Watching China

Over the past few weeks, it has becoming increasing clear which countries and their currencies are headed down the gutter:

The 3 currencies that I am most bearish for the near term are (in order of bearishness).

The anticipated bear market bounce in Financials has led to the usual fools' chorus that the worst is behind us, the economy is on the mend, and a recession is avoided. If their song sounds familiar, it is because you heard the same tune with the homebuilders, and the same melody with the monoduoline insurers.

For those with their heads in the sand, here is a broad and varied look at where the economy is contracting. Note that this isn't a cherrypicked list of negatives -- it is the crème de la crème of corporate America, ranging from consumer to finance to industrial to transports, and includes such stellar names as Apple (AAPL), Toyota (TM), American Express (AXP), UPS (UPS), Caterpillar (CAT), Costco (COST) and JPMorgan (JPM). (There's not a slouch in the bunch!)

The Black & Decker Corporation (BDK) is expected to report Q2 earnings before market open Friday, July 25, with a conference call scheduled for 10:00 a.m. ET.

Analysts are looking for a profit of $1.42 on revenue of $1.6B. The consensus range is $1.36 to $1.46 for EPS, and revenue of $1.51B to $1.64B, according to First Call. In April, Black & Decker reduced its Q2 EPS forecast to $1.40 to $1.50 and its FY08 EPS forecast to $5.25 to $5.65 vs. First Call consensus of $5.30.

ITT Corporation (ITT) is expected to report Q2 earnings before market open Friday July 25, with a conference call scheduled for 8:30 a.m. ET.

Analysts are looking for EPS of $1.10 on revenue of $2.93B. The consensus range is $1.06 to $1.13 for EPS, and revenue range of $2.89B to $2.95B, according to First Call. When ITT Corp. reported its Q1 earnings it gave guidance for FY08 EPS and revenue. The company expects FY08 EPS of $4.00 to $4.10 vs. consensus $4.10, and FY08 revenue of $11.4B to $11.5B vs. consensus $11.52B.

I guess it all depends on what you look for.

Analysts and the talking heads have largely chosen to ignore several key developments in their assessment that it’s time to buy financials stocks. As I mentioned in Monday’s essay, this current market rally, led by financials, was largely the work of the SEC crushing shorts. The icing on the cake for the “worst is over” crowd were better than expected results from Citigroup (C) and Bank of America (BAC).

Juniper Networks (JNPR) is expected to report Q2 earnings after market close Thursday, July 24, with a conference call scheduled for 4:45 p.m. ET.

The consensus estimate is 27c for EPS and $852.29M for revenue, according to First Call.

Chubb Corporation (CB) is expected to report Q2 earnings after market close Thursday, July 24, with a conference call scheduled for 5:00 p.m. ET.

Analysts are looking for EPS of $1.47 on revenue of $3.08B. The consensus range for EPS is $1.22 to $1.60, while the consensus range for revenue is $3B to $3.38B, according to First Call.

As exports slow, is Japan recession-bound? This is an interesting question, and my immediate response is yes, recession looks almost inevitable in Japan with exports folding the way they are in an economy where domestic consumption is unable to sustain growth.

Japan's exports fell year on year for the first time in more than four years in June (although they had been down month on month in both May and April, and ironically they were up in June over May) Exports decreased 1.7 percent in June 2007, according to the Finance Ministry this morning. The drop was the first since November 2003. (Click charts to enlarge.)

What in the world are the people at WaMu (WM) thinking now? You might assume the bank would be drooling over the prospect of picking up a bunch of erstwhile IndyMac customers and their deposits--especially given the turmoil going on elsewhere at WaMu. You would be wrong.  

The Los Angeles Times reports the bank has a policy of not accepting IndyMac checks, even though, as everyone in the world knows, those checks are backed by the FDIC. Which is to say, they’re backed by the federal government. Still not good enough!  Customers who insist on depositing IndyMac checks have to wait up to eight weeks before they can get full access to funds, the Times says.

CJR Online's Audit column discusses a provocative issue -- how the SEC's politically motivated campaign against short selling has hurt business journalism.

