Well the “most crucial earnings season in decades” went into full swing last week, largely following the pattern we predicted. That is, technology, having become part of the whisper number gang, performed like any high expectation, momentum driven group and sold off on earnings reports--even when the reports (and guidance) surpassed expectations. Banks and financials, solidly in the low expectations camp, didn’t disappoint in their ability to disappoint and, so, also sold off on in-line to worse than expected news. Uh-oh? Summarizing earnings season to date, then, we’ve gotten some really good reports that resulted in a sell-off and some so-so reports that also ended up with profit taking. Have stocks truly run too far ahead of fundamentals and are their reactions signaling the end of the bull-run, as so many bears have predicted? We remain unconcerned for now as a little profit-taking is a necessary function of a healthy market. Frankly, we are less concerned with the implications of the reaction to earnings reports than with what the reports themselves are saying.
In our humble opinion, this earnings season is already over in terms of economic signaling. Now, consultants and anyone else trained in statistics and nothing else will criticize our sample size, conclusions and extrapolations. Fine--we like it here on the other side--but hear us out. So far this bull-run has demonstrated an almost classic pattern. That is, early cycle stocks like technology, transports and even some financials have led the way off the bottom. We say “almost” because many mid to late cycle stocks such as producer durables and basic materials have also been strong leaders (we wont even touch gold) while some traditional early cycle sectors like consumer cyclicals (principally retailers and many bank and non-bank financials) have been laggards. All this, however, is quite explainable given the weakness in the US dollar. Early cycle technology and late cycle producer durable manufacturers share one common trait—they are, largely, multinational exporters. The weak US dollar has made their products more attractive overseas and sales are expected to follow. Similarly, dollar-denominated commodities like oil, precious and industrial metals (mid-late cycle) have also benefited from the greenback’s weakness and stocks in those sectors have also been market leaders in anticipation of greater global sales. Missing from this entire equation are the early-cycle consumer cyclicals—specifically, retailers and, to a large degree, non-bank and regional-bank financials. To be sure these two sectors have performed well off the bottom but they have lagged the later-cycle groups significantly of late. The reason is simple. These sectors are pegged more to domestic than international growth.
This earnings season, so far, is demonstrating the implications of that narrow dependence. Management at Intel, IBM, Alcoa and Caterpillar, all multinational industrials, had good things to say about the quarter past and those to come. Citibank, BofA and American Express Management were less sanguine. Though they have a good deal of international exposure, their domestic consumer franchises are holding them back--and with 70% of our domestic GDP tied to the consumer and unemployment nearing 10%, that is hardly a surprise. One thing we do agree on with the pundits is that employment is a lagging indicator so expect regional banks and consumer finance companies to say much the same things over the coming weeks. We anticipate more of the same as the reports roll in and so, from our point of view, this earnings season has already said all it needs to about the health and direction of the economy. Regardless of what market reaction we receive during and following this earnings season we are more concerned with a set of data points further down the road…specifically, Black Friday and beyond. That, more than “the most crucial earnings season in decades,” will be a bigger “tell” on whether that lagging indicator will continue to be a drag on earnings and whether we have, in fact, come too far too fast.
No comments:
Post a Comment