Monday, August 6, 2012
The market will likely bask some more in the after-glow of
Friday's positive job report as it has nothing else to latch on to
given the almost empty economic calendar and the winding down of
the second quarter earnings season. There is some optimism on the
European front as well, with initial disappointment over Draghi's
plan from last week giving way to hopes that something may be afoot
after all.
That said, we have reached the dog days of summer when news flow
and trading volumes get thinner. May be we should all just focus on
the Olympics for the next few days instead of the market. But with
Michael Phelps and Usain Bolt already done with their events and
the Lebron James squad magnitudes better than their competitors,
the rest of the London spectacle may not be that engaging
either.
Notwithstanding continued German opposition to bond purchases
from the ECB, the market appears to be seeing some glimmers of hope
in the Draghi plan after all. This reassessment follows reaction
from the Spanish government that seemed to indicate that it may be
not be averse to jump through the hoops to enable the ECB to
purchase its bonds. The modest downtrend in Spanish bond yields is
a reflection of this hope.
We are entering the final phase of the second-quarter earnings
season this week, with results from 410 of the S&P 500
companies (or roughly 82% of the total) already known. We will be
closer to the finish line by the end of this week as we will have
results from 91% of the companies by then. Total earnings are
up 5.1% from the same period last year, primarily due to easy
comparisons for the large banks. This compares to 8.3% growth for
these same companies in the first quarter, when banks didn't have
such easy comparisons. Excluding Finance, total earnings growth
falls into the negative territory, down 1.3% from the same period
last year, compared to positive 6.5% growth for the ex-Finance
group in the first quarter.
The most notable aspect of this reporting season has been the
top-line weakness, with only 38% of the companies coming out with
positive revenue surprises. Even a number of these companies with
positive surprises for the second quarter have guided towards
softer revenue numbers in the coming quarters. Other notable
features of this reporting season were change of leadership from
Tech to Finance, negative comparisons in the Energy sector and the
weaker than expected results in Basic Materials as high profile
misses from
Dow Chemicals
(
DOW
) and
International Paper (
IP
) show. The drought and its impact on grain prices is starting to
show up in results as well, as this morning's
Tyson Foods
(
TSN
) report shows.
Sheraz Mian
Director of Research
DOW CHEMICAL (DOW): Free Stock Analysis Report
INTL PAPER (IP): Free Stock Analysis Report
TYSON FOODS A (TSN): Free Stock Analysis Report
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