The Nvest Market Blog, our current thoughts on the Street

Earnings and Economic Data: Telling Two Stories - Week Ended 10/23/09

posted 10.26.2009 at 09:32 a.m. by steve

US stocks essentially moved sideways the week ended October 23 amid generally positive corporate earnings but a more mixed bag of economic data. The strongest day of the week came Monday with the S&P 500 gaining about +1%. Still, despite the strong start and marking of new 12 month highs, gains slid throughout the remainder of the week; the S&P finished the week down -0.74% while the Dow and NASDAQ surrendered just -0.24% and -0.11%, respectively.

As mentioned above, economic data and corporate earnings seem to be telling two different stories. On one hand, overwhelmingly positive 3Q earnings from companies seems to be saying that the recession has ended; meanwhile the economic data is suggesting otherwise. For those betting that the economy is in recovery (now a consensus view), weaker than expected reports related to housing starts, mortgage applications, consumer confidence and unemployment claims were enough to stall the recent climb and overpowered favorable company results. Still, while most notable economic headlines were weaker, there were several offsetting items as well. In contrast with a related housing report earlier in the week, US existing home sales rose +9.4% in September from August and the Fed Beige Book also showed a continued trend toward overall improvement. Additionally, the US LEI (Leading Economic Indicator index) rose 1% in September, the sixth straight monthly increase. This week looks to be a busy one. Not only will corporate earnings continue to be reported at a swift pace, but there are several key economic readings. Included among those will be consumer comfort and confidence (tomorrow); new home sales and durable goods orders (Wednesday); GDP, money and unemployment claims (Thursday); and the Chicago PMI, personal income and consumer spending (Friday). If a good number of those key items can surprise expectations to the upside, then we should see a more notable move past 10,000 on the Dow and a close above 1,100 on the S&P.

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Dow Clears 10,000! - Week Ended 10/16/09

posted 10.19.2009 at 11:04 a.m. by steve

Earnings season continued last week with announcements generally upbeat. Accordingly, markets continued to tread their way higher and pushing the Dow up through above the psychologically significant 10,000 mark for the first time in more than 12 months. Most notable for the continued drive up was stronger than expected earnings from JPMorgan and Intel. The results from both the banking sector and tech giant were especially encouraging from the standpoint that while earnings outperformed expectations, revenues also expanded. So far this year, earnings (bottom-line results) that have beat expectations have come primarily from cost cutting rather than expanding sales (top-line growth). News continued into Thursday as Goldman Sachs bested even the loftiest of expectations when it reported earnings; economic data also followed suit. Initial jobless claims fell to the lowest level since January for a second consecutive week, which is helping investors quickly forget the worse than expected losses reported in late-September. Ultimately though, news took a slight turn for the worse on Friday with the release of earnings from General Electric which missed earnings estimates and reported that revenues fell by more than expected. The news on Friday, coupled with a fairly significant rise earlier in the week, was enough reason for some profit-taking to occur and the Dow closed just below the 10,000 level for the week. Still, the 5-days were modestly accretive for investors with the S&P 500, Dow and NASDAQ up +1.51%, +1.33% and +0.82%, respectively.

While clearing the 10,000 level mid-week provided investors reason for continued optimism, there argument by many that the market has come too far, too fast is only further highlighted. A more-than-healthy-skepticism remains as to whether the rally, now 7 months long, is sustainable for the longer term. More important perhaps are the questions about the economy. Most economists now believe that the recession ended in the second quarter and actually resumed expansion during the recently completed third. Many people are most skeptical that the economy will be able to maintain growth throughout 2010. Those concerns certainly have merit given stubborn high unemployment and money hoarding attitudes of consumers and some businesses. Still, it would not be too hard to imagine that if markets continue to behave themselves through the holidays, that consumers might be more willing to spend. If that is the case, as it has been in the past (historically holiday shopping has been strongly positively correlated with YTD stock market performance), businesses will find themselves with recovering revenue streams and possibly enough demand to begin some re-hiring. Bottom line: a strong holiday season on top of a good third quarter could be a self-feeding improvement of consumer and business sentiment and lead to a stronger recovery than most forecast. Not to mention, less-fundamental factors for the stock market (such as technicals like trend, momentum, breadth, leadership, etc) remain supportive for asset appreciation.

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3Q Earnings Season Begins on Positive Note - Week Ended 10/9/09

posted 10.12.2009 at 2:20 p.m. by steve

In a stark reversal from the prior week, US stocks advanced handsomely for the week ended Friday, October 9. The Dow closed at a new 2009 high. After climbing in each trading session during the week, the broad market S&P 500 index popped +4.51%, while the NASDAQ and Dow gained in similar fashion +4.45% and +3.98%, respectively. Somewhat surprisingly, stocks welcomed in the start of 3Q earnings season, rising by roughly +2% on Monday and +1.5% on Tuesday. When Alcoa released its earnings following the closing bell on Wednesday, results did not disappoint. In fact, Alcoa announced its earnings significantly topped consensus expectations (which were calling for a slight loss). But, it was not just strong earnings that revived the now 7-month long rally since March 9; it was also better economic data. Better than expected (although still not good) news came from the ISM non-manufacturing survey showing a jump in new orders and output; and, it gave evidence that some companies are considering re-hiring. Additionally, initial unemployment claims fell -33,000 this week and chain-store sales posted a 1.1% year-over-year gain; a figure that shattered the consensus expectation for a slight decline.

