Courtesy of Phil’s Stock World
The last Beige Book report was on September 9th.
At the time the Dow was looking toppy at 9,650 and we had poor consumer confidence numbers (just like yesterday) and poor consumer credit number (no change) and the book had very little “good” news to report (see my analysis) – Yet the market broke over 9,600 again that day and then took off all the way to 9,900 a week later. At the time, we were looking for any excuse to go higher on the hopes that this earnings period will look like last one but have we now come too far, too fast?
It seems we are finally hitting the point of diminishing returns for earnings. Expectations have finally gotten so high that even big beats aren’t enough to keep the momentum going.
Last earninings Q, we were down from 8,900 in June to 8,100 on July 9th as companies began reporting and we had a nice, 1,000-point relief rally over the first two weeks of earnings. This time, we went up an additional 500 points in the past two weeks, over our 9,600 line and that has been in anticipation of a repeat of last earnings but the circumstances are very different this time and it takes a lot to justify a 20% run off the July lows.
Keep in mind that, looking at the sector charts, Energy, Materials and Tech are leading us. Since semiconductors are simply another form of commodity – this is almost entirely a commodity rally in the midst of a recession with Consumer Staples, Financials, Health Care, Industrials, Telcom, Utilities and Transports all underperforming the rest of the S&P. As I keep saying – if no one is shipping anything, how the hell can we be having a proper recovery?
The Beige book is an anecdotal view of the economy gathered roughly through the middle of October and we’ve seen no improvement in Jobs since the Sept 9th report, Cash for Clunkers ground to a halt and, just this morning, we got a horrific 13.7% decrease in the number of mortgage applications from the previous week. That nuber includes “seasonal adjustments,” without adjustments, morgage apps plunged 22.4% despite record low rates as government assistance begins to peter out. The Refinance Index, also adjusted for the holiday, decreased 16.8 percent from the previous week and the seasonally adjusted Purchase Index decreased 7.6 percent from one week earlier. The unadjusted Purchase Index decreased 16.7 percent compared with the previous week and was 3.4 percent lower than the same week one year ago.
Clearly the earnings reports that are coming in are still doing so mainly on cost cutting, not any underlying improvement in sales. This week we had GCI with a beat but earnings are down 18%, some other notable revenue numbers are: PETS +5%, WFT -15%, AAPL + 25%, STLD – 54%, TXN -15%, WERN – 26%, EAT – 21%, CAT – 44%, KO – 4%, DRH – 15%, DD – 18%, GAP -5% (that’s food!), ITW – 20%, LXK – 15%, EDU +26%, OXPS – 7%, BTU + 24%, PCP – 27%, SHW – 12%, UAUA – 20%, UNH + 8%, WU – 5%, CNI -16%, CREE + 20%, GILD + 31%, ISRG + 19%, NBR – 44%, SNDK + 14%, STX – 12%, STM – 23%, YHOO – 14%, AAI – 11%, APD – 21%, ATI – 50%, CAL – 20%, MAN (jobs) – 26%, SWK – 16%…
So we get a general impression that sales are off about 15% from last year. Last year’s Q3 wasn’t that great you know, the market collapsed in September so we already knew things were falling apart last Q3 so these are not tough revenue comps we are facing. AFTER getting the revenue and profit numbers last October, the market went down considerably. Should we be concerned? Of course we should, any rational person would be but the markets are clearly IRRATIONAL right now so we are playing the market, not the data.
We have to willingly suspend our disbelief in order to play these markets and our play mix, though still cautious, is reflecting that forced change in attitude. Sure we still look at the data, but we do so while keeping in mind the great Bill Murray’s advice - ”It just doesn’t matter!”
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