Earnings Season Begins with a Miss or 3

Despite all the demand for Aluminum and the supposedly robust economy, Alcoa’s number’s were pretty punk Tuesday night. Doug Kass is right on top of it:

The earnings season started off with a whiff, resembling Alex
Rodriguez’s pathetic hitting and fielding and the New York Yankees’ postseason
disaster over the last week.

  • Genentech (DNA) struck out on a full count as several metrics failed
    to meet expectations. While Lucentis dramatically beat forecasts, its old
    drug drivers stalled.

  • Alcoa (AA) whiffed on three straight pitches as cost pressures, mill
    outages and weakness in residential construction (remember the multiplier effect I have been emphasizing!) contributed
    to a large miss.

  • Legg Mason (LM) also struck out on three consecutive pitches as the
    company guided lower on a revenue shortfall and a product mix change towards
    lower yielding fixed income. (Mother Merrill cut the stock to a sell this
  • Alcoa and Legg traded much llower, while the bulls
    all claimed these were "company-specific misses" and not indicative
    of a new corporate profit trend. Indeed, since then, Pepsi’s (PEP) numbers were very good, and so too appears Lam Research (LRCX).

    Kass notes what this potentially means to this quarter’s reporting:

    "First, these misses are consistent with my outlook for lumpy and uneven growth in the next few years. As I have repeated often, exiting a world of aggressive stimuli (fiscal and monetary) will produce a period of choppiness, providing a challenge for corporate managers to navigate. This is not a P/E multiple expanding development.

    Second, the broad scope and implications of a protracted and hard landing for housing is not being adequately reflected in overall corporate profit forecasts. Housing casts a much longer reach than is generally envisioned and Wall Street’s bottom up 12%-13% earnings growth expectations for 2007 will likely be widely off the mark.

    Third, over the next few weeks I believe an expected rise in bond yields to be an even greater threat to the deceleration in corporate profits and the growing perception that corporate profit margins are at risk.

    Interesting take. Thanks, Doug.


    Those Damn Yankees
    Doug Kass
    The Edge, 10/11/2006 7:45 AM EDT

    Print Friendly, PDF & Email

    What's been said:

    Discussions found on the web:
    1. Eric commented on Oct 12

      Is the rise in bond yields a technical correction or driven by something else? Foreign central banks?

    2. DD commented on Oct 12

      please dont buy anything american…especially wgo…are you kidding me.

      also a real yankee’s fan would say…somebody had to die for that horrible performance. but that maybe a bit harsh…

    3. spencer commented on Oct 12

      We are now seeing unit labor cost rise faster than pricing — what always kills profits growth.

    4. grodge commented on Oct 12

      Legg Mason hit into a double play.

    5. S commented on Oct 12

      “…Wall Street’s bottom up 12%-13% earnings growth expectations for 2007 will likely be widely off the mark.”

      Doug Cliggott was interviewed yesterday and he’s calling for profits to fall 16% in 2007, based mostly on the two things Kass mentions: The impact from housing and a decline in fiscal and monetary stimulus.

    6. GerryL commented on Oct 12

      The bulls have been saying that falling interest rates will save the housing market. If interest rates continue to rise what will they say?

    7. ac commented on Oct 12

      Is the rise in bond yields a technical correction or driven by something else? Foreign central banks?

      The extraordinary revisions to the past employment numbers in the past week have made the bond market believe a December rate cut is much less likely.

      That said, I personally think both the upward revisions and then sudden drop in employment numbers is even more indicative of a bubble economy going bust.

    8. Barry Ritholtz commented on Oct 12

      The Bulls were also counting on a Fed cut, and now it looks like that is less likely –a dnt he market rallies anyway.

      That has the smell of liquidity driven trading (i.e., lots of hedgie cash around)

    9. Caver commented on Oct 12

      Anyone else willing to admit this rally is/was for real. I been waiting for it to end about every 15 pts.

    10. ss23 commented on Oct 12

      man..this rally keeps going up..and up big time since July..even a 10% correction down the line won’t mean anything!
      Are bears completely wrong!!!

