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Olé! Brace for Earnings Season!
What a great match in Soccer City on Sunday and congratulations to Spain
for this well earned victory and their first World Cup ever.
Now that the World Cup
is over, traders will be focusing on earnings. David Milstead of the
Globe & Mail reports, Wary
markets brace for earnings season:
The second-quarter earnings season that
kicks off today may be the make-or-break test for a global recovery
that suddenly looks to be sputtering.
The past several weeks have
seen a string of disappointing economic data, as growth in the U.S. and
elsewhere unexpectedly slowed. More bears came out of hibernation to
argue the recovery that was once seen as V-shaped would look more like a
W – an imminent double-dip recession.
Last
week’s market rally, in which the prior week’s carnage was reversed,
occurred without any major economic or market news and blunted that
talk.
What will occur over the next several weeks, however, is a
string of major earnings releases with little margin of error, owing to
a consistent ratcheting up of expectations in 2010.
“You’re going to need a lot of upside
surprises to break the negative mentality,” said Beata Caranci, the
deputy chief economist at TD Bank. And the high expectations “tells you
where the balance of risks are – it’s much easier to disappoint than
surprise.”
Peter Buchanan, a CIBC economist, said “as economists
are getting more cautious, analysts for companies in the S&P 500
have not cut their estimates. We’ll see who’s right in the weeks to
come.”
Robert Kavcic, an economist at BMO Nesbitt Burns, notes
that at the beginning of 2010, the consensus analyst estimate for 2010
earnings for S&P 500 companies was 8.6 per cent below 2009 levels.
On the strength of the fourth-quarter 2009 and first-quarter 2010
earnings reports, 2010 estimates have been jacked up so much that the
consensus numbers are now 34 per cent above 2009.
For the second quarter, consensus estimates
are for earnings to grow 27 per cent over 2009’s second quarter,
according to Thomson Reuters.
“The last three quarters have been
absolute blowouts with respect to earnings surprises,” Mr. Kavcic said,
as about 80 per cent of S&P 500 companies have beaten consensus,
versus a historical norm of about 66 per cent. “But the market can only
be fooled for so long … it won’t be surprising if the impressive rate
of earnings surprises seen in the past three quarters marks the high
watermark of this cycle.”
Mr. Buchanan, at CIBC, notes that
Canadian analysts have actually tempered expectations recently, meaning
there’s more downside risk in the U.S. from missed numbers.
Investors
will get samplings from several sectors this week. Alcoa Inc. kicks it
off Monday with a look at industrial production.
Other companies
reporting this week include Intel Corp., Advanced Micro Devices,
Google Inc., JPMorgan Chase & Co., Bank of America Corp., Citigroup
and General Electric.
“Cost-cutting is still the order of the
day, so the earnings numbers probably won’t disappoint like the
economic numbers did,” said TD’s Ms. Caranci.
Of course, cost-cutting typically includes head count, and
that’s a big reason why the blowouts in corporate earnings haven’t
translated to an across-the-board economic recovery.
“We should
have employment [head count gains] at a rate four to five times higher
than it is, based on the health of corporate profits,” Ms. Caranci
said. Productivity is at its highest rate since the 1960s, unit labour
costs are at their lowest point, and companies have very high
liquidity, as measured by their ratio of current assets to current
liabilities – yet companies haven’t brought back workers to any large
degree.
“The longer that persists, [a downturn] is
self-prophesizing,” Ms. Caranci said. Another quarter of healthy
earnings, however, “might ignite some faith in the sustainability of
this recovery, and that might feed into the labour market.”
To
that end, the real news of the earnings season may not come in the
second-quarter numbers themselves, but in the second-half outlooks
issued by management. “They’re not necessarily going to be negative,
but they may be somewhat cautious,” said Mr. Buchanan.
The
S&P 500 is coming off its biggest
weekly gain in over a year. Some analyst like James Barnes of
GaveKal Dragonomics in Hong Kong, think last week's surge in stocks
was due to a shift in asset allocation:
Bonds
outperformed stocks in the second quarter of the year quite admirably,
and when bonds beat stocks by 23%, as they did between April and June, it’s a rare and strong signal to pension
funds and insurance companies that they need to jump into stocks,
which Barnes reckons (citing anecdotal evidence) happened Wednesday.
With U.S. and European companies hanging on to more cash these days
than usual, the takeover and buyout impulse is growing as a viable
theme, Barnes argues, pushing up the share prices of potential takeover
targets.
