The Market Bounces Through the Bad News

By Dr. Duru written for One-Twenty

July 15, 2009


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While talking about the stock market today, a friend of mine sighed out loud: "the vacillation is mind-numbing." Another bad jobs report motivates some to clamor louder for a second stimulus package, and the stock market reels. Goldman Sachs (GS) wows us with how much profit exists in riding the backs of American taxpayers, Intel (INTC) crushes well-managed expectations, and the market goes back to celebrating the coming end of the recession. It probably also helps that almost every stock market technician was staring at that tantalizing head and shoulders pattern on the S&P 500. Anyone shorting based on those technicals has likely been scrambling for cover this week as the bounce that I expected from oversold conditions continues. With today's surge, this is all the bounce I am willing to bet on for now. I am going back to neutral for the next two weeks or so, and I remain bearish over the next 4-6 months. I still suspect that the June highs will hold for the summer and the extended trading range will throw both bears and bulls for loops.

While expectations for an imminent recovery grow, I remain interested in tracking contrary data as a way to stay prepared. This earnings cycle has already delivered, and the market has bounced anyway. I know that commentary from company executives must be treated with caution - after all, last summer, almost every one outside of the housing industry seemed to insist that business was satisfactory. So, it is certainly possible that today's somber and sober executive simply does not or cannot see the recovery bearing down upon the business. As always, time will tell.

Here are snippets of the latest commentary suggesting confirming that the economy is weak and likely will remain so at least through the end of this year (click here for the first warnings earlier this month).

Martin Marietta Materials, Inc. (MLM) updates 2009 earnings expectations

MLM revised earnings guidance downward partially because of "a weaker and slower-than-expected recovery of the general United States economy" and "a marked decrease in transportation infrastructure spending resulting from a decline in state revenues and a longer-than-expected delay in federal stimulus projects moving to the construction stage." Other highlights:
  1. "Aside from the federal programs, a number of states are challenged with their own budgets as revenues decline. This has caused most states to pull back and defer on state funded projects"
  2. "Commercial construction activity remains weak, primarily in office and retail construction, and there has been little change in the residential construction markets, although the indicators point to the beginning of recovery in the second half of 2009...we expect a decline in commercial construction volumes in 2010, we do not have meaningful visibility into these markets at this time" (This has become a common theme for companies serving this industry)
  3. "With steel production forecasted to decline in line with general industrial demand, we do not expect volume growth in dolomitic lime in 2009"
  4. "We believe there will be a significant increase in infrastructure related projects as the effects of federal economic stimulus work their way into the economy"
W.W. Grainger, Inc. (GWW)

GWW is another industrial supplier who does not yet see signs of an economic recovery. Highlights:
  1. "We have not seen an indication of an economic turnaround at this point but our results indicate that we are gaining market share during this recession. We are in a great position to grow when the economy eventually recovers..."
  2. "Sales declined in all customer end markets except government, which was up slightly. Heavy manufacturing declined almost 30 percent; commercial declined high single digits with most other segments declining in the low to mid teens..."
Fastenal Company (FAST) reports 2009 second quarter earnings

FAST is another industrial supplier that continues to suffer from declining conditions in commercial real estate. Highlight:

"The economic weakness that dramatically worsened in the fall of 2008 and continued into 2009 has caused us to alter the 'pathway to profit'. These changes center on two aspects (1) temporarily slowing store openings to a range of 2% to 5%...and (2) stopping adding headcount except for store openings and for stores that are growing. The duration of the economic weakness and the prospects of future deterioration could impact the timing of when we achieve the $125 thousand per month average..."

CSX Corporation (CSX) announces second quarter earnings

CSX seems to have confirmed that China's stockpiling of coal is slowing down as "Volumes continued to decline across the board, although the rate of decline in the coal market accelerated in the second quarter." The CEO did note that "While the economy continues to significantly impact our business, there are some signs that we may be seeing the bottom in many markets." These signs were not listed in the printed earnings report. I am sure the conference call contains much more detail on this. I hope to check it soon for myself.

Texas Industries (TXI) reports fourth quarter and year-end results

While CSX reported declines in coal volumes, TXI reported coal prices are up 20-25% in California. However, 8-% of TXI's sales come from Texas. Note that TXI also believes that Texas will be one of the first states in the country to emerge from the recession.

Finally, note that food-related companies like YUM! Brands (YUM) are reporting better margins from a (year-over-year) decrease in commodity costs. I expect these tailwinds to end sooner than later. Watch for these very same companies to miss earnings expectations in the months ahead.

Be careful out there!

Full disclosure: long INTC, CSX. For other disclaimers click here.

DR. DURU®, 2009