Il Primo Ministro greco Lucas Papademos riceve l'approvazione del governo su tagli al bilancio che corrispondono al 7% del Pil nei prossimi tre anni e su una ristrutturazione finalizzata a ridurre di €100 mld gli oltre €200 mld di debito detenuto dai creditori privati, atteso il voto del parlamento • Standard & Poor's declassa il merito creditizio di 34 banche italiane tra cui UniCredit a BBB+ da A, Intesa Sanpaolo a BBB+ da A e Banca Monte dei Paschi di Siena a BBB da BBB+, S&P anticipa "una redditività decisamente debole per le banche italiane nei prossimi anni" • La produzione industriale italiana aumenta a dicembre +1,4% da novembre +0,3%, oltre le stime degli economisti +0,5%, anche se i dati del quarto trimestre -2,1% suggeriscono che la terza economia della zona euro è entrata nella seconda recessione dal 2009 • I Btp decennali salgono per la quinta settimana consecutiva, il periodo di recupero più lungo in oltre cinque anni, la prossima settimana il Tesoro vende €4 mld di buoni al 6% con scadenza 2014 • L'euro cala dal massimo di due mesi contro il dollaro, il mercato azionario europeo cala dal massimo di sei settimane e l'azionario Usa registra la prima settimana di perdite del 2012 dopo che i ministri delle finanze europee non hanno concesso il pacchetto di aiuto necessario a prevenire il collasso economico della Grecia

mercoledì 24 ottobre 2012

Market Comment - October 24

(Marco Bonelli)  "Fundamentals finally start to matter" - really?

When the Dow Jones and SPX already dropped more than 1.5% and the Nasdaq more than 2% on the 25th anniversary of the stock market crash in 1987 last Friday, market participants unilaterally sounded the mentioned phrase, referring to a number of disappointing Q3 earnings reports that were blamed for Friday's sell-off, as well as Monday's intraday selling and also yesterday's weakness. Adding to that, a disappointing European Summit, poor data for GDP and budget deficit and mixed bond auction results from Spain as well as a few "unexpectedly" weak sentiment data out of France and Germany gets piled on top of the miserable fundamentals over the last few days.
                   
But how does this all fit together? Aren't investors talking themselves into something?


Even until beginning of last week, this earnings season was touted as the "worst earnings season since 2009" and the majority of market participants expected disappointing headlines. At the same time Q4 earnings growth was still expected to be up 10.2% (up 6.6% ex financials), inexplicably untouched despite massive revisions to the downside for Q2 and Q3 earnings over the last few months (only last week, estimates for Q4 and Q1 saw the largest revision to the downside so far, about one percentage point less than two weeks ago). Now companies from the technology (large-caps in particular) and industrial sector deliver disappointing numbers and 9 out of 10 of all companies warn that Q4 earnings will come below expectations.

Even worse, only 41% of the reported results so far show rising revenues; multinationals suffer from weak global growth and the higher Dollar (compared to 3Q11) shaved off around 5% of revenues. If you gave that description to the majority of investors a few weeks ago, everybody would have agreed and wouldn't have been surprised at all. And all of a sudden, it's a big disappointment...- something just doesn't smell right here.

Regardless of many disappointing reports from blue chips, 60.0% of the 160 S&P 500 companies that already reported, "beat" earnings estimates  (only slightly below the 62% historic average) and the expected negative 2.0% growth currently runs at a positive 0.39%, partly driven by a surprisingly positive performance of the financial sector!
                                                   
Talking about fundamentals - isn't it important to include the macro-economic side, which looks quite different than the predominant earnings topic? Many consumer data, various Fed indexes, industrial production and of course housing starts came in quite strong with positive surprises outpacing negatives more than 2:1 (sure, exceptions confirm the trend, weekly jobless claims last week, yesterday's Richmond Fed Manufacturing Index or the latest trade data out of Japan disappointed). In addition, more data from China points towards some stabilization and even the chance of an economic "recovery".

Although the market only saw around one third of the earnings season so far, it might already be over!  
                                                   
Going forward, stocks may face a battle between macro data and earnings. Unlike the usual routine, when investors start focusing on the macro picture after the earnings season concluded, market players may already get forced to compare a known and confirmed bad earnings season with better than expected economic data that carries the perspective of an economic recovery into 2013 (even globally, considering the latest data from China) and consequently also an earnings recovery next year, leaving even the possibility that the current earnings season may be the worst investors will see (I am more referring to the perception than the reality!).
                                           
On Monday, as a result of a late short-covering rally, the Dow Jones and SPX defended their 50day MA and the highs from March/April (13338 and 1422, respectively), while the Nasdaq Composite and NDX defended their 100day MA. Yesterday, these levels were forcefully broken in the opening, the Dow Jones came close to its 100day MA and both Nasdaq indexes almost tested their 200day MA. Also the Russell 2000 tested its 100day and 200day MA. Although the very short-term picture of the Nasdaq chart flipped to the negative after last Friday's sell-off, the index trades right at the uptrend from the lows beginning of October 2011 (same does the Russell 2000), has its 200day MA as a support and even managed to outperform the SPX Monday and yesterday. Also on the bright side stands the Dow Jones Transportation Index, the same index that many feared would drop to new yearly lows as recently as end of September.

Finally, despite the weak finish yesterday (thanks to AAPL dropping more than 20 points), the extremely weak market breadth after the opening recovered considerably, which shows underlying relative strength in sectors like technology (ex AAPL), telco, retailers and industrials.
                      
As a result, negative investor's sentiment drops even more into bearish territory but with plenty of macro-economic data coming up over the rest of the week, possible positive surprises could easily trigger a powerful surprise counter-rally, that has the potential to lift prices to new multi-year highs until the election week.

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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