    11. V L commented on Oct 12

      “That has the smell of liquidity driven trading”

      It appears that fast money gradually pulling out of commodities into the stock market to ride on the upward trend. Nevertheless, the trend can reverse on a dime and the hedgies will get out fast and run like there is no tomorrow.

    12. jkw commented on Oct 12

      Perhaps the bears are wrong, but I’m going to hold onto my index puts anyway. I’ll keep trading short-term calls until that stops working. If the market never declines, my long-term puts and short-term calls will cancel out (the short term calls may even make more money than the puts lose). If the bears are right, then the puts will become very valuable and actually make money. Given the current state of the economy, I still think things are more likely to go down by a lot than they are to go up by a lot.

    13. Nick commented on Oct 12

      Face it bears, you are just plain wrong. The economy will be fine. Emerging markets are strong, base metals are still super strong (copper, zinc nickel etc…). The most difficult thing in the investing world is to realize that our outlook was wrong and to regnonize it.

    14. V L commented on Oct 12

      “Emerging markets are strong, base metals are still super strong (copper, zinc nickel etc…)”

      Go ahead and jump right into these overstretched and complacent markets.

      They will snap back fast like a rubber band before you will get a chance to blink (everyone thinks that they can get out fast when it is time; traders at Amaranth thought they could get out too)

    15. jkw commented on Oct 12

      The economy is being driven by debt creation. The economy will be strong until the debt creation stops. It is already at an absurd level, but that doesn’t mean it won’t go higher. The longer it is pushed out, the worse things will be once things start to fall. When the economy starts to contract, it will happen faster than anyone has prepared for.

      I can keep financing long-term out of the money puts with short-term near the money calls. I’ll make 1-2% annualized until the market falls. Then I’ll double or triple my money in a few months. One-sided leverage is great.

      The problem with having a leveraged economy is that a margin call will cause a collapse. We’ve been living on borrowed money for quite a few years now. At some point, we will have to pay the loans back or default. Either way, we won’t be able to borrow money anymore.

    16. V L commented on Oct 12

      “base metals are still super strong (copper, zinc nickel etc…)”

      DJ LMEX Base Metals Index closes down today by 24.6 pts to 3785.3

      “super strong”???

    17. KB commented on Oct 12

      When’s the last time Alcoa beat earnings anyway? Does anybody even consider them a good company? I’ll wait till the real ones report before I pass judgment.

    18. V L commented on Oct 12

      Dow Jones News Services

      “The explosive growth of hedge funds and their aggressive use of borrowed money have raised alarms about whether a financial crisis could set off a chain reaction of hedge-fund failures that could cause chaos in the financial system… “Amaranth is a small example of what happens under macroeconomic stress,” said Allen Sinai of Decision Economics Inc., who warned a larger economic event could have catastrophic effects. “Amaranth is just the tip of the iceberg.”

      This is the rubber band snapping back that I was talking about – all you need is one macroeconomic stress.

    19. V L commented on Oct 12

      Forecasting U.S. gross domestic product growth in the third Q:

      Diane (Goldilocks) Swonk (Mesirow Financial) – 1.8
      Lawrence Kudlow (The Best Story Never Told) – 3.0
      P. Hooper/J.A. LaVorgna (Deutsche Bank) – 1.5
      Mickey D. Levy (Bank of America) – 1.4

    20. DD commented on Oct 12

      B, as we rally numerous times after numerous hawkish comments from the almighty fed…maybe its not a rate cut that we await….??

    21. Mark commented on Oct 12


      I have 1.9%. Market will probably rally on THAT too!

    22. HT commented on Oct 12

      last comment was for whipsaw

    23. V L commented on Oct 12


      Actually, PepsiCo Inc. was down today by 1.6% because of lower guidance.

      Gee, Bulls have completely blocked the reality and they only see what ever they want to see.

    24. gg commented on Oct 12

      ” Bulls have completely blocked the reality and they only see what ever they want to see ”

      bulls and bears are both blind to objectivity

    25. V L commented on Oct 12

      ‘bulls and bears are both blind to objectivity”

      Both agree that growth will slow but bulls see a fairy tale period and bears see the reality.