With so much cash on hand, David Templeton
asks, Will
Dividend Payments Likely Improve?:
As I have
noted in past posts, 2009 was the worst year for dividends since the
late 1950s. S&P reports that dividends on the S&P 500 Index
fell 21%, which was the biggest decline since 1938. Even worse for
investors was the fact that the higher quality dividend paying stocks
lagged the broader market rebound in 2009 by returning 26% versus 65%
for the S&P 500 Index. As Tom Huber, portfolio manager of T. Rowe
Price's Dividend Growth Fund notes,"A dividend-oriented
strategy has to be looked at over market cycles—there are times when it
will lag, typically coming off a market correction or recession, and
times when it does relatively well, usually in periods of market
turbulence."Today, companies
are in a position to once again focus on growing their dividends for
several reasons.* Strong
Balance Sheets: Many companies are flush with cash. A recent
Wall Street journal article noted, "U.S. companies are holding more
cash in the bank than at any point on record, underscoring persistent
worries about financial markets and about the sustainability of the
economic recovery. The Federal Reserve reported Thursday that
nonfinancial companies had socked away $1.84 trillion in cash and other
liquid assets as of the end of March, up 26% from a year earlier and
the largest-ever increase in records going back to 1952. Cash made up
about 7% of all company assets, including factories and financial
investments, the highest level since 1963."* Sluggish Growth: In periods of slow
economic and earnings growth dividends become a more critical part of
the total return of a particular company's stock. In this environment
companies are likely to respond to the investor's desire for more
income from their equity investments. Since 1925, reinvested dividends
have accounted for almost 44% of the total return of the S&P 500
Index.* Less Volatility:
Dividend paying stocks tend to be less volatile during downside market
volatility. One factor we believe that will be present in the
investment markets for the foreseeable future is a more volatile
investing climate. A recent T. Rowe Price report notes,
"dividend-paying stocks in the S&P 500 outperformed nondividend
payers in every bear market since 1973 but tended to lag in bull
markets, according to Ned Davis Research (NDR), a market research firm.During
the bear market from March 24, 2000, to October 9, 2002, the S&P
500 plummeted 49.1%, while the Dividend Aristocrats gained 15.5%,
according to Strategas Research Partners, another market research firm.
In the recent market decline from October 2007 to March 2009, the
Aristocrats declined 49.6%, compared with 56.8% for the S&P 500."*
Long-Term Performance: "NDR
calculates that from 1972 through March 31, companies in the S&P
500 that have consistently increased or started making their dividend
payouts provided an annualized return of 9.4%, compared with 7.3% for
companies that paid dividends but did not increase them and only 1.5%
for non-dividend-paying stocks."* Steady Cash Flow: "From 1980 through 2009, dividends on
stocks in the S&P 500 grew at an annual compound rate of 4.7%
compared with the 3.7% annual inflation rate."Over a longer
time period, principal growth of an equity portfolio outpaces that of a
fixed income portfolio as well. The T. Rowe Price article cites a Ned
Davis Research study showing this performance difference."NDR
tracked the performance of two portfolios over the past 25 years. One
consisted of the top 50% of dividend payers in the S&P 500. The
other was the S&P Long-Term Government Bond Index. The study
assumed all interest and dividend payments were taken in cash each
year.Assuming a $500,000 initial investment in each portfolio
at the end of 1984, the equity index provided total dividend payments
of more than $2.6 million through 2009, or about $212,000 more than the
total interest payments from the bonds. Moreover, in terms of
principal value, the original $500,000 investment in the stock
portfolio grew to more than $2.8 million compared with about $908,000
in the bond portfolio."For an investor then, a resumption of
dividend growth could be at hand. The stock prices of dividend growers
will likely benefit from this growth as well.
I
wouldn't be surprised if high quality dividend paying stocks outperform
in the next decade, but there are other sectors worth looking at as
well. Last week Chinese
solar shares popped after mega Chinese loans were announced:
News
of China doubling the world's solar panels capacity by loaning Yingli
Green Energy $5.3 billion in order to expand production had a positive
impact on the stock. The funds will be lent by China Development Bank,
which also funded approximately $12 billion to Suntech Power and Trina
Solar in April.
"The loans are enough to increase the world's
solar wafer and cell capacity by 100 percent," Jenny Chase, head of
solar-energy analysis for New Energy Finance, told Bloomberg.
According to the group, China accounted for 43% of world production
last year.
