Weekly Chartology: Goldman On Earnings - "Good, But Not Good Enough" A/K/A The Calm Before The November Storm
While everyone knows that the broader economy is now largely slipping back into re-recession, so far corporate America had been relatively insulated courtesy of the low-cost of credit wealth transfer from taxpayers (whose saving potential is getting destroyed) to blue chip CEOs. Yet in Q3 even this trend is starting to gradually come to an end. As Goldman's David Kostin says: "3Q earnings are off to a good start, particularly relative to the modest expectations that we detailed in our earnings preview. 159 S&P 500 firms accounting for 45% of the total equity cap have reported 3Q 2010 earnings so far and 52% of reporting companies have beat consensus EPS estimates by at least one standard deviation, above the historical average of 41%. However, two points of caution have emerged: (1) 20% of firms have missed revenue estimates; and (2) large positive EPS surprises have been required for a stock to outperform the market." Also, it appears investors now only reward 3 std dev EPS beats: "Stocks beating consensus EPS by three standard deviations have a median outperformance of 211 bp while firms beating by between one and three standard deviations have underperformed by a median of 17 bp. Notable positive surprises include Google, Parker-Hannifin, Oracle, Carmax, and Best Buy. Each of these stocks beat consensus estimates by at least three standard deviations and outperformed the market by at least 500 bp." Is this sustainable? Of course not.
And some observations on what is coming up, and why even the "EPS beat" wave will not be sustainable:
Next week, 179 firms representing 29% of the equity cap of the S&P 500 are scheduled to report 3Q results. The bulk of Utilities, Energy and Materials companies will release earnings next week. See pages 5-9 for a complete earnings calendar.
Micro for now but first week of November looms. Despite the high volume of micro news, macro themes continue to impact markets. This week, China’s interest rate hike and continued public discussion surrounding Quantitative Easing (QE2) captured attention during the trading day between pre/post market earnings reports. 3Q earnings will be the focal point next week. However the balance will tilt heavily towards macro news during the first week of November when important data releases will provide new evidence on the trajectory of the US economy.
And courtesy of Goldman here is a calendar of the first week of November. It sure is about to get exciting, so enjoy the next week of relative quiet, which however will feature the Q3 GDP number on the 29th of October which will cements the decision on QE2 once and for all. Also, not the following prediction: "the market has already priced in $500 billion to $1 trillion of easing." And when the Fed announces $1.5 trillion as a final QE2 amount in several months, DXY flash crashes like the one seen yesterday will be a daily occurrence.
Monday, November 1: US ISM will reveal the next step in the path of the business cycle. Consensus expects 54.5. Our US Economics team expects the ISM will fall below 50 by early 2011. Last month’s slight decline in headline ISM to 54.4 was about in-line with expectations but a negative New Orders less Inventories spread implies larger declines in the headline index over the next few months. We believe a move below 50 this year would disappoint investor expectations and pose risks to the recent rally.
Tuesday, November 2: US Election Day should provide clues on the nearterm path for policy. Polling data aggregated by Realclearpolitics.com show the GOP winning a majority in the House of Representatives and gaining seats, though remaining short of majority, in the Senate. Polls as of October 22, 2010 show 48 Senate seats safe or leaning Democratic, 44 safe or leaning Republican, with 8 seats classified as toss-ups. In the 435-seat House where 218 seats are needed for a majority, 215 seats are safe or leaning Republican, 178 seats are safe or leaning Democrat, and 42 seats are considered tossups. Conversations with investors suggest a split Congressional outcome is largely expected and would be interpreted constructively because it would slow what fund managers perceive as a negative policy environment for business. A Republican Senate majority would be viewed as a positive while no change in either chamber would be viewed negatively and provide incremental risks around that central case. Investors want the first order of business in the lame-duck session to be clarification of the tax law. Stocks will likely respond positively if the existing rates are extended for all, or at least for those with income below a certain threshold. We continue to recommend our Dividend Growth basket (Bloomberg ticker <GSTHDIVG>).
Wednesday, November 3: FOMC will likely announce a second round of quantitative easing (the so-called “QE2”), but how much and at what pace? Our US Economics team expects $1 trillion of QE2 that could add about ½ percentage point to US real GDP growth. Investors generally share that view and have coalesced around an announcement of at least $500 billion of security purchases following the FOMC meeting. In addition, the consensus view is for statements that more easing will be taken as needed. We expect QE to be positive for equity markets and other risk assets but estimate the market has already priced in $500 billion to $1 trillion of easing. Our analysis also suggests that $100 billion per month of QE2 and $7.5 billion of AMG mutual fund flows have similar impact on equities. That relationship is vital as portfolio reallocation towards US equities would be very bullish for the S&P 500.
Friday, November 5: Employment report. Consensus expects employment growth of 63,000 (private payroll gain of 89,000) and an unemployment rate of 9.6%, flat versus last month. Our US Economics team forecasts the unemployment rate will rise to 10% by 2Q 2010. Our US Economics team does not expect a double-dip recession, although it assigns a 25%-30% probability of such an outcome. Non-farm payrolls and the ISM are the two most relevant data points in our economists’ US-MAP score. S&P 500 monthly performance has tracked macro surprises relative to consensus expectations more closely since 2008 so the payroll report will be a key to both the economic outlook and the near-term trading pattern.