      Bulls: Yes, growth will slow but company profits will continue growing at the same rate as analysts have predicted because the Fed is like fairies. They can use magical powers to orchestrate a soft landing and a fairy tale economic period called Goldilocks… etc.

      Bears: Growth will slow and company earnings will slow; thus, current earnings estimates are overoptimistic and companies will lower guidance. Recession is very much possible because the Fed has no control over the economy. The Fed is behind the inflationary curve (according to many Fed members outside of their comfort zone, all they can do is to pray for slow growth lowering inflation), thus, stagflation is also possible… etc.

      What view is more realistic?

    26. gg commented on Oct 12

      if the Fed’s behind the inflationary curve , Fed Funds wouldn’t be expecting a rate cut as they are now

    27. samuel commented on Oct 12

      Mutual Fund cash levels must be under 4% now. This market looks manic. Ned Davis’ sentiment indicator is at an extreme level of optimism. Maybe we had our 4th quarter rally already?

      Also, remember we have the discount rate over 6% which is a huge negative for the market historically. Yet, the market keeps ignoring all this. Amazing.


    28. Barry Ritholtz commented on Oct 12

      I have a subscription only commentary going up tomorrow, explaining in grim detail what I think is going on, and how long it will last for —

      Perhaps I can move it to the free sample area …

    29. V L commented on Oct 12

      “if the Fed’s behind the inflationary curve , Fed Funds wouldn’t be expecting a rate cut as they are now”

      This is a classic case of wishful thinking.

      Let’s not forget that the main job of the Fed is to maintain price stability. Period.
      (Not to please the complacent bulls and to make their fairy tails come true).

      How in the world the Fed can cut rates while inflation is still well above 2%?


    30. gg commented on Oct 12

      the bond market’s forecasting inflation to go below 2% by then ……
      that’s why the Fed cuts rates on average by 7 months after it’s last rate increase

    31. gg commented on Oct 12

      for the record , I’m not a Bull
      I don’t forecast the future , what I do is let the market tell me what they think

      But when I see huge institutional accounts sell Corporates for Governments , or Sell $500M of Energy positions for Tech ,
      the flows tell me what the next move “may” be … and that’s been going on for many weeks by huge accounts…. not fast money flippers

    32. V L commented on Oct 12

      “the bond market’s forecasting inflation to go below 2% by then”

      Maybe it is not so much the inflation falling below 2% but severe recession forcing the Fed to cut rates to stimulate the economy.
      I just simply cannot imagine the inflation to subside below 2% within 7 months at the same time as US dollar continue to remain week and worldwide inflation running high (many central banks in Latin America, EU and Asia continue raising rates because of inflation)

      “But when I see huge institutional accounts sell Corporates for Governments , or Sell $500M of Energy positions for Tech”

      You could be absolutely correct about institutions rotating from energy into US stocks but also do not underestimate the magnitude of liquidity highly leveraged hedge funds (a.k.a. “fast money flippers”) can generate.

    33. Caver commented on Oct 12

      gg: I can see why they might be buying treasuries, but why are they buying tech?

      BR: You’re going to explain in “grim detail” the meteoric rise of the Dow to 36,000? :)

      I will make myself feel better remembering that one of those inherent investor biases that behavioral finance people like to yap about is the tendency for the investor to extrapolate the current conditions well into the future. Sounds like there is a lot of that going on.

    34. gg commented on Oct 12

      you should check your $ index charts to see where $ has traded vs. Y , Euro , BP , SF , CAD , AUD the last few months …. those currencies are in worse shape than the $ , have all fallen 2-3% in the last 6 weeks , and their economies are slowing at a greater rate notwithstanding the Tankan and Ifo surveys that came out recently

      and I never underestimate fast money , just know that in spite of their speed , they don’t carry enough weight as they proved after the carry-trade went away from them in May , setting up that Emerging Markets and Energy inspired margin call thru July

    35. whipsaw commented on Oct 12

      bah, I got tired of the pain and sold off most of my SPY puts today so you can count on the market finally tanking tomorrow to take down my DIA calls too. :/

      I think I’m going to give this directional stuff a rest until after the elections at least and focus on playing volatility with delta-neutral straddles and strangles. I don’t know who is pushing things around, but this market is too crazy to assess in a macro way.

