Earnings

January 24, 2013

Technically, the United States went over the fiscal cliff on January 1, and for those of you paying attention, the S&P 500 rallied 4.57% from 12/28/2012 to 1/4/2013.* What? Not what the financial media was predicting? The good news is that Congress was able to pass the American Taxpayer Relief Act before markets opened in 2013, thereby making permanent the Bush-era tax cuts for most Americans. The bad news is that Congress kicked the can down the road two months on $109 billion in painful spending cuts. While we wait, and endure two more months of headlines about partisan bickering, we’ll get some real news about how companies are doing with the fourth quarter 2012 corporate earnings.

Corporate earnings seasons provide a report card for how companies around the world are doing. Not only do we get a backward view at business activity and profitability, but corporate managers provide forecasts about how they expect their business to perform in the future. Wall Street plays a bit of a silly game with earnings. Wall Street analysts try to guess how much companies will earn. If the analysts guess too high, stocks tend to fall; if they guess too low, stocks tend to rise. Then, there is guessing about the guessing. Money managers we are talking to think that Wall Street analysts have set the bar for corporate earnings a bit low for the fourth quarter. So while economic activity may have been hampered by the uncertainty around the fiscal cliff and a mediocre holiday selling season, Wall Street may be too pessimistic relative to how companies performed, relative to the previous quarter. In fact, we have seen many analysts significantly reduce their estimates since last October. According to Thomson Reuters data, earnings were expected to grow by 2.7%. Now, those guessing about the guessers say that these lowered expectations leave room for companies to surprise investors, even if their results aren’t particularly strong.

While corporate earnings are interesting and can sometimes provide insights into important economic trends, we don’t care all that much about any one earnings season as we are long-term investors; in general, we don’t get too caught up in the events of any three-month period. While we don’t focus that much on a single earnings season, you can expect the financial press to be buzzing. Headlines from the financial media about which companies beat and which ones missed their projected earnings make great news; but, remember, the financial press isn’t in business to give you advice. They are in business to sell advertising and generate ratings. So while the news swirls about earnings, about the budget deficit, and just about anything else, the key is to stay focused on your financial goals and maintain a consistent strategy.

 

*Source: Bloomberg

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Will it be a “bearish” summer?

June 15, 2012

Lately, the weaker-than-expected economic data globally and the deepening of the European sovereign debt crisis have prompted market observers to sound the warning bells for a bear market. Some are comparing the current downdraft to what happened in 2010 and 2011, implying much further downside. Others—including international policy makers—have compared the current environment to the summer of 2008, likening the fall of Lehman Brothers to a Greek exit from the eurozone and emphasizing the unknowable “unknowns” and the spillover effects that could follow such an exit.

It seems as though a bearish sentiment has become increasingly pervasive. The American Association of Individual Investors’ sentiment survey has shown a significant increase in bearish sentiment in recent weeks. From our perspective, this level of bearishness is in sharp contrast to the year-to-date total return of 2.6% in U.S. equities! So the question is…whether such bearishness is warranted.

We are highly skeptical of the “doom-and-gloomers” or any forecaster with a strong view of how markets will perform in the near future. Markets and the events that shock markets are nearly impossible to predict on a consistent basis. A broader review of the economic data seems to indicate that while the U.S. economy might be in another “soft patch,” there is still meaningfully positive growth and that growth is likely to continue.

The media is focusing on Europe as the potential catalyst to knock the United States off its path of positive growth; we view this as unlikely. While peripheral Europe has serious solvency and liquidity issues, core Europe is growing and is not in recession, which gives Germany and France room to act to stabilize the economy. Political actions are almost as difficult to predict as the markets; however, the cost of a eurozone breakup would be much greater than the cost of a bailout to the core European countries. So if core Europe acts rationally, it’s difficult to imagine that the European Union would break up, even if it means large additional bailouts or, more likely, major structural reform.

Furthermore, Greece is relatively insignificant. A Greek exit could send a troubling message and start the game of “who’s next,” but on its own, it is a non-event. And, we believe that a Greek exit is unlikely. Returning to the Drachma doesn’t solve any of Greece’s problems; in fact, it enhances them by leading to potential hyperinflation and restrictive capital controls, making an exit even more unlikely. 

So while it might feel reminiscent of the summers of 2008, 2010 and 2011, it’s the summer of 2012. The situation today is materially different from those of previous years. The United States is growing, core Europe is creatively (if too slowly) dealing with the problems of the peripheral countries, and central banks around the world are working to coordinate and promote growth. Overall, the data indicates a heightened level of concern, but nothing that should distract us from staying focused on the long term.

