In just a couple of weeks, second-quarter earnings season
kicks into high gear, but the lull before those reports start
rolling really is not a lull at all. Before earnings season,
there is warnings seasons and investors have been enduring a
spate of cautionary tales of sluggish profits for several weeks
now.
With the warnings spigot flowing hard and fast, several
sectors are looking vulnerable to earnings disappointments. In
some cases, that vulnerability increases by the day. Those
looking to short ETFs that could potentially see more earnings
warnings and/or low-quality earnings, should consider the
following funds.
iShares Dow Jones U.S. Oil Equipment & Services Index
Fund (NYSE:
IEZ
)
Earlier this month, Halliburton (NYSE:
HAL
), the world's second-largest provider of oilfield services, said
it believes that its North America margins will be impacted 300
basis points more than its previous guidance of 200 to 250 basis
points, for a total impact of 500-550 basis points lower than
first quarter levels.
The problem with a warning from a marquee oil services name
like Halliburton is that it very well could mean more glum news
from rivals is not far behind. Surprisingly, IEZ has traded
higher since the Halliburton warning, but consider the catalyst
for that warning. The company said the price of
guar gum rose more rapidly than anticipated
.
Guar gum is a food ingredient, but it is used in hydraulic
fracturing fluids. Translation: Halliburton is not the only IEZ
constituent using guar gum and that probably means Halliburton is
not the only oil services being pinched by rising prices for the
material.
Market Vectors Steel ETF (NYSE:
SLX
)
The Market Vectors Steel ETF has its hands full. The fund has
plunged more than 22 percent over the past 90 days. Not only
that, but since June 15, two SLX holdings, Steel Dynamics
(Nasdaq:
STLD
) and AK Steel (NYSE:
AKS
)
have issued profit warnings. Maybe that is no big
deal since those stocks combine for just over five percent of
SLX's weight. On the other hand, where there is smoke, there is
usually fire.
Energy Select Sector SPDR (NYSE: )
Exxon Mobil (NYSE:
XOM
) and Chevron (NYSE:
CVX
), which combine for about 35% of XLE's weight, now how to turn a
profit. Exxon has been frequently vilified in the court of public
opinion for making too much money and that is almost certainly
because the company produces oil, not iPads.
Putting one's personal support or disdain for the oil business
aside, it cannot be ignored that
oil futures have traded lower in much of the
second quarter this year than they did last year
. There are no guarantees XLE's constituents will be issuing
warnings, but it would not be all that surprising if Exxon,
Chevron, Occidental Petroleum (NYSE:
OXY
) or comparable firms do tell investors to temper their
expectations.
Market Vectors Agribusiness ETF (NYSE:
MOO
)
Projecting earnings warnings from MOO holdings is a tough call to
make, particularly because Agrium (NYSE:
AGU
) recently issued bullish guidance. On the other hand, the impact
of
rising natural gas on nitrogen fertilizer
producers cannot be ignored
.
Natural gas is by no means in a bull market, at least not yet,
but the commodity has started to show signs of life recently.
That is not good news for a company like CF Industries (NYSE:
CF
), the largest U.S. nitrogen fertilizer maker. In the case of
MOO, it must be noted the nitrogen fertilizer firms are just one
part of this ETFs lineup and not the primary determinant of MOO's
returns.
Goldman Sachs is bullish on fertilizer names and raised its
price target on CF to $230 from $225
, which implies significant upside from current levels. Just do
not make the mistake of looking natural gas futures. Since the
start of June, the U.S. Natural Gas Fund is up almost 9%. CF is
flat.
(c) 2012 Benzinga.com. Benzinga does not provide investment
advice. All rights reserved.