Well this last quarter is one most investors would surely spare. As we said here in the blog on Friday, this was the worst quarter since first quarter 2009. Since we announced that here Friday some of the other larger slightly more read publications (Barron's and WSJ) did not feel right using my data so they are telling us that this was the third worst quarter since 1989 or something like that. Needless to say it sucked.

That sentiment permeated this weeks Barron's. Really, I could not find any hope or optimism in most of the articles in this week's issue. Well I guess the cover story about smart cities was a positive article if your time line was 5-20 years. Other than that, the last time I saw a completely negative issue of Barron's was the first quarter of 2009, mmmmmm?   That was when the market bottomed. Could this call for a double recession (a call we do not support at the moment) be am early confirmation that we will see a bottom of bad news or are we in for an investment Armageddon?

We have shared our views on the subject. The key, as it has been since late 2008, is employment, the housing market and corporate earnings. Friday night we talked a lot (a few of you indicated maybe too much-moi) about corporate earnings. Tuesday October 11, is the kickoff to the next earnings season as AA Alcoa reports.

Before we start trying to build our puzzle for the week, we have to assume that we will see volatility and lack of direction in the market at till mid to late November. If you are a buy and hold investor with a two-20 year timeline, look for opportunities to buy your core holdings on the dips. (Assuming you have done all your homework.) If you have all or a portion of you portfolio more in a trading strategy, you are forced to play the volatility. Here is what you might consider. Look at the list of companies reporting earnings two or three weeks out. Do some homework on companies you are vaguely familiar with by researching as many relevant headlines about the company and the sector as possible. The make some wagers, yes these are speculative gambles, on which how the companies are going to do meeting, beating, or missing analysts expectations. You should consider making these wagers using options if your risk tolerance can handle it and your trading account allows it.

Here is one example:

AA Alcoa, Inc. engages in the production and management of aluminum, fabricated aluminum, and alumina. We have made money and lost money on AA and options around AA. Overall we have lost money. It is tricky to decipher because it is global in nature so you have currency issues to navigate and you have geopolitical issues to pay attention to. More recently you have the sleeping giant of China buying lots of Aluminum products but at the same time becoming a global competitor to AA. With the recent and closely associated copper devaluation, we can see a drop in Alcoa's key products. The expectation for profits is 28 cents a share. The Whisper Numbers out there are 28 cents and 27 cents. (This is a broadly followed stock so you could have a couple of whisper numbers.) With a whisper number below the analyst's expectation numbers, that is a slightly bearish signal. By reading all the press releases over the last two weeks and a quick visit to the SEC filings, we can not see any strong reason to think the earnings will be far way from expectations. Since most companies are talking down future earnings, we expect AA to do the same. Now AA was off 4.5% on Friday and is down 41% on the last quarter so this stock is really beaten down. The chart for the stock is ugly. $9.57 puts the value below the 200, 100, and 50 day moving average and at the bottom of a 20,2,2 Bollinger Band. (use stockopedia link to the right to see what that is if you care). Our wager is going to be a slight miss of expectation on the 11th. Say 26 or 27 cents a share in earnings. Then the CEO will talk down future earnings citing a continued slowing in the economy, (especially China), increasing production costs (water and electricity are the two largest expenses for AA). This all bodes badly for an upside to the stock even though the price has been whacked. So we are going to try and catch a January Put Option at a strike price of $10.00 for 1.50 a contract. Now as a reminder, this means for every PUT contract we buy we have the right, but not the obligation to sell (if it were a call option it would be the right to buy) 100 shares of Alcoa at $10.00 a share on January 21, 2012. If AA is drops between now and January, 12 we theoretically will make money. If AA surprises and has a great quarter, we will see the value of the put diminish very quickly. We are looking to make a 30% gain within a few days of the earnings announcement. If you look at the quarterly filings since October 2006, when AA misses estimates (our guess) the stock falls 2.7% in the following 5-20 days. A 2.7% drop can easily trigger a nice return on a PUT option.

Now it's your turn. MAT Mattel, Inc., together with its subsidiaries, engages in the design, manufacture, and marketing of various toy products worldwide reports on October 14, 2011. Analyst's estimates are at 87 cents a share. Do your homework, and send me your guess as to how they will do and how you might play the stock and or options. We will publish any responses unless instructed other wise.

We have said it has been a lousy quarter, but it was really nasty to our Charity Portfolio Contestants. Our leader for the year was knocked off the leader board due to a savage loss of value in NFLX Netflix. This lady has hardly ever cursed in the 35 years I have known her and she made comments implying the CEO's parent were not married when he was conceived or born.

Her contest portfolio went from being one of the few with a positive balance to being 20.42% in the red. (She had a 91% drop in the Netflix position) According to my figures that means the person who has been chasing her all year in now the leader with a negative value of 3.93%. Please check your portfolios and make sure I am not missing any of you. (I could not access the two Aussie contestants so please let me know if you can beat a minus 3.93?)

The Puzzle Ahead

We have about 10 possible edge pieces that will help us define what Mr. Market might look for this week. In the back round the forces telling us where those pieces might go is the Euro-Greece situation which is sounding pretty sad as I write this. The Euro markets are not looking smart at this time.

In a quick rundown, Monday will see motor vehicle sales and while the estimates are expecting a slight increase, we feel it might be better than expected. The ISM survey is set to decline as well, but again we are thinking a slight beat of expectations. (We based this upon freight patterns and utility tracking in the industrial areas of the US both are showing tells of stability.) Construction spending is set to increase but remain in negative territory. We can't argue that consensus. Tuesday we will hear Uncle Bernanke speak before congress. No surprises are expected. Factory orders are set to report a drop on Tuesday and we cannot argue that guess as the month before had an unexpected and yet unexplained bump. (Boeing might be skewing the numbers.) Wednesday we will get a pulse on the job report as the ADP number comes out. The number is basically supposed to be flat, but we are thinking a slight positive surprise. The ISM non-manufacturing index reports on Wednesday and is due to drop a bit. We again think we will have a slight positive surprise. Initial jobless claims report on Thursday and we will see the number above 400,000 again. If it goes over 410,000, Mr. Market will have some heartburn. The market is prepared for a bearish jobs report on Friday. It is expected to jump to 9.2% unemployment. We agree and think 9.2 is built into the market.

With all of that, and little earnings news this week, all eyes will be watching the gyrations in Europe. That means even if we got all the edges right on our puzzle, it looks like a picture of a clear glass window. That makes finding the center pieces (actual stock choices) a bit difficult. Stay nimble, watch your stops, and look for opportunities to beef up your core holdings.

If you are not as optimistic as I, here is a number you might want to keep your eye on. Watch the S&P 500 index. There is a huge technical and emotional support level at 1,100. If the index falls through that support and stays below, we could easily see another 6-15% sell off. Watch it close.

Salve Lucrum