The Audit also points out that media has failed to cover a possible short squeeze in shares of the financial stocks affected by the SEC emergency order.

GT Solar International (SOLR) provides specialized manufacturing equipment and services for the solar energy industry.

All quotations are from the company’s most recent S-1 filing with links provided.

BMC Software (BMC) is expected to report Q1 earnings after market close Thursday, July 24, with a conference call scheduled for 5:00 p.m. ET.

The consensus estimate is 43c for EPS and $432.55M for revenue, according to First Call. Last quarter, 4Q'08, the company reported higher than expected EPS and revenue, and provided higher than expected EPS guidance of $2.10 to $2.20 for 2009. The company's operating margins had jumped to 790 basis points year-over-year, to 29.4%.

CyberSource (CYBS) is expected to report Q2 earnings after market close Thursday, July 24, with a conference call scheduled for 4:30 p.m. ET.

The consensus estimate is 15c for EPS and $54.32M for revenue, according to First Call. Company guidance provided on the last earnings call is for Q2 EPS of 14c on $54 to $54.5M in revenue. The Q2 is a seasonally slower quarter for online transactions and merchant adds.

Global Payments (GPN) is expected to report Q4 earnings after market close Thursday, July 24, with a conference call scheduled for 5:00 p.m. ET.

The consensus estimate is 51c for EPS and $327.69M for revenue, according to First Call. Guidance for the quarter calls for a range of 49c to 52c.

PayPal had Q2 revenue of $602 million and is on track to reach 2008 revenue of $2.5 billion and and somewhere around $3.3 billion in 2009. This implies a 2009 top-line growth rate of 32% which would be a modest deceleration from current rates and assumes PayPal will continue to be able to counterbalance lower growth rates on-EBAY with an ever-increasing proportion of business coming from Merchant Services.

PayPal's operating margin (excluding options) is expected to come close to 20% in 2009. This would yield 2009 pro-forma operating income of $660 million and tax-adjusted pro-forma earnings of around $500 million. If we assume a forward P/E multiple of 30x (restricting PEG to under 1.0x) we get a current valuation of roughly $15 billion.

In the first half of 2008, according to a Ministry of Commerce release Thursday, investment flows from Hong Kong to the mainland rose by 95% over the same period last year, to $23.4 billion.  Interestingly enough, the number of projects declined by 8.2%, to 6,900.  I suppose it is possible that the average size of each project has more than doubled, but given the large number of projects, I think this is extremely unlikely.  So why the discrepancy?  According to an article in Thursday’s Xinhua:

There has been all kinds of trouble since yesterday afternoon for MEMC Electronic Materials (WFR), maker of silicon wafers and raw polysilicon used int he semiconductor and solar sectors.

For starters, the company whiffed Q2. Revenue of $531.1 million was well short of Street estimates of $557.9 million. Non-GAAP profits of 92 cents a share missed the Street consensus of $1 by 8 cents. MEMC noted that the results were a bit below the bottom of its targeted range.

Hifn, Inc. (HIFN)

F3Q08 Earnings Call

Financial Times: “Banks rally in face of gloom”

For its part, Reuters was completely undone, and tried to ignore the stocks’ moves altogether: “Wachovia, other banks post dismal results,” it simply said, with no mention until the sixth paragraph that “dismal results” or no, Wachovia’s stock price was zooming. The stock closed the day up nearly 30%; the S&P Financials overall rose by 8.4%.

Yesterday was a very good day!

We had oil fall all the way to $125 as NYMEX hostage-takers cannot dump enough barrels to stop yet another net inventory build, this time with 2.4Mb of distillates and 2.8Mb of gasoline being added to the stockpiles despite refineries running at just 87% of capacity.  Predictably there was a 1.5Mb draw in crude - that’s what happens when you don’t order any but we weren’t buying it for a minute and laughed off the post-inventory pump as we were able to clean up on the XLE, XME and USO bets that we discussed in Tuesday’s wrap-up.  We had a lot of nice plays yesterday and I did a portfolio review last night in lieu of the wrap-up.  We’re very pleased with the move in commodities and the dollar is close to breaking the 50 dma at 73 - a great combination.