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Tony Sagami

Tony Sagami

Harvest Advisors

Tony Sagami is the owner and founder of Harvest Advisors, an investment research and money management company. Sagami has been managing money for more than…

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Connecting the Dots

What's in your wallet?
Caterpillar gets clobbered by rising raw materials
Celestica loss reflects weak telecom sales
Mortgage rates hit 15-month high
Can I borrow your lawn mower?

The bulls got to be scratching their heads and licking their wounds.

After celebrating the 129-point gain on Wednesday, the bulls have to be disappointment at the market's inability to hold on to those gains. The 133-point loss on Thursday sure felt like a classic failing rally, which is usually very reliable evidence that the primary trend is downward.

On Thursday night, the market was given a steroid shot from Google, who delivered a home run Q3 earnings report. That type of better-than-expected news for a tech giant like Google should have set the market on fire. The bulls, however, couldn't make any hay with that good news and the Dow Jones lost 65 points for the day.

Bulls market ignore bad news and go higher (climbing a wall of worry), but bear markets ignore good news and go lower. I think that is exactly what you saw on Friday and the bulls should be very, very worried.

Bonds, by the way, had a furious rally that looked suspiciously like an early flight to quality. Gold too enjoyed a big, big rally.

I'm not telling you what you should or should not do, but I can tell you that my personal trading portfolio is 100% short the market. I may end up being very, very wrong...but I'm hunkered down for a bear market.

What's in your wallet? Capital One Financial (NYSE:COF) reported $ 1.81 a share of Q3 profits on Thursday night. Too bad that is way down from the $1.97 it made last year and the $1.82 Wall Street was expecting.

Capital One also warned that its full-year 2005 earnings would be at the low end of its $6.60 to $7 guidance, again lower than the $6.97 the Jack-and-the-beanstalk crowd was expecting.

Naturally, Capital One trotted out the newest version of the dog-ate-my-homework excuse.

"First, a $44 million impact related to the Gulf Coast hurricanes; and second, a $75 million impact from the unprecedented number of bankruptcy filings made last week immediately in advance of the new legislation."

While there is certainly some truth to the hurricane and bankruptcy impact, it isn't like nobody knew about them. The hurricanes -- while horrible -- are old news and the surge in bankruptcy filings have been front-page news for weeks.

The reality is that Americans are having trouble making ends meet because of higher energy prices, higher interest rates, higher insurance premiums, higher real estate taxes, and higher inflation on everything from eggs to nails to clothes.

You can tell by these other troublesome warnings buried in the fine print.

==> Capital One raised its credit card default rate forecast to 5% and increased its Q3 loss reserves to $42.0 million.

==> The delinquency rate of loan more than 30 days past due rose to 3.73% in Q3 compared to 3.49% in Q2.

==> Even though the loan portfolio increased by $1.8 billion to $84.8 billion, Capital One's interest revenue fell from 12.65% in Q2 to 12.54% in Q3. And it is way, way down from the 13.03% it made in Q3 of 2004.

==> The big shots running Capital One are doing just fine though. Thanks to generous stock options, the number of outstanding shares grew from 263.5 million to 266.6 million in the last 90 days.

Even though Capital One is an accident waiting to happen, its problems are NOT company specific. Everybody in the consumer lending business is going to see their deadbeat rate sharply rise and profits sharply fall.

Caterpillar gets clobbered by rising raw materials. Caterpillar's Q3 results fell far, far short of Wall Street's lofty expectations. Caterpillar made 94 cents of profit in Q3, well short of analyst forecasts of $1.06.

Caterpillar doesn't expect business to get any better in Q4 either. CAT now says it will make $1.01 to $1.16, compared with Wall Street forecasts of a $1.20 profit and $3.85 to $4.00 for full-year 2005, below analyst forecasts of $4.15.

The problem is pretty simple: rising raw material costs.

"Core operating costs rose $303 million from the third quarter of 2004, primarily due to a $236 million increase in manufacturing costs. Approximately 60% of the manufacturing cost increase was attributable to variable costs due to material, volume-related inefficiencies and increased freight and expediting costs."

Without trying to beat a dead horse, we've told you many times that you were going to hear a lot of companies complaining about rising commodity and energy prices. Warnings, like this one from Caterpillar, should not be a surprise to you.

More importantly, there are a lot more warnings like this yet to come.

Mortgage rates hit 15-month high. According to Freddie Mac, the average rate on 30-year fixed-rate mortgages rose to 6.10% this week, up from last week's 6.03%.

One year ago, mortgage rates were at 5.69%.

You're probably sick of hearing me warning that interest rates are headed higher, so it might help for you to hear that forecast from somebody else.

Somebody like Jack Guynn, the President of the Atlanta Federal Reserve Bank.

"We should continue to move toward a neutral setting for monetary policy. The Fed already has moved interest rates a long way toward a more normal level consistent with sustainable growth. By most conventional measures, however, policy is still accommodative. So I believe the continued removal of that monetary accommodation is appropriate for now."

Are you sitting on an adjustable rate mortgage? Are you invested in any long-term bonds? Are you a glutton for punishment?

Celestica loss reflects weak telecom sales. Celestica is a contract manufacturer that assembles and repairs electronics for companies like IBM, Cisco, Sun Microsystems, and Lucent.

Business isn't so good though. Celestica reported 9 cents per share loss, 2 cents worse than the 7 cents Wall Street was expecting.

The problem is an old one: weak demand.

"This quarter's results reflect the continued weakness we had previously highlighted from our largest communications and information technology end markets."

It doesn't take a rocket scientist to figure out Celestica is talking about Lucent and Cisco. Anybody bothering to connect the dots would know to stay far away from telecom stocks.

Can I borrow your lawn mower? Briggs & Stratton, a maker of small engines used in lawn mowers and generator, reported slightly better than expected Q3 result but warned the optimistic Wall Street crowd to tone down its rosy forecasts.

Briggs & Stratton (NYSE:BGG) now says that it will make 44 cents on $560 million sales in Q4, far short of the 51 cents $529.2 million of sales Wall Street was expecting.

I can't say for sure that this connects to the real estate bubble, but I can remember borrowing my parents lawn mower for a couple years after I bought my first house because I didn't have enough money to buy my own.

This just feels like another piece of the puzzle (like American Standard earlier in the week) that shows a topped out real estate market.

Positions in stocks mentioned: Long Capital One puts

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