Top Gun FP Client Note: Channelling Rudyard Kipling

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NOTE: Every week I write a Client Note for my clients.  For a limited time, I am allowing non-clients to sign up and receive the Client Note.  You can sign up at the top right hand corner of the website.  Here is this week’s.


If you can keep your head when all about you
Are losing theirs and blaming it on you;
If you can trust yourself when all men doubt you
But make allowance for their doubting too;
If you can wait and not be tired by waiting.

– “If”, Rudyard Kipling

In our view, the only thing propping this market up is investor sentiment.  Earnings have not improved…. Investing is and has always been about the real economy, and this market is ignoring the hard data.

– Eric Sprott, “It’s the real economy, stupid”, July 2009 Newsletter
The two week run ending July 24th was the best for the Dow since March 2000.  Over that same period, the S&P rallied 11.4%.  The Nasdaq was on a 12 day winning streak finally broken last Friday. 
In the past few weeks, Wall Street strategists have been raising their year end price targets to keep up with the dizzying rise in the S&P 500.  Goldman raised their target to 1060 from 940, Credit Suisse to 1050 from 920, HSBC to 1020 from 900 and Barclays to 930 from 760.  It’s hard to bet against this market but that remains the right stance in my opinion.
The one earnings report that continues to shock me was Caterpillar’s (CAT) announcement of a 43% drop in revenues in its core Machinery and Engines division.  Revenues in this division dropped to $7.3 billion from $12.8 billion a year ago.  How can we be having an economic recovery if nobody is buying industrial machinery?
Along the same lines, commercial truck manufacturer Paccar (PCAR) reported a shocking drop in revenues after the close yesterday.  Revenues in their core truck division were off 58% from the year ago period – to $1.6 billion from $3.8 billion.  Again, how can there be a recovery when transportation companies have no demand for commercial trucks?
I also noted these quotes from Paccar CEO Mark Pigott from the last two earnings releases:
I am very proud of our 17,000 employees who have delivered good performance to our shareholders and customers in today’s very challenging business conditions.
– 1st Quarter Earnings Release, April 28
I am very proud of our 16,000 employees who have delivered good performance to our shareholders and customers in today’s very challenging business conditions.
– 2nd Quarter Earnings Release, July 28
The other earnings report I want to mention was UPS’s (UPS) from last Thursday.  Revenues were down 17% and operating income 38% from the year ago period on a 4.7% drop in average daily package volume and a 10.5% drop in average revenue per piece.  No wonder they don’t need any new trucks!
Not all of the earnings reports are this bleak.  Panera Bread (PNRA) yesterday reported flat same store sales and a 28% increase in net income.  Business at AT&T and Verizon continues hold up nicely.  Storage hardware maker Western Digital (WDC) yesterday reported essentially flat revenues compared to the year ago period.  But the highly cyclical businesses continue to suggest to me a continuing deteriorating in the real economy.
Disney (DIS) reports earnings before the open tomorrow and I will be very interested to see the performance at its theme parks and related hotels.
Amidst all the bullishness, it’s worth pointing out that a number of stalwart and venerable bears remain.  Check out Eric Sprott’s “It’s the real economy stupid”, David Bernstein’s most recent “Market Thoughts” which John Mauldin writes in the introduction that he agrees with (thanks to reader Joe T for passing that along) and Morgan Stanley Strategist Jason Todd who recommended “selling into” the rally last week.
Weekly Returns (7/20-7/24)
S&P: +4.13%
Wilshire: +4.43%
Top Gun: -1.62%
YTD Returns (through 7/24)
S&P: +8.42%
Wilshire: +10.72%
Top Gun: +8.47%
Greg Feirman
Founder & CEO
Top Gun Financial (
A Registered Investment Advisor
9700 Village Center Drive #50H
Granite Bay CA 95746
(916) 224-0113

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