    36. gg commented on Oct 12

      never play options from the long side Whipsaw ,
      play the deltas on the short side

    37. V L commented on Oct 12

      “you should check your $ index charts to see where $ has traded”

      The dollar has been sliding down and down. It is historically very weak relative to almost all other major currencies.
      What do you think happens to the dollar if hypothetically the Fed cuts rates or China further revalues their currency or our deficits continue widening at current rates?







    38. Si commented on Oct 13

      I am thinking that the rally is gonna stuggle into November, traditionally a nice bullish time of year. I heard so many people saying that they were going to see whats happening at the end of Oct that a Sept/Oct rally had to be on the cards. Reckon the end of year is going to be down a bit to flat.
      I have been amazed by the strength of the market all year really. Could even be off to the races again with these guys running things. whack interest rates down as soon as possible, mess around with a few numbers to make this seem not so crazy and get the whole debt stew going again. Lets face it, it could be ten years away but when the cracks in all this begin to falter….

    39. tjofpa commented on Oct 13

      I’ve been using the $ index as my guide to the marts recently; The April drop in $/yen was certainly a warning for May.

      And speaking of the fast money;

      “Speculative short positions, or bets that the yen will fall, outnumbered long positions by 90,804 contracts on Sept. 19, up from 69,498 two weeks earlier, CME futures trading data show.”

      “The difference in the number of wagers by hedge funds and other large speculators on a fall in the yen compared with those on a gain — so-called net shorts — was 104,151 on Oct. 3, compared with 87,358 a week ago, the Washington-based Commodity Futures Trading Commission said on Oct. 6. ”

      Everyone piling on one side of the trade and it WORKED! How did they know there would be a banker over there handing out free Yen to anyone who wanted to buy $’s?

      Today we see Jap PPI rising the fastest in 25 years.
      I don’t believe $/yen can go above 120.

    40. jkw commented on Oct 13


      Have you considered how suicidal it is to naked short options when implied volatilities are this low? I certainly don’t want any negative vega right now. There’s a reason the margin requirement on short options is so high. The return on long or short is about the same when you are right about what the market will do, but the risk is much higher when you short options. A low implied volatility means that options are underpriced. Why would you want to sell something that is underpriced?

      Straddles/strangles are the way to make pure volatility bets. Unless you can figure out how to trade vix options/futures.

    41. bri commented on Oct 13

      Federal Reserve Bank of St. Louis President William Poole said he would support a cut in interest rates if the US economy stalls, citing an interview with Poole. The risk of inflation has eased “a bit” in the past eight to ten weeks, citing Poole. He sees more risk to growth than prices.
      ( reuters )

    42. gg commented on Oct 13


      never said to short naked , and i’m long vega

    43. V L commented on Oct 13

      ” Oct. 13 (Bloomberg) — Federal Reserve Bank of Chicago President Michael Moskow said central bankers may need more rate increases to curb inflation, bringing to five the number of Fed officials since Oct. 4 who have played down a possible rate cut.

      “Some additional firming of policy may yet be necessary to bring inflation back to a range consistent with price stability in a reasonable period of time,” Moskow said yesterday in a speech at the Four Seasons Hotel in Chicago. ”

    44. whipsaw commented on Oct 13


      I’m afraid I don’t understand your reasoning. Volatility is extremely low now and options are far too cheap in my opinion. I’d much rather buy vol than sell it under the circumstances, but don’t have any interest in trading VIX directly, so straddles/strangles appear to be a pretty good way to go. Using McMillan’s filtering reports to find candidates, I did this last spring under similar circumstances and it worked out ok- one straddle made about 20% and the other broke even when I took them off.

      At this point, I am satisfied that I have no idea of whether things are going to go up or down, but an increase in volatility is a good bet between now and May. But I am listening if you would care to explain further. Thanks.

    45. jkw commented on Oct 13

      If you’re long vega, than you aren’t really short options. Short options positions have negative gamma and vega and positive theta. Long options positions have positive gamma and vega and negative theta. For any combination of options, the sign of those three parameters has to match one of those possibilities (unless they are practically 0 and the sign can be basically ignored). Delta can be set independently.

    Posted Under