Wealth Enhancement Group


Perspective: JPMorgan’s big losses

May 15, 2012

JPMorgan Chase’s surprise $2 Billion loss is exactly what’s not supposed to happen anymore, but we are not surprised. Before 2008, big Wall Street banks had a great deal going with the American people. If the banks bet big and won, their employees were paid handsomely; if they bet big and lost, well then, American taxpayers were on the hook. The Volcker Rule, part of the sweeping Dodd-Frank bank reform measures that were passed in response to the financial crisis, was supposed to change that by taking the ability to make big, short-term bets on risky assets away from banks that are considered “too big to fail” and, therefore, implicitly backed by taxpayer money. However, the Volcker Rule won’t take effect for another two years, and this recent blunder by JPMorgan will be additional ammunition for bank critics who want to impose more regulation.

These big bets, though, tend to be really profitable. The highly skilled traders that banks can attract, coupled with their knowledge of the markets and technological prowess, means that banks’ trading desks can win more often than Main Street investors. Given that greed tends to rule (and greed is not always bad), it’s no surprise to us that JPMorgan found its way back into the business of betting its own money in a big way. These bets have been very profitable and, up until the surprise announcement, had been almost a bragging point for JPMorgan’s revered CEO Jamie Dimon.

But there is no return without risk, and the risk finally caught up with them. Dimon attributes the loss to “many errors, sloppiness and bad judgment.” He makes it sound as though taking risk doesn’t always lead to some unexpected losses, and if they could have had “more control” over the risk they were taking, the losses wouldn’t have occurred. That’s just not true. The lesson here is that when big bets are taken, both big gains and big losses are possible, regardless of how good you are at managing risk.

 

Wealth Enhancement Group

 

The opinion voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. The opinions expressed in this material do not necessarily reflect the views of LPL Financial. To determine which investment(s) may be appropriate for you, consult with your financial advisory prior to investing.

Ahhhh, 13,000!

March 1, 2012

“After bouncing up and down around the 13000 level for a week, the Dow Jones Industrial Average finally closed above that psychologically important mark for the first time since May 2008.”

That’s what The Wall Street Journal says in its online edition about the February 28 market close. But is closing above 13,000 really psychologically important?

The short answer is that for the pros, no, it isn’t. They’re busy drawing conclusions from the facts hiding behind the milestone. The twin specters of U.S. recession and European debt collapse are fading. The Dow is up 22% since October and 6.4% since the beginning of 2012, the strongest rise to start the year since 1998. Will it continue?

On the plus side, there’s another bailout for Greece, rumors of a renewed Federal Reserve bond buyback should the economy show signs of weakness, declines in borrowing costs for Italy and Spain, and a 12-month high in the Conference Board’s index of consumer confidence. On the minus side, the slowing growth rate of corporate profits, fears that China’s real estate bubble will pop, rising oil prices, and the plain fact that stocks have been rising for five months and could be due for a correction.

So the answer to “Will it continue?” is, as usual, maybe.

And if 13,000 isn’t psychologically important for the pros, is it for the Main Street investor? Probably it is. Consider the five-month run-up that led to 13,000. In the past few weeks it has finally brought the Main Street investor creeping back into the market.

Here are some ways the average investor can avoid letting the psychological component override the facts: 

  • Pay attention to valuations, the most fundamental measure that moves stocks.
  • Remain focused on broadly diversified portfolios with exposure to multiple asset classes.
  • Focus on long-term goals and stay invested.
  • Avoid the “herd mentality” of jumping on the most recent investment bandwagon.

 

James Copenhaver, Director of Investment Management

 

Sources: Optimism Drives Dow Past Milestone; Main Street’s $100 Billion Stock-Market Blunder

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

China’s Choices

December 11, 2009

In normal times, the Chinese government uses the banking sector to send masses of low-interest rate loans to companies and sectors targeted for growth. This maintains growth and employment levels, preserving social and economic stability in a country with a massive population.

In times of stress, this aggressive lending goes into overdrive. The year 2009 has witnessed an unprecedented lending-surge by Chinese banks, who, under government direction, hoped to stave off a recession in China’s domestic economy as exports to the U.S. and rest of the world plunged. This has been a dramatic success. For example, the data reported for the month of October was very strong:

1. Growth of industrial value-added, which accounts for about half of China’s GDP, accelerated to 16% year-over-year.
2. Electricity production, a good growth barometer, grew by 17% year-over-year.
3. Steel production set a record 44% year-over-year gain.
4. Retail sales increased 16.2% year-over-year.
5. Vehicle sales totaled 1.2 million (more than the 838,000 sold in the U.S. in October).

By the end of the year, the net new loans fueling this growth are likely to total more than $1.5 trillion, which would equal over a third of China’s GDP. In October, the money supply was up 29.4% year-over-year and bank loans were up by 34%. This is a massive lending spree, even by China’s standards.

Much of the lending that was targeted to growth industries has leaked into the stock and real estate markets, which have rallied dramatically and are beginning to form bubbles. With subsidized loans still growing and the global economy now in recovery mode, the threat of double-digit inflation (already prevalent in India, another BRIC country) is looming.