Things haven’t gone as some had expected….
Ahh…the Davos Forum of 2013, held in Switzerland, where the oracles of all knowledge across world governments, economics, business and technology go to attend expensive soirees and bestow upon us Lilliputians what is going to happen in the year ahead. The powers of divination concluded their self-romancing spectacle over the weekend. To paraphrase the esteemed, economist and New York University Professor Nouriel Roubini, also known as “Dr. Doom” said that as far as the euro zone crisis was concerned the situation was “less worse than it was last summer.” You don’t say? European Central Bank President Mario Draghi, an actual player in the financial events of the world eluded towards positivity, saying the worst of the Euro Zone Crisis was probably over and that the situation is more favorable than it was at this same time last year. Cheers for a few words of optimism. Alas, Billionaire investor George Soros is predicting “riots on the streets that will lead to a brutal clampdown that will dramatically curtail civil liberties. The global economic system could even collapse altogether.” Yikes, better make sure I have on clean underpants for that.
Here in the good ‘ole USA, we are in the throes of corporate earnings season. Of the 134 S&P Index companies that have thus far reported earnings for the fourth quarter 2012, 69% have reported earnings above estimates. In terms of revenues, 64% of companies have reported sales above estimates. Both percentages are well above the average recorded over the past four quarters. Which is quite remarkable and sends an abrupt shot across the bow of the Doom and Gloom crowd here, which unfortunately were actually ecstatic after a decline in earnings growth in Q3 2012 of only -1% mind you. The S&P index is reporting earnings growth of 2.3% for Q4 2012 and six of the ten sectors are reporting earnings growth for the quarter. However, not to be without the ability muck up a good thing, the naysayer cheering section over on CNBC and FOX Business will cite Hurricane Sandy and fiscal policy uncertainty as impediments to earnings and sales growth for Q4. Yes there’s validity in that, but for those who actually live in reality and avoid the bloviating personalities, solid information indicates that companies are optimistic about renewed economic growth for 2013. I’m sure the knuckle draggers will reappear for Q1 2013 earnings expectations in a matter of months.
I remain optimistic. The reporting corporations are showing higher profit margins. If growth continues at this pace, which I believe it will, those same profit margins will begin to decline with an increase in revenues and gross earnings. Call it a re-balancing. Interest rates will rise mandating more government expenditures and the byproduct will be more alternatives to the stock market. The economic rebound led by employment, will continue to increase and business and consumer investment will grow as we move through the year. That’s my assessment, granted I’m not an economist, media talking head nor politician. I’m a cautious optimist with a bureau full of clean underpants.
To broke to pay attention
For the week, the U.S. equity indexes were all up marginally as the market continued along with the now waning New Year rally and its focusing look ahead to earnings season. Expectations remain mixed for growth in corporate earnings. Are the analysts too bullish on outlooks or has the data led them to leave expectations so low, that topping them is a dubious achievement? The market appears to be again motivated on how low the bar has been set and the most expected result is that the “beat rate” as earnings trackers call it, will probably be higher than normal. I agree that the markets are healthier and getting stronger, the strength within certain economically sensitive sectors will become more apparent and will be presented regarding the health of the continuing recovery. Now, what could possibly throw a wrench into the spokes of the turning economic wheel?
The penalties of not raising the debt limit in a judicious manner would have severe repercussions for not only the U.S. but the global economy. Let’s get something’s clear right from the beginning; the debt limit does not prevent the Federal Government from spending more. By the time we get to the point that we are now, Congress has long ago spent that money on things like military and health care outflows. An argument against raising the debt limit becomes invalid if you fail to recognize this.
The federal debt limit was created during the First World War to give voters the credence that Congress is maturely managing the nations borrowing and spending. Its reason for existence is so that Congress can retroactively approve the spending it has already passed. To decline to pay for the things we have already purchased, the country would consequently default on its debt obligations, unless Congress raises more revenue by increasing taxes across the board. We already know how that fight would play out, don’t we?
I remain optimistic. Who’s seriously going to be irresponsible and use the debt limit as leverage? And leverage for what? The reality of a federal debt limit has never barred Congress from making ruinous budgetary decisions before and the new 113th Congress doesn’t appear to readily want to break that winning streak. The actual argument on tackling the federal debt needs to be made much earlier in the budget process, when Congress originally approves the spending it eventually will have to pay for. Unfortunately, the inmates have taken over the asylum and the debt ceiling conversation is being wielded like a baton to damage to the country’s financial security in this ridiculous era of ultra hyper partisanship. Even within this turmoil, I remain objective and cautiously optimistic.
The January Effect
The first week of 2013 was quite a spectacular one for the stock market. Gains ranged from just under 4% for the Dow Jones Industrials and to near 6% for the Russell 2000. The overseas market place also took part in the rally and posted gains, with several hitting new 52 week highs. Noise on the street has relayed that the gains are associated to the so-called January Effect, where stock prices, somewhat historically, increase in the month of January. Call it an opportunity where investors bought securities before the end of the year (2012) for a lower price, and then sell them in January to generate profit from the price differences. I’m not totally buying that theory, but hey, we are off to a nice start and I’ll let the punditry have their encyclopedic moment.
Not only have the markets begun anew but we’ve also started 4th quarter’s earnings season. Positive earnings reports should help to keep the rally moving if all goes as planned. It’s also been said that the best laid plans of mice and men often go astray. Caution shouldn’t be thrown to the wind now. Heaven knows our financial markets have shown a remarkable apathy towards the positive indicators in recent memory.
2012 was a year for safe havens in the Treasury bond market. For all intents and purposes the flight to safety in the bond market proved worthy. Now, at least to me, Bonds look unattractive technically. Even with the 10 year note closing above 1.9%, the 30 year bond ends the week above 3% and the 5 year note closing at its highest level since April 2012. Bonds have become a crowded safe haven trade. On the flip side, municipal bonds, which corrected severely in December, are up nicely at the start the year. Caution, yet again, prevails.
I remain optimistic. Hopefully I can now remove from my vocabulary the term Fiscal Cliff, making it a phrase that shall never be enunciated again. Those that continue to moan and dwell can’t see the forest because of the trees. The agreement avoided an economic tsunami. It was good for the economy and absolutely a blessing for equity markets. Yes, the attention should now rightful turn to our spending issues, and we can count on many in Congress to continue to issue sermon after sermon on our impending doom. Their ferocity of argument is only going to get louder in the coming weeks. Bottom line however, what is the U.S. going to do? Not pay our bills? Congress holds the purse strings, they approved the expenditures and now the check has arrived at the table and has to be paid. I won’t anticipate a meeting of the minds on Capitol Hill, as we all witnessed in the last few weeks; there is a significantly limited supply of brain power up there to get anything accomplished in a timely and efficient manner. I continue to remain optimistic as companies begin to report. January earnings season regularly includes full-year guidance. I’m expectant of good things in 2013 and this earnings season could provide a spark going forward.