(Marco Bonelli) Let's say, a lot of things fit together these days: Unexpected good news and expected bad news that remove any overhanging uncertainty and has consequently be treated as a positive as well!
The rating downgrade of a number of European sovereign debt and the EFSF papers itself has been feared, discussed and expected for a long time, now that it happened , it can be checked off and investors can concentrate on their day-to-day business. (There may be some implications as a result of higher borrowing costs at a later stage, but that doesn't concern anybody right now.) The situation in Greece appears to be a more complicated issue but even there, optimism rides high that some kind of solution will be found. Overall, a few voices are already heard that the European debt crisis is "probably behind us" - well, this is a very brave statement and time will tell.
Economic data continues to surprise to the upside (January Michigan Consumer Confidence from Friday and January Empire Manufacturing Index) although the state of the US consumer is not entirely clear. After some big publicity of record Black Friday sales and eventually record holiday sales and online sales, many retailers preannounced disappointing earnings due to massive promotions and discounts, official December retail sales turned out to be disappointingly low and even hardware and software sales in the hot computer games sector dropped double digits according to the latest NPD report. Then you see the Michigan Consumer Confidence survey from January jump to the highest level since February 2011 and you wonder what's going on. Obviously a lot of these different statistics cannot be compared apples to apples as some contain certain components like online sales and others don't. Fact is that in the last decade, retail sales always followed rising consumer confidence (2002, 2003, 2005, 2006, 2009, 2010) while it sometimes didn't react or had substantial delays in reacting to falling consumer confidence (2007, 2011). So given historic data, the recent rise in confidence should be reflected in better overall retail sales in the upcoming months.
Despite better economic data, discussions about QE3 are still alive which also provides some psychological support, especially when you see the Monetary Base expand by 2% in the first two weeks in January, a development that already happened beginning of December after almost six months shrinking (only to be reversed in the latter part of the month). Central Bank action also continues to support confidence in Europe and expected action in China keeps hopes alive that the second largest economy in the world will construct a perfect soft-landing.
One last comment regarding earnings: disappointing earnings from the banking sector can easily counted to the initially mentioned expected bad news and should surprise anybody. On the other hand, in the technology sector, CHKP reported solid number and tonight investors will get a first impression from the semiconductor sector when LLTC reports. With overall earnings growth for the S&P500 at a mere 4.6% for Q4 and 3.4% in Q1, any better than expected reports will likely get celebrated. So let the party begin!
Trade well.
(Marco Bonelli is the Managing Director of International for CL King & Associates in New York. The opinions expressed are his own.)
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