Global Investing

Weekly Radar: Q3 earnings; China GDP; EU summit; US debate

Markets have turned glum again as October gets underway and the northern winter looms, weighed down by a relentless grind of negative commentary even if there’s been little really new information to digest. The net loss on MSCI’s world stock market index over the past seven days is a fairly restrained 1.5%, though we are now back down to early September levels. Debt markets have been better behaved. The likes of Spain’s 10-year yields are virtually unchanged over the past week amid all the rolling huff and puff from euroland. The official argument that Spain doesn’t need a bailout at these yield levels is backed up by analysis that shows even at the peak of the latest crisis in July average Spanish sovereign borrowing costs were still lower than pre-crisis days of 2006.  But with ratings downgrades still in the mix, it looks like a bit of a cat-and-mouse game for some time yet. Ten-year US Treasury yields, meantime, have nudged back higher again after the strong September US employment report and are hardly a sign of suddenly cratering world growth. What’s more, oil’s back up above $115 per barrel, with the broader CRB commodities index actually up over the past week. This contains no good news for the world, but if there are genuinely new worries about aggregate world demand, then not everyone in the commodity world has been let in on the ‘secret’ yet.

So why are we all shivering in our boots again? Perennial euro fears aside for a sec, the latest narratives go four ways at the moment. 1) The IMF’s World Economic Outlook (WEO) downgraded world growth and its Financial Stability report issued stern warnings on the extent of European bank deleveraging 2) a pretty lousy earnings season is just kicking off stateside, 3)  U.S. presidential election polls are neck and neck again and unnerving some people fearful of a clean sweep by Republicans and possible threats to the Federal Reserve’s independence and its hyper-active monetary policy 4) it’s a new quarter after a punchy Q3 and there’s not much new juice left to add to fairly hefty year-to-date gains. Maybe it’s a bit of all of the above.

But like so much of the year, whether the up moments or the downers, there’s pretty good reason to be wary of prevailing narratives.

On 1) the WEO downgrades: These have been flagged by the Fund for well over a fortnight and were relatively modest given some of the worst fears out there. Many economists argue IMF forecasts were far too sanguine in its last July update and are only now being corrected to reflect the well-documented summer doldrums. That doesn’t make the world a pretty place all of a sudden, but it does question why this alone should be an especially new factor to investors or market traders. If anything the most recent signs from global PMIs and the US housing or labour market show some stabilisation rather than deterioration. The Fund’s euro bank deleveraging estimate was also upped to $2.8 trillion by end-2013 from a $2.6 trillion call in April. Again, the scale of the forecast change is almost a margin of error — not because the nominal $200 bln adjustment is small but because of the “guesstimate” nature of the forecast. It’s also not clear how much it takes account of the welter of policy action in the pipeline and there are signs from the likes of Fitch and the European Bank for Reconstruction and Development that the frontline of this banking retreat at least – central and eastern Europe – is not suffering as much as was originally feared. That may change, but it’s not at all different from what we already know here.

On 2) and the earnings season: the big question is how much of the dour earnings pre-announcements and profit warnings (the worst ratio of warnings to positive guidance since 2001) have already been built into prices.  It’s reasonable that the market braces for some negative surprises and gloomy corporate outlooks, but it’s hard to imagine anyone is unprepared for the Q3 numbers per se. Alcoa was first out of the traps as ever this week and a good snapshot of the overall picture – underlying aluminium demand is weakening, but its earnings actually beat the well-prepped forecasts. JPM is up on Friday. But the “real economy” global bellwethers  of GE, Google, Microsoft, Intel and IBM next week may be more telling than what the big banks show.

America Inc. share of GDP – 12 or 3 pct?

Wall Street has been doing pretty well in recent years. Just how well is illustrated by the steady rise in corporate profits as a share of the national economy. Look at the following graphic:

Of it, HSBC writes:

The profits share of GDP in the United States must rank as one of the most chilling charts in finance.

 
What this means is that around 12 percent of American gross domestic product is going to companies in the form of after-tax profits. A year ago that figure was just over 10 percent and in 2005 it was just 6 percent. In contrast, the share of wages and salaries in the U.S. GDP fell under 50 percent i n 2010 and continues to decline. Comparable figures for the UK or Europe are harder to come by but analysts reckon the profits’ share is within historical ranges.