And it's not just Chinese solars that
rallied strongly last week. According to Bloomberg
New Energy Finance, US solar stocks rebounded 6.9% with Power-One Inc, the US-based inverter and
energy efficiency company, being the star performer.
But
there are other sectors worth tracking too. For example, while everyone
is worried about the collapsing Baltic Dry Index, China
just posted a monster trade surplus with exports up a whopping 44%.
What does that mean for your portfolio? It means keep an eye on
shipping companies which are heavily leveraged to the global economic
recovery. Companies like Dryships (DRYS) are breaking out from
important technical levels after being crushed.
And what
about semiconductor companies like Lattice Semiconductor (LSCC) which surged 14% on
Friday? It may also be breaking out and remains on my watch list.
Importantly,
there is plenty of liquidity to drive risk assets higher, so don't be
surprised if we have a low volume melt-up this summer. I think some
sectors will do better than others this summer, but generally speaking
earnings and companies' guidance shouldn't disappoint.
We shall
see. Some experienced traders, like Tim Knight of Slope of Hope, believe this mini-rally fuel is going to run out soon, and he is positioning
himself accordingly.
Who knows how this all plays out in the
coming weeks. I believe there is way too much pessimism out there and
that risk assets will be bid up. Instead of selling the news, traders
and algos are likely to be buying the news. If underperformance anxiety
kicks in, everyone will be chasing indexes higher again. Stay tuned,
should be interesting to see how things unfold this earnings season.
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Go long Urguayan Tech sector, dot.com here we come!
How can they offer anything as a coutnry when most of their capital on the books is gained via foreign aid. It's like paying yourself with your own money at that point.
Although that coco/weed trade is very lucrative, although my understanding the weed trade is getting softer by the day with law enforcement not really giving a rats ass about ganja.
"What a great match in Soccer City, but in the end someone had to win"
Great match?? That was a really UGLY match!
Great match was Germany 3 x 2 Uruguay in the contention for third place, on Saturday.
"La Celeste" did a great campaign in this World Cup, and the fourth place (best result for Uruguay since 1970) is a deserved reward for Diego Forlan's team...
Sorry Leo and bilda-bulls.
You lost me at "earnings" and "balance sheet"....
The illusion of money on the sidelines, gimme a break. I love how perma bulls assume that I would put a wooden nickle into that slop. The only real volume I've seen in the last two years is OTC and PINKS, how sad is that? Unbelieveable that the shittiest exchanges in the known universe are the only ones with real people trading on them. Not that I would touch anything in there either.
Second, I can't even vest any of my captial into property because it's a hole as well
Only thing I can safely tell people to invest into is themselves, regardless of analyst expectations. Start a business, any business, pick one and start building it. While the rest of the world is busy losing their shirt in listening to the fuckwit bulls you can side step that nonsense and take advantage of a couple things that are happening.
While the rest of these companies are busy shooting themselves in the foot because their "tactical investments" like property, bonds and equities go tits up. You have infinite number of ways you can go to run your business cheaply
So before you put one thin red dime into the markets reconsider giving your money to what appears to be a bunch of thieving bastards that are as organized as a fart in a windstorm...just stop and think about it first. Running a business might not be easy, but it's alot easier to control fiscal loss than the nonsense going on right now in terms of traditional investment vehicles.
you quote Tim Knight??
What? are you next going to be citing Atilla http://www.xtrenders.com/
A good read from CR this AM on Deflation
http://www.calculatedriskblog.com/2010/07/deflation-and-fed.html
This is a wrong way of thinking. Most of the industry has shown a nice uptic these last 3 months and that will translate in higher courses.
Employment will follow when the turnovers hold for another 6 months as the industry can't afford a second miss.
So people who play crybaby because the employment doesn't go fast enough should get the asses kicked.
Who has had a "real" gain in two years other than resource companies? Last i looked, the market is still trading at 1999 and that's just this week. I'm not even going to pretend that the new earning season is going to run anything but "Positive", but they need to trim more bodies. A lot more bodies.
Symantecs I suppose but my expectations for the coming quarter are flat and under.
Fastenal and Grainger. These 2 provide tools and fasteners for construction and metal industry.
If these 2 are up, all will go up.
And they will be up BIG year to year.
That's 2 out of thousands and they've been making their money on industrial cleaning products and after market parts for manufacturing equipment (which is good). They are up because nobody is buying new. It is a good recession stock play though. With lower capitalization for new projects, it stands to reason that companies would do more with their older equipment. Alternatively it also means output is expected to be lower because work stopages are going to be expected but not concerning as sales are lower in the manufacturing arena.