It goes without saying that the shift back to more positive-oriented economic data was welcome. In the final week of September and first week of October, investor concern was reheating as to whether the stock market had run too far, too fast given the still weak economy. The reports this past week allowed many investors to re-affirm that an economic recovery, albeit sluggish, is likely in progress. As we discussed in our most recent quarterly newsletter (issued and posted to this site last week), we discussed how the events of the past year have made some investors hesitant to participate in the current rally. And, it has given pause to others looking to put still idle-cash back to work. While we acknowledge that the current rally has been nothing short of astonishing (especially given our outlook for a slower speed limit of growth for the US economy going forward) we still believe the greater risk to investors is missing further upside potential. We do believe that the US stock market can continue to climb a wall of worry as investors still holding too much low-yielding cash feel increasing pressure to get reinvested. Today looks like the recent winning streak will continue. As we continue marching closer to the end of 2009 and look forward to 2010 and beyond, the biggest question remains the health of consumers. Most pivotal will be corporate and economic releases that provide insight in that vein; not only indicating that earnings are up, but that sales are improving and/or that additional employees may need to be (re)hired.

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Oppenheimer Developing Markets Fund - ODMAX

posted 10.09.2009 at 1:15 p.m. by steve

Late this spring, we began discussing with clients the concept of a New Normal. Our newsletters, commentary and recent meetings have attempted to articulate that vision. As a refresher, economic growth in the US is not likely to occur at the pace that it has in past recoveries under the New Normal. We strongly believe that life has been changed, perhaps semi-permanently as credit will be more rationed for years to come. Consumers have begun to save more and reduce debt; they are likely in the early innings of their de-leveraging process. That behavioral change, combined with higher anticipated taxes to pay for large government deficits and increasing regulatory oversight will set a slower speed limit for growth in the United States and other developed economies. We believe that developing country economies, also known as emerging markets, will grow at a more swift pace. Countries like Brazil, India, China and the like will continue to experience fast economic gains, especially as compared to their developed country counterparts. The most notable difference between countries like the US and emerging economies is the consumer. While the US consumer is de-leveraging, consumers in other parts of the world are actually increasing their level of spending as they marginally increase their standard of living.

We are currently increasing client exposure to foreign equities beyond what we have ever before. We are targeting foreign equity exposure to represent roughly one-third of total client equity exposure. For example, if a client investment objective was 90% stock and 10% bonds, that client portfolio would target 30% foreign equity exposure. In addition, we feel that emerging markets in particular will be an area of especially strong opportunity for investors. With that in mind, we sought to identify an emerging/developing markets mutual fund with a well-defined process, articulated buy and sell discipline and strong track record to best capture this opportunity. The result of our process yielded the Oppenheimer Developing Markets fund (ODMAX).

In recent months you have likely noticed it being bought in your investment portfolios that we manage. It has performed well, and we anticipate that it will significantly outperform domestic-oriented funds going forward in this New Normal. For more information and in-depth analysis on the fund, click the link (ODMAX). Please contact us if you would like to receive additional information on this fund, and our current investment thesis.

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Is It Earnings Anxiety? - Week Ended 10/2/2009

posted 10.05.2009 at 09:20 a.m. by steve

The final days of September and first two of October were nothing short of discouraging for investors holding a more bullish view. Despite opening the week (Monday) on strong gains, US stocks declined in each of the remaining four trading sessions and the S&P 500 finished the week down 1.84%. While a decline of that magnitude is not terrible news for a week, perhaps more troubling is that the S&P has now declined in 6 of the last 7 trading days. There has been a noticeable shift in the package of economic news recently released to a less favorable tone. And, increasing is the worry that the market has come too far, too fast. Most influencing on the general tone of news has been the data related to employment, consumer confidence and overall consumption. Continued improvement in unemployment has been weaker than expected. Consumer confidence has stalled in its ascent, and consumption appears to be in a state of hangover following the sugar high of activity that was attributed to the cash for clunkers program.

To put the most recent week in perspective, ISI Group (NY economic research firm) may have said it best with a comment to the effect that the US economy has hit a pothole. The question is, will the economy stay on the road or will it veer off into the ditch?

While news has been of a more mixed variant lately, the pattern seems reminiscent of the week(s) leading up to each calendar quarter-end this year. In each case, the markets have experienced a higher level of stress around the weeks and days immediately preceding corporate earnings season (think back to late December, March, June and now September). Investors have seemed determined to extrapolate only the more negative headlines during these times. Again it seems that markets have anxiety over what story will be told through the collective announcement of earnings, which begins this Wednesday afternoon with industrial component, Alcoa. If the past 2 quarters are any guide, the story told will assuage the worst of fears and once again help the markets melt up. Still, while earnings will be a key focus this coming week, there is still much in the way of new economic data being reported. Included among the data will be the national non-manufacturing PMI, unemployment claims, trade data and monthly retail sales. Today, US markets appear ready for a bounce. Will the commencement of earnings this week again be the catalyst needed to restore optimism and resume the rally? Stay tuned!

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