Thursday, November 15, 2012
While there is no shortage of issues for this market, ranging
from the weak global growth outlook to the sub-par corporate
earnings picture, the key concern for the market at present is
the looming Fiscal Cliff situation. It is perhaps fair to assume
that a full-blown crisis will get averted, but the continued
impasse is taking a toll on business confidence as this morning's
Empire State survey shows. The New York Fed's manufacturing
survey showed that the region's industry sector contracted again
in November. The similar survey from the Philly Fed coming out a
little later is expected to show the gauge in positive territory,
but drop from the previous month's level.
In other news this morning, the Euro-zone economy is now formally
in a recession after experiencing back-to-back GDP contraction in
the third quarter. The economic growth performance in Germany and
France, which combined account for about half of the region's
output, was positive in the third quarter. France is not in that
good a shape and the it's hard to envision that Germany's export
centric economy can remain immune from the region's problems for
long. The consensus view is that the Euro-zone economy will come
out of the slump in the second half of the 2013. But given the
enormity of problems facing Spain, Italy, and others, it is hard
to buy into that sunny view.
On the home front, we got a benign looking inflation reading this
morning from the October CPI report, though the 'core' reading
(excluding food and energy) came in a bit higher. The weekly
initial Jobless Claims data this morning appears to have been
distorted by the East Coast storm. Jobless Claims dropped surged
78K to 439K last week from the previous week's revised 361K
level. The four-week average, which smoothes out week-to-week
volatility, increased by 11.8K to 383.8K. We will have to wait a
few more weeks to get 'cleaner' jobless claims data undistorted
by the storm as this morning's numbers don't reflect true
underlying trends.
On the earnings front, the positive earnings beats from
Wal-Mart
(
WMT
) and
Target
(
TGT
) this morning and
Cisco
(
CSCO
) the other day cannot camouflage the overall weak corporate
earnings picture. We are at the last leg of the third quarter
reporting season at this stage, with results from 466 companies
in the S&P 500 or 93.2% of the index's total membership
already known. Total earnings for these 466 companies are down
3.7% from the same period last year, with 63.1% of the companies
beating earnings expectations. The growth rates look even weaker
when Finance is excluded from the aggregate numbers. Excluding
Finance, total earnings are down 8.6% from the same period last
year.
Importantly, estimates for the fourth quarter have been steadily
coming down has companies have guided lower. While there may
still be room for downward adjustments, the current fourth
quarter earnings growth rate of 3.5% is less than half of the
7%-plus expected just a few weeks back.
A prompt resolution of the Fiscal Cliff issue could undoubtedly
serve as a positive catalyst for the market. But while both sides
are making conciliatory statements, they still remain poles
apart, making a prompt resolution less than likely at this stage.
But even when this issue is resolved, the market still has to
come to grips with a sub-par corporate earnings picture and a
weak global growth backdrop.
Sheraz Mian
Director of Research
CISCO SYSTEMS (CSCO): Free Stock Analysis
Report
TARGET CORP (TGT): Free Stock Analysis Report
WAL-MART STORES (WMT): Free Stock Analysis
Report
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