Friday, November 16, 2012
The 'Fiscal Cliff' debate is all the rage at present as
negotiations between Congress and the White House get underway
today. But the two sides remain poles apart, notwithstanding
their conciliatory postures and a resolution, even a temporary
one, may not emerge for quite some time. Importantly, the odds of
going over the 'cliff' are non-trivial, which means that we
shouldn't expect this issue to go away anytime soon.
'Fiscal Cliff' aside, we get the October Industrial Production
report a little later, with expectations of a moderation in the
growth pace from last month's level. Given the soft international
backdrop, any level of positive growth in the industry sector is
welcome. But one has to be wary of the sustainability, if not the
prospect for improvement, of this trend given how much
international demand has been behind sector's momentum.
The monthly ISM survey, which is basically a sentiment
indicator, appears to have started improving after showing
persistent weakness in the summer months, assuming Thursday's
weakness in the Philly Fed and Empire State readings were
Sandy-related. But the monthly Durable Goods orders, which
reflect actual ground reality, has been far less
Recent data on China's factory sector show signs of life, but
the picture in Europe, Japan and elsewhere remains downbeat. This
goes on to show that while the Fiscal Cliff uncertainty is a big
deal in the near term, it is hardly the only issue on the
) travails, as reflected in its quarterly earnings report after
the close on Thursday, is due mostly to the secular shift in
demand for desktops and laptops due to the popularity of tablets.
) is essentially in the same boat as well. That said, it would
not be correct to put the entire blame on this phenomenon and not
acknowledge the subdued corporate capital spending picture that
has repeatedly come out from the earnings reports of such
The Tech sector's third quarter earnings performance clearly
tells this story. Total third quarter earnings in the Tech sector
are down 7.9% from the same period last year, while revenues in
the sector are down 9.1%. Only 60% of the sector's companies have
beat earnings expectations, which is weaker than the aggregate
average for the S&P 500 as a whole (the 'beat ratio' for the
index is 62.6%, as of this morning). Given the Tech sector's
status as the largest earnings contributor to the S&P 500 and
its profile as the perennial growth driver, this state of affairs
raises doubts the current quarter and beyond.
There isn't much to write home about the earnings picture
beyond the Tech sector, either. As of this morning, we have third
quarter earnings reports from 476 companies in the S&P 500,
or 95.2% of the index's total membership.Total earnings for these
476 companies are down 4.7% from the same period last year, with
62.6% of the companies beating earnings expectations.
The growth rate looks even weaker when Finance is excluded
from the aggregate numbers. Excluding Finance, total third
quarter earnings are down 9.8%.
Estimates for the fourth quarter have come down by more than half
since the start of the third quarter reporting season, but
full-year expectations for 2013 still remain elevated and likely
need to come down.
What this means is that while the Fiscal Cliff debate is
dominating everything else at present, it is by no means the only
issue that we need to be concerned about.
Director of Research
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