Weekly Chartology: Unusually Uncertain Outlook And Midterm Mayhem

Tyler Durden's picture

In this week's chartology from David Kostin, the Goldman strategist focuses on two key topics most pertinent to his client discussions: (1) The path of the US economy; and (2) whether profit margins will continue to establish new record highs. Kostin summarizes the divergence in views on the record corporate profitability (the micro bullish indicator) as follows: "No common ground exists regarding the outlook for profit margins. Bulls argue that further productivity gains will allow firms to drive margins higher to a succession of new record levels. Supporting evidence is that firms are not hiring (at least not in the US) so unemployment will stay high and the Fed will not raise rates, allowing firms to continue re-financing debt at low interest rates. Bears counter that weak top-line sales growth makes it difficult for firms to boost margins. Price hikes are impossible as the lack of job creation means wage growth is stagnant. A weak US Dollar (viewed by most clients as a secular trend) would help margins but only 30% of aggregate revenues for S&P 500 is sourced abroad and for the median firm the ratio is just 25%. Margins for emerging market operations are often lower than the overall company average." As for the macro picture: forget about it - as the Goldman macro team has noted numerous times, the economy is sliding, and only a last minute intervention from the Fed in precisely one month can help.

Kostin also devotes space to the implications of the mid-term election on stocks.

The mid-term election is just 32 days away (November 2nd). Historically, it has marked an inflection point with the S&P 500 recording positive gains during the 12 months after each of the 15 mid-term  elections since 1950. Appreciation averaged 18.1% during the first year following the election, with a minimum gain of 3% and a maximum gain of 33% (see Exhibit 1). All elections have consequences, but the stakes seem especially high this cycle. According to RealClearPolitics.com, an independent political web site that aggregates the latest polling data, Republicans seem likely to gain control of the US House of Representatives while Democrats appear likely to retain their majority in the US Senate. Polls as of October 1, 2010 show 207 seats in the House of  representatives as safe or leaning Republican, 190 seats as safe or leaning Democratic, with 38 seats considered “toss ups.” Majority in the 435-seat House requires 218 votes and 37 of the 38 toss-up seats are currently held by Democrats. RealClearPolitics.com shows 48 seats in the US Senate as safely Democratic or not up for election (including 2 independents who caucus with the Democrats), 46 seats as safely Republican or not up, with 6 seats considered “toss-ups.” All six “toss-up” seats are currently held by Democrats. A change of control election in the House and/or Senate has generally been associated with positive returns during the subsequent 12 months. The results of the mid-term election will have important implications for the business and regulatory environment in the US during the next two years.

So now the next big meme will be the run up following the mid-terms, since the massive surge of the market into the midterm elections to new all year highs did not quite materialize. Also, on Exhibit 1 below, whgre does the chart suggest a 10% rise in the market two months ahead of elections? In fact, the average reading suggests a drop in stocks in the 2-3 months before mid-terms. In other words, timing mid-terms is yet another completely irrelevant data point, and the only thing that continues to matter is Ben Bernanke's "middle-class destruction" world tour.

Full report


Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Careless Whisper's picture

what's next, ads from tobacco companies?


ISEEIT's picture

RCP is not fairly described as 'independent'. RCP is a marvelous site for junkies of the political realm, but to claim no bais is a serious stretch. We all have biases and to think that a pending alteration in balance influence won't effect finance is profoundly ignorant. Of course these mid terms are significant!

Uncertainty is the greatest certainty at this time. I personally believe that the 'recovery' has not occured due to capital having no idea where to profitably flow. The unknown outcome of this mid term is HUGE. Capital will adjust once a clear map is available.

We do not live in a free market. The government does indeed determine the direction of markets and therefore the composition of the government is a critical factor in determining allocation.

This all seems like gist for an AYN RAND novel.

I'm going to go spend some time reading/loving my intellectual lover.

99er's picture

Chart: SPX

Diamond Top.


For more, see 99er Charts in the Market Commentary Forum.

snowball777's picture

No choice left to deal with purchaser price increases but further auto-cannibalization...UE 12% ho!

At least none of our precious, precious CEOs will be affected by their cuts, in fact, they may get bonuses for all that costly production they helped freeze and purge.

One less pesky factory using energy and needing its toilets cleaned. Snickersnack.

A Man without Qualities's picture

"A weak US Dollar (viewed by most clients as a secular trend) would help margins but only 30% of aggregate revenues for S&P 500 is sourced abroad and for the median firm the ratio is just 25%."

This is an very important point.  There are many bulls talking about overseas earnings, implying that global growth and demand will allow the S&P500 to continue to raise earnings.  But the thing is, they confuse earnings from overseas operations (i.e. including manufacturing in low cost places that then gets shipped and sold into the domestic market, where most of the profits are kept in offshore for tax purposes), and genuine external demand.  Therefore, the weaker Dollar being good for earnings is a bit of a myth.  It raises input costs for domestic goods.  In theory, the cheaper Dollar would make US industry more competitive, but you can't turn things around that quickly, especially if you closed the factories ten years ago and shipped the machines to China and Mexico.

In the near term, The Fed's apparent desire to kill the Dollar is all about saving the banks and also making investors so worried about what the Fed is going to do - think of it as "Mad Dog" central banking - that it reduces equity redemptions.  The damage that would be wrought by a collapse in equity prices is terrifying the bankers and politicians, so this is how they are trying to fight it.

cjbosk's picture

I think too the pundits are underestimating just how weak this economy is.  Banks/brokers are about to embark on one of the grandest head count reductions in the Country's history, this will add grossly to unemployment not including other industries that are now slashing head count...big pharma has also just jumped on the wagon.  Truth is, without jobs, there's no recovery.  Period! 

I just wonder how long the Gubberment can keep this thing propped up?  This must be obama's market, the market of hope

no life's picture

One lesson I have learned from all this is that a recession really takes shape and gets worse because of all the power players in the world starting to make moves to not only secure, but grow their fortunes, during the whole process.  In this case, the actions of the Fed really served to make the recession last longer, due to the fact that they were funnelling so much money to Wall Street so those guys could get a backdoor windfall while all the rest of us are trying to figure out how to stop from going broke.  All the pols, same story... trying to position themselves right.. this is a money making event for them.  Hedge fund guys add to their billions off of 'recessions' like this last one.

Groty's picture

I don't understand how margins can continue to improve when raw material prices are sprinting higher.  Copper is at a yearly high.  Oil is up 7% IN A WEEK.  The CRB is up about 10% from when the market started sniffing out QE2 in August.  How can higher commodity costs get get passed on when GDP is running at less than 2% growth and unemployment is bumping its head against 10%?  I just don't see it.

My guess is margins have peaked for the cycle, but the dunderheads are going to chase stocks higher into year end anyway.

rosiescenario's picture

...and a portion of the margin improvement seen so far came from delaying repair and maintenance, which is a major budget item for basic manufacturing and mining companies.Repair and maintenance will eventually have to be done.

coopers paper's picture

If the Bush tax cuts don't get extended, what do you think about stocks selling off so they don't get posted next year?

snowball777's picture

This year's short-term gains

vs sunset'd short-term gains

vs long-term gains

rosiescenario's picture

Walmart last week was mentioned as having had to raise prices. Obviously the vast majority of what they and other retailers sell is imported. A weaker USD will impact retailers the hardest. The few remaining U.S. steel producers will benefit as will the ag industry and many of its suppliers...ditto U.S. based mining companies.