If those two are doing well, it's a good sign that companies are saving their coin but with two years of getting hammered it's hard to determine if they can continue to function as the janitor and the mechanic indefinitely. Development goes in the crapper and weird shifts happen in the labour market after that.
Leo, please answer a question for me while I listen to the beatiful music this site provides free. By what percentage would the stock market have to go up to make the $50 trillion in infunded liablilities whole?
Why the spoiler, Oléi ? I don't come to ZH to discover the results of sports I may have set to record on the DVR and I'm sure I'm not the only one. If you must be the first to divulge please consider placing 'spoiler alert' in title and divulge in the body of the comment.
Please junk your post for me. I'm too lazy to click it.
Updated DOW charts etc.
http://stockmarket618.wordpress.com
http://www.zerohedge.com/forum/latest-market-outlook-1
Leo - appreciate the contrarian (for Zero Hedge) perspective here, but why does this feel like the last couple of run-ups in the last few weeks? I don't know for the SP500 as a whole, but the company I work for generated something like 40% margin over the past year when 20% is more typical. Backlog decreased significantly - funny how when you don't invest in your marketing your business profits in the short run actually go up. Could it be this way over a lot of other businesses now too?
Dude, US companies are sitting on loads of cash. They have done well and focused on trimming fat. They will have to give the cash to share holders or use it to hire.
Stocks rose 5% last week.
The last 2 quarters of 2010 will show significant hiring plus great dividends.
Leo wins, Bilda-bears lose.
So companies will hire because they fired so many people which creates demand for their products which means they need to rehire all those people that they fired because they have cash on their balance sheets, re-read what I wrote over and over until it sinks in. They are holding cash because they deleveraged their balance sheet. They may do some capex, but nothing to get too excited about since they have held this cash for how many months and they have done what with it??? Nothing, that's right. Last week was short covering because the bears went on vacation after one hell of a week before. I am willing to bet that earnings are going to be so-so in Q2, but the guidance is going to be shit. Technology will not have those fabulous positive FX results from a weak dollar, oh no, you did not know that did you? My point is, one should not be a perma anything in this market you and a certain author seem to be perma bulls, I am a perma bear, but I trade what is in front of me. Of note, PWER, I owned since $3 so suck it China Solar trash... An FYI, no one can afford solar panels once the subsidy is gone they all fold and go bye-bye.
I wouldn't waste your breath on him, I doubt he even has a single stock or ever owned one. Either that or he's reached that acceptance part of the five stages of dying and is happy-happy joy-joy about it.
Yes loads of valueless cash, perpetua-pumper. Next 2 quarters will show significant hiring? Now youre just proving a terminal case of anala-cranial inversion syndrome.
The level of debt being carried by the companies themselves has never been higher. What is more concerning if you are long, is the lack of cash flow except en route to the government in the form of taxes.
The amount of cash positive companies is very few and with two and a half years of slight trickles into the coffers, it still gets taxed in some form or another, not to mention a lot of companies expanded during the "boom". Only one on the list I'm seeing MAYBE breaking even is Intel from cost cutting management methods (aka shit can staff, move to temp help). AMD I'm not even sure why they are still kicking. JMP and BoA, lol, whatever.
Here's what's going to happen, they'll be making their announcements and as the quarter goes on, they'll run up more lay off notices across all sectors. The market will interpret this as a positive sign and the market goes up because we've all seen the bizzaro superman universe out there. Volume will slowly lower it's self into the ground a bit more and if you are wise you'll stay the fuck out of the pool, it's full of sharks that only want your capital.
Companies may have cash, but they also have debt. Bear vs. bull argument still up for debate. And why would I ever again believe a "balance" sheet?
lol. Yeah I think I saw a total of 5 shots on net, 200 players bitching or complaining, and about 30 players milk an injury. Then if that wasn't enough, after the entire fucking game I finally saw a soccer ball go in the net. WOW, I can't control my excitement.
Quote I read (wish I could take credit for it):
"Soccer is like 'Twilight' - everyone runs around aimlessly for two hours, no one scores and yet its two billion fans tell you that you just don't get it. "
"If underperformance anxiety kicks in, everyone will be chasing indexes higher again"...
Higher again? WTF Leo? The indexes have gone nowhere in 12 years, there is nothing to chase.
My sentiments exactly! Whew, I was thinking I was the only person out of what, 2 billion or so that saw the same game you did! How that game gets so many people that riled up is beyond me. At the end I just looked around and said "Sorry, I don't get it."