Stock take

POOR START: US earnings season began on a weak note this week. Poor revenue numbers from Alcoa saw the aluminium manufacturer tumble by 6 per cent, taking indices down with it. Bespoke Investment Group notes that Alcoa-led market declines have occurred four times since 2001, with indices continuing to fall during the rest of earnings season on each occasion, by an average of 5 per cent.

Too small a sample size? Maybe. Another Bespoke report is more comprehensive, finding that 64,000 earnings reports have been issued since 2001, with 63 per cent beating estimates and 25 per cent falling short. As for revenues, 57 per cent have beaten estimates, while 33 per cent missed on this front.

Showing that companies like to under-promise and over-deliver, only 9 per cent raise guidance.

So should one jump on stocks that actually raise guidance? Not so fast. Typically, such stocks open higher before flatlining for the rest of the trading day.

OIL SPECULATION:Oil prices slipped this week. With the Saudis citing weak demand and Goldman Sachs predicting a "substantial pullback", there's increased talk that the recent speculative move higher has been overdone.

After reading Barclays Capital’s latest oil note, one would hope so. BarCap estimated that a sustained move to $150 would cause inflation to rise by 2.7 percentage points in advanced economies and by 4.5 in emerging markets.

However, regarding oil’s impact on earnings, UBS notes that corporate profits are typically weak during periods of commodity deflation and healthy economic growth.

Rising energy prices, in contrast, “shift income from consumers to corporations”.

Yes, more margin-related profit warnings ensue but many industries benefit. All in all, rising energy prices “are probably positive or at worst neutral to profits”.

SILVER LININGS:Oil is not the only commodity that may be ripe for profit-taking. Silver has risen by over 30 per cent in 2011 and more than doubled over the last 12 months.

Having exceeded $40 this week, it’s looking pricey. One ounce of gold now buys about 36 ounces of silver, compared to an average of 62 over the last 10 years. This is the first time since 1983 that the gold-silver ratio has dipped below 40-1. Bulls note that the ratio was higher still in 1980, when silver hit its all-time high of $50.35. However, that was a freak event.

Prices rose eight-fold inside a year after the billionaire Hunt brothers attempted to corner the market by buying up to one-third of the world’s supply.

A change in the exchange’s leverage rules resulted in a price crash, with the brothers losing most of their fortune and eventually being banned from commodity trading.

Silver may yet go higher, of course, but it’s seldom looked so expensive.