Phew! Emerging from euro fog

Holding your breath for instant and comprehensive European Union policies solutions has never been terribly wise.  And, as the past three months of summit-ology around the euro sovereign debt crisis attests, you’d be just a little blue in the face waiting for the ‘big bazooka’. And, no doubt, there will still be elements of this latest plan knocking around a year or more from now. Yet, the history of euro decision making also shows that Europe tends to deliver some sort of solution eventually and it typically has the firepower if not the automatic will to prevent systemic collapse.
And here’s where most global investors stand following the “framework” euro stabilisation agreement reached late on Wednesday. It had the basic ingredients, even if the precise recipe still needs to be nailed down. The headline, box-ticking numbers — a 50% Greek debt writedown, agreement to leverage the euro rescue fund to more than a trillion euros and provisions for bank recapitalisation of more than 100 billion euros — were broadly what was called for, if not the “shock and awe” some demanded.  Financial markets, who had fretted about the “tail risk” of a dysfunctional euro zone meltdown by yearend, have breathed a sigh of relief and equity and risk markets rose on Thursday. European bank stocks gained almost 6%, world equity indices and euro climbed to their highest in almost two months in an audible “Phew!”.

Credit Suisse economists gave a qualified but positive spin to the deal in a note to clients this morning:

It would be clearly premature to declare the euro crisis as fully resolved. Nevertheless, it is our impression that EU leaders have made significant progress on all fronts. This suggests that the rebound in risk assets that has been underway in recent days may well continue for some time.

Ford: Failure to Communicate?

fordtruck11Here’s an idea for Ford — make sure that when you talk to The Street that The Street is listening.

The shine on the Blue Oval got smudged Friday as shares fell as much as 15 percent after its fourth-quarter profit missed estimates by almost 40 percent. Why? Analysts were apparently blindsided by more than $1 billion jump costs in the fourth quarter compared to the third.

It was the first time Ford fell short of estimates in two years, and the miss upstaged what was an otherwise notable year. Ford reported its best annual income in more than a decade and had more cash than debt in its automotive operations, a key milestone it has aimed at hitting for more than a year.

Full of Sound and Fury: Earnings Arrives

On some level, every quarter is a make-or-break earnings season, and maybe that’s particularly true for the midsummer earnings season, as it comes at an otherwise quiet time for the broader markets.

 

But as investors get ready for Alcoa’s ‘kick-off’ of earnings season (and really, Alcoa serves as a nice beginning more for its symbol’s position in the alphabet than as any barometer for earnings), there may be something to all of the fretting this time around. After all, investors endured an awful fourth quarter, where the entire S&P collectively managed to lose money on an operating basis (thanks, AIG, and Citigroup, and GM, and, um…), and a first quarter mostly notable for a slightly better performance than expected – even though earnings were down 36% from the previous year.

 

It’s still hard to see where the improvement is going to be, however. Earnings are expected to fall about 36% once again, and investors in recent weeks have finally cottoned to the idea that vaulting over low bars really isn’t much to get optimistic about. If the market is truly going to turn higher, it will depend on the quality of earnings, and there, some aren’t so optimistic. Mike Lewitt, president of Harch Capital Management, said, “I don’t think there’s a lot of revenue growth, just shrinkage – basically everybody is shrinking across the board and that’s what we’re seeing.”

Market bounce at crucial point

The latest stock market rally is at a crossroads as bear market bounces go, at least those seen in 2008-2009. They usually last on average 30 trading days. 

Today is the 30th trading day since the UK’s FTSE 100 and the pan-European FTSEurofirst 300 hit their lows on March 9. The FTSE 100 has rallied some 15 percent since then, while the FTSEurofirst 300 has surged 22 percent.

Bulls and bears have been at it for sometimes over whether this latest rally is the “real deal” or yet another bear market rally.  Pessimists point to potential shocks in corporate earnings in the latest reporting seasons in the U.S. and Europe, which will give investors a reality check, and the bank stress tests in the United States that are expected to be released on May 4.