Concerns About the EUs Grand Plan
One of the most interesting parts of this business is that the game is constantly changing. One minute it’s all about earnings and the next, well, it’s about the global economy, or Mother Nature’s fury, departed dictators, inflation, the Fed, oil, or even the debt levels of little countries in Europe. But that’s what keeps it fun, right?
It is likely the understatement of the year to suggest that Europe has been the singular focus of traders since early summer. But with the Eurozone’s comprehensive plan now taking shape and finally agreed upon, I’m wondering how long it will be before the ADHD gang that hang out at the corner of Broad and Wall each day turn their attention to something else.
While there are still a few annoying little details to be worked out with the EU bailout plan over the next two months, I’m going to argue that traders may already be eyeing other areas to drive their investment process. My list of potential focal points includes Italy’s interest rates, China, the U.S. economy, Ben Bernanke’s gang, Europe’s economy, the Super Committee, the Presidential campaign, earnings, valuations, and the price of commodities. And cutting to the chase, how these issues are interpreted will make all the difference in the world.
For example, the current earnings season, which is more than halfway complete and has been all but ignored of late, can be viewed two different ways. According to the numbers I’m seeing, 71% of the companies have reported EPS that were above consensus expectations. And while at first blush this may sound like a good number, it is down from recent quarters and below the historical averages. As such, the bears will argue that earnings are a negative input.
Shocking as it may be, the glass-is-always-at-least-half-full gang has a slightly different view. I’m told by the bull camp that the key to this earnings season (and to the economic data, for that matter) is it hasn’t been a disaster. If you think back to a time before every move in the market had something to do with our favorite vacation spots across the pond, you will likely recall that traders feared that the economy was slowing precipitously. Responding to this fear, analysts spent much of September cutting their earnings estimates. If you know anything about the earnings estimate game, you know that analysts are traditionally behind the curve and tend to be slow in cutting their estimates to appropriate levels when conditions change. Thus, the bulls suggest that expectations may have been too high coming into the current reporting season. And because of this, our heroes in horns are saying that earnings have actually been pretty good.
On the subject of the economy, recall also that before the focus shifted entirely to Europe, the Q2 GDP report had come in with a one-handle and the revision to Q1′s growth rate was only barely positive (+0.4%). As such, the talk of the town at that time was that the U.S. was heading into another recession. But so far at least, the data has been – again – not disastrous. And with Q3′s initial reading of GDP coming in above expectations at +2.5% yesterday, the bulls argue that the U.S. economy will be the focus for a while.
Finally, let’s talk about China for a moment. Anybody who owns commodities is already watching China closely as a rising growth rate in China means good things for commodites such as industrial metals, oil, coal, etc. So, with China now hinting at putting an end to their monetary tightening campaign and talking openly about stimulus programs for businesses, the “China Demand Theme” may be making a comeback. A quick peek at the chart of JJC (the iPath Copper ETF) will likely convince you that this area may quickly be becoming a focal point.
Please understand that I’m not suggesting I know where the next focus will be – I don’t. But I am beginning to get the feeling that we won’t be talking about Team Merkozy’s dinner plans on a daily basis anymore. And as for the question of what traders will be programming their computers to pay attention to next, I can assure you that we will be here each day doing our darndest to try and figure it out. After all, this is what gets us up before the sun each and every day of the week.
Turning to this morning… Concerns about the EU’s grand plan are surfacing today as details remain a question mark. In addition, with rates hitting record highs at Italy’s 10-year bond auction, the credit contagion appears to be ongoing. U.S. stock futures are pointing to a modestly lower open.
On the Economic front… Personal Incomes rose by +0.1% in September, which was below the consensus expectations for an increase of +0.3%. Personal Spending (now called “Consumption”) for the month rose by +0.6%, which was in line with the expectations of +0.6%. And the Core PCE (think inflation) came in unchanged which was below expectations for +0.1%.
Note that we’ll get the Univ. of Michigan Sentiment index later this morning.
David Moenning
Editor: The Daily Decision
