now I’d like to watch from the sidelines.

As of the close on October 5, I’ve got a 43.9% loss in Greenbrier since I added it to the Jubak’s Picks portfolio on November 18, 2014.

Here’s what I posted about on my paid JubakAM.com site this weekend

posted on October 4, 2015 at 7:59 pm
NY Stock Exchange floor

Busy, very busy weekend on my paid JubakAM.com site this weekend as I tried to make sense of the market reaction to Friday’s disappointing jobs numbers for September.

On Friday, on this free site, I noted that the early sell off in U.S. stocks followed by a strong rally didn’t exactly clarify market sentiment.

In four posts this weekend on my subscription JubakAM.com I 1) laid out a fundamental scenario through the end of 2015 that pointed to a grind lower in U.S. stocks; 2) in a video explained why I think the debt ceiling deadline on November 5 is more of a danger to the markets than the expiration of the temporary funding bill on December 11, 4) projected that the big trend for the week ahead would be the weak dollar as traders speculate on the Fed holding its fire until March or3later, and 4) gave an update on what technical analysts are saying about why this market is still in a downtrend but with signs of hope to the upside.

That’s what I’m worked on at my subscription JubakAM.com site–I think there’s some value to you in passing on the direction of my thinking about the market on that site. Hope so anyway.

And, of course, there’s an ulterior motive: If you decide that you’d like more detail on those posts, I’m hoping that you’ll subscribe to my site at JubakAM.com for $199 a year. (By the way, you can get a full refund during the first seven days if you change your mind for any reason.)

Reaction to today’s disappointing jobs numbers clarifies very little about this market

posted on October 2, 2015 at 7:46 pm

Well, I was sort of right in yesterday’s post when I said the reaction to today’s jobs report for September would tell us a lot about the worries and hopes of the financial markets.

Of course, what we got was one summary of worries in the morning and a totally different take on market fears in the afternoon.

And I was just a bit wrong about the numbers themselves. I thought that the numbers were likely to show a strengthening U.S. economy.

But… instead of the 200,000 net new jobs that economists surveyed by Bloomberg had projected, the U.S. economy added just 142,000 jobs in September. Revisions took a total of 59,000 jobs out of the figures for July and August. Average hourly wages, which were supposed to increase, instead fell by a penny from August. People left the workforce, again, with the labor participation rate falling to 62.4 from 62.6% in August. (Unemployment did stay at 5.1% thanks to the decline in labor participation.)

In the morning that news led U.S. stocks down with the Standard & Poor’s 500 falling 1.5%. Fear that the U.S. economy might be slowing and would therefore play into—rather than counter—a slowdown in the global economy drove the losses.

In the afternoon, however, stocks rebounded with the S&P 500 finishing up 1.43% on the day. In the afternoon session stocks, U.S. Treasuries, and commodities rallied as the U.S. dollar fell. The weak jobs numbers would postpone any Federal Reserve interest rate increase, investors and traders decided. The odds of a December increase fell to 34% from 46% before the data release, according to the Fed Funds futures market. Odds on a January increase fell below 50%.

With the likely first move on U.S. interest rates delayed later into 2016, the U.S. dollar fell. (A delay in raising U.S. interest rates removes part of the reason to buy dollar-denominated assets now.) A weaker dollar pushed up the prices of commodities denominated in dollars andalso led to yields on benchmark 10-year U.S. Treasuries falling below 2% for the first time since August.

So where does that leave us in terms of figuring out market sentiment?

Pretty much where we went in with financial markets suspended between fear of faltering global growth and hope for a delay in rates.

It’s interesting to me that the market did have a rationale for ignoring or at least downplaying the weakness in these numbers since the September and August jobs figures are notoriously subject to revision once government statisticians get a better handle on seasonal adjustments from the start of the school season.

But the market chose not to take that out. And instead took the drop in jobs at face value. To me that’s an indication that in the glass half full/half empty debate between growth and interest rates, the market is inclined to go with the half empty view that slowing growth is indeed the bigger worry. Earnings season could confirm that view if a large number of U.S. exporters complain about pressure on revenue and earnings from a slowdown in China and other parts of the global economy.

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