Earnings: BAC, YHOO, INTC, CSX

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Yesterday we had a solid bounce, or will it shape up to be just a dead cat bounce? This morning the futures are down again and it seems that volatility and the gold story are still with us. I read an interesting observation which speculated that this could be the start of a disconnect between the paper gold market (ETF & Futures) and the physical gold market (SPOT). Part of the reason for this theory is that the physical demand is still VERY strong, regardless of the move in the gold price (driven by the futures market). It is important to remember that the volume that drove down gold prices over the last couple of days was in the FUTURES market, not the spot market. Could paper gold (which is fraction of the representation of physical gold) be starting to disconnect? It’s an interesting theory, but for now the spot market is still tracking the paper gold market (futures and ETFs). So will earnings help or hurt today’s market action, or will earnings be ignored as concerns about gold and Europe dominate headlines?

Earnings: BAC, YHOO, INTC, CSX

Courtesy of wikipedia

Bank of America (BAC) is the twin brother of Citigroup (C), both are giant zombie banks with so much government intervention it is hard to separate REAL earnings from government subsidization. At least Citigroup got rid of their CEO, Pandit. Bank of America is still being run by Brian Moynihan, who has really just managed this titanic rather than fixing the problems. BAC needs to be broken-up into a mortgage company, investment bank/brokerage, and traditional savings bank. I say that NOT from any ideological belief or even the “too big to fail” mantra. My opinion comes strictly from a business sense. The bank, like Citigroup, does have profitable and strong units; however, these stronger units are just subsidizing the weak parts of the bank. There is so much incest in these giant zombie banks that it is hard to tell if assets from one division are really just used to prop up another. Remember, Congress changed the accounting rules at the start of the recession, which allowed these banks far more latitude to adjust their books (or in my humble opinion – mask troubled areas). Additionally, the Federal Reserve is still buying down crap mortgages from them and supplying short-term loans via the Fed’s Discount Window, all of which continues to mask the true liabilities of these zombie banks. The company is also still mired in mortgage related lawsuits. Remember that company Countrywide? Let’s not forget that it is part of this zombie bank. After that diatribe, let’s review their earnings. BAC reported 1st quarter earnings of 20 cents a share on a non-GAAP revenue of $23.5 billion. While better than a year ago, it did fall below analysts’ expectations. The gain in reported profits came from the ability to unload and offset most of their liabilities, which still remain great. Additionally, lay-offs continue and that has helped lower costs by $1 billion in expenses from a year ago. Pouring over the numbers, there remains questions, however. The stock was down over 2% in the pre-market and analysts and investors are not impressed with Bank of America’s efforts to turn this zombie bank around. It didn’t help that CEO Brian Moynihan sounded like President Obama with his statement that his BAC turnaround efforts are a “balanced approach”. Really? Stay away!

Courtesy of wikipedia

Yahoo (YHOO) had looked like a company that was on a death spiral. It was a one-trick pony that clung to its old search engine ways, hoping to go toe-to-toe for ad revenue. The company recently hired a new CEO, Marissa Mayer, who was once a top Google (GOOG) manager, and there is hope that she will turn Yahoo into fierce competitor. She has made some big inroads with coupling data and services with new partners, but it is still a long road to get back up to the top of the hill and she cautioned this will take time and not be overnight. No doubt it is an uphill battle. The company saw revenue shrink 7%, which is never good, but it did see profits rise to 35 cents a share, up from 23 cents a year ago. However, the company has been on a buying spree through acquiring start-ups aimed at bringing more products to the market and helping to move the company into the mobile and social networking space. The stock is down in the pre-market.

Courtesy of wikipedia
Intel (INTL) is in a very difficult position; it is married to Microsoft (MSFT), which means that its core business has remained in the computer desktop and laptop space, which is losing ground. Intel has not been able to dominate in the Android, mobile app, or tablet markets and that is hurting growth. Revenue is down 2%, from $12.91 billion to $12.6 billion, and gross margin was down 2%. The chip industry is a commoditized business as more competitors squeeze into a saturated space. The cost to make faster, smaller, and cooler chips remains expensive vs. the competition price points in finished products. The ultra-books are coming down in price radically, which is a big market for Intel. This year we have seen ultra-books break below the $500 dollar price point and the need to make a faster, smaller, and cooler running chip for these smaller faster ultra-books (super small full-fledged laptops) is squeezing the margins. R&D is not cheap! Intel needs to come out with new chip architecture at lower price points to compete; they also need to break further into the tablet and mobile market. Can Intel embrace Android given its deep relationship with Microsoft? The stock is down slightly in the pre-market.

