April 14, 2011 – Where's the Beef?

Featured Trades: (WHERE'S THE BEEF?), (SPX), (SPY)

 

3) Where's the Beef? With the Q1 earnings season now underway, investors seeking a repeat of Q4's blistering results are about to be sorely disappointed. While calendar 2010 delivered a white hot 41% improvement in reported earnings, the growth rate for the most recent quarter could deliver gains as low as a paltry 13.6%. Still, a gain is still a gain.

However, we are about to see divergences between sectors not seen in the past arising from the huge increases in commodities prices. Rising costs against frozen selling prices is not a great business model. The distinction is very simple to predict. Industries that produce energy, commodities, and food, and those that service and transport them, will surprise to the upside. Industries that consume these things will disappoint. Since consuming industries substantially outnumber producing ones, the overall results will be muted at best.

Perhaps this is what the stock market is trying to tell us with its recent subdued performance. Take a look at the chart of the S&P 500 below and tell me if you see a double top lurking in there somewhere. My experience is that if it looks like a duck and quacks like a duck, it is definitely not a bull. This is why I have been studiously avoiding longs since the first peak in February. It is also why I am stretching my muscles and cracking my knuckles, getting ready to lay on some serious shorts into the next rally.

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Looks More Like a Bear to Me

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