MORNING BID – Margins, China and whatever else
We’re deep into a period where the earnings calendar has basically dried up and the news flow overall is pretty slim, so the market will hang whatever gains it can on thin reeds – deals involving master-limited partnerships here, results from the likes of Sysco (the food services company there), and maybe Priceline.com in the mix too. The broader economic signals remain the more important ones for markets right now, and while they’re not uniformly outstanding, there are some hopeful signs for those finally looking for an acceleration in activity.
The earnings situation has been better than anticipated – Goldman Sachs notes that margins broke out of an 8.4-to-8.9 percent rate in the second quarter, ticking up to 9.1 percent, and the firm’s corporate “Beige Book” – a compendium of company comments – shows that the concerns the C suite has looks more like the concerns of those seeing accelerating demand and rising prices, and not slack demand and weak pricing power. They cited a strengthening corporate outlook, margin forecasts coming under pressure as a result of inflation expectations, and a combined focus on spending money on both buybacks and capital investment. Furthermore, companies have been less negative than in the recent past when it comes to revisions, and guidance for the fourth quarter of this year and first quarter 2015 was revised higher.
China – per Goldman Sachs, company conference calls that had a focus on international and emerging-markets growth say everything hinges on China. The expectation is for rates to remain lower for longer, but the country is dealing with a real difficult time in its domestic property/construction. Citigroup researchers believe that the central bank is going to keep the spigot going as best as they can – so they revised their 2014 growth forecast higher, to 7.5 percent from 7.3 percent.
Not all is hunky-dory. Until the Fed exits the game, at least from its bond-buying and then as it eventually starts to slim its balance sheet, there will be plenty of fuel for some to argue that the gains are built mostly on cheap money that isn’t having the required exponential effect on economic growth as it should. Underemployment remains a problem, one that isn’t easily sloughed off as the ‘cheap money’ argument, and while some credit dislocations are being seen, they’re not nearly as big as has been seen in the past. The relative calm that pervades is also a risk, particularly if the Fed heads in the direction it is expected to and gets out of QE. Volatility rose after the ends of QE1 and QE2 (events played a role too) so that’s always a concern, but the markets will have to learn to walk again eventually.