Courtesy of wikipedia
CSX reported a quarterly profit of 45 cents a share, 5 cents above expectations. The company also increased their dividend to 15 cents a share and announced a $1 billion share buyback. CSX’s rail shipment company continues to see higher shipment volumes as it steals flow from the more costly trucking industry. They have also lowered expenses. It seems their ad and marketing campaign continues to work and rail is back and strong. Cheaper, faster, better – who can complain? However, the stock is down in the pre-market, even with better than expected results.

It looks like the whole market is under pressure. I guess even some better-than-expected earnings can’t save the market this morning. I think we are just seeing broad-based volatility and the gold story is still dominating the headlines, as no one is really talking about earnings.

Fed’s approaching the event horizon?

Europe is also seeing some problems, as the German bond auction didn’t bring the kind of bid volume as was expected and the Club Med Socialist nations in the south are coming under credit rating agency fire again with more downgrades and a “negative watch”. Austerity is coming whether they (we) like it or not. How much MORE can the central banks print? Japan is printing so much currency that it will double the amount in two years; the US is currently printing enough to double the amount of paper in 4 years and may speed that up. At what point do we all find it absurd? Print double the amount in a year, 6 months, in days? Hello – that’s called monetary inflation!

The Fed is approaching the “D-Rate” boundary (Default Rate), the point at which the Fed’s net interest margin becomes NEGATIVE. This is when the outflows due to interest payable to the reserve surpasses the cash inflows from the Fed’s low-yield asset portfolio (government bonds).When this boundary is crossed the Fed technically becomes insolvent. Some have suspected that we have already crossed the boundary if we back in the many under or non-performing mortgage liabilities that Fed has purchased.

When this point is crossed, the Fed is just printing paper and really no longer has assets to back it up. Technically, the Fed can’t go broke, they can just print more, but the money needs to have value and that value is based off the assets that supposedly back the money. This is the point in which the money that we print, which is backed by the Full Credit and Faith of the issuing government, no longer has any credit (because liabilities are larger than assets + interest). The money is only backed by faith at that point.

I am not sure if we have crossed the boundary or not, but at some point other central banks have taken notice and are concerned. We have seen the demand for sovereign gold by Germany and others from the US, this is usually a sign they, too, are concerned about our Fed crossing the D-Rate boundary.

Support & Resistance

INDU 14,600
I would look at this as the short-term support level. If we get there today, we need to hold that level and close above it. Many eyes are watching the market this week to see if this is just a pull-back to get long and we go higher, or if the bullish trend of 2013 comes crashing down.

NDX 2800
The tech heavy index has seen some good and bad earnings already, lots of forward revenue warnings and concerns that Apple (AAPL) is seeing a slowdown in iPad sales. Apple stock is down over $10 dollars in the pre-market. I would mark the 2800 level for key support and we need to close above it. It looks like we will open close to that level.

SPX 1550
The VIX rocketed up 40%, came down 20%, and is now back up over 10% in the pre-market. Volatility is all over the place and people don’t know if they should panic and sell or get long. We are seeing volatility in the volatility. The S&P 500 looks to have 1550 as a key support area that we need to close above today to give any hope that the market will bounce from here. If not, expect volatility to go higher as the SPX goes lower.

RUT 900
Set your support alert for 900 in the RUT. If the broad-based market loses ground it will reflect that there is not enough general order flow heading into equities to buoy the market in its entirety. The 10-year yield is still holding in the 1.7% range, so we are not seeing a massive flight into treasuries. Also, the dollar index is holding up; for now. Perhaps there is a flight into cash?

This week could mark the pivot point in this rally. We have had a solid pullback, led by gold, which triggered margin calls and selling pressure across the board. Remember the market is built on leverage and that means when people need cash to cover a position they could be selling good assets to raise money.

The gold story is interesting; a trade set it off and we are not sure who or why at this point. The volume driving down gold prices came from the futures market. That tells us something. The futures market is BIGGER than the ETF or actual gold spot market. Additionally, we know that MORE futures contracts traded than all the physical gold on reserve. As I mentioned, there is speculation that we are starting to see a disconnect between the paper gold and physical gold markets. What happens when everyone realizes, as Kyle Bass did when he tried to take delivery of REAL gold from his futures contracts, that there is only a fractional amount of gold vs. all the futures out there? Could we see a decoupling of the London Spot market and the NY COMEX Futures market? For now the futures are driving the price of gold.

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