We’ve been watching the firm bid under the market with detached amusement. The liquidity-driven rally is now firmly detached from the fundamentals, and will likely continue that until the Mid-Term elections are over.
A reader suggests that recent market headlines remind him of the Chicago Cubs:
Ace Pitcher Prior Strikes Out 18!
But then you read further down into the article: But Cubs still lose 2-1. (If Cubs fans can wait for over 50 years, then we can only guess how long the markets will stay irrational for).
Let’s look at the earnings picture more closely: Dow component Alcoa missing badly on softening demand for metals (Gee, what might that mean to the economy?), markets looked past a miss by a major bellwhether and a key economic indicator to focus on Pepsi and CostCo.
Consider: Pepsi 3Q Profit Rises was the headlines; But deeper into the report, we learn that the profit increase was in comparison with last year’s results, depressed by a large tax charge. Similarly, Domino’s Earnings Rose 21% headline was primarily based on European growth; In the U.S., the company saw a decline in sales, with same store sales off 3.1%. (What slow down?)
Meanwhile, despite all the hoopla over technology and semiconductors, Chip companies have been warning left and right. Both Intel and AMD expect revenues to be down 14% from a year ago. On the warnings, the SMHs have been rallying.
But the biggest earnings goof was Costco — earnings rose a paltry 1% in Q4. The headlines trumpeted the beat ("Costco earnings up unexpectedly") — but then we read on: The company only recently lowered expectation for Q3 & 4, as sales have softened. Their unexpected beat-the-number was based on 3 items 1) a one time tax benefit; 2) lower-than-expected worker’s compensation costs; and (my favorite) 3) Unexpectedly profitible gasoline sales in the last week of the quarter.
I am not at all suggesting that earnings are god-awful — they still look to be up double digits on a year-over-year basis. But this quarter saw more preannouncements, more misses, more reduced guidance than prior quarters. Its exactly what you should expect for a slowing economy.
There is not a whole lot of room for any misses. The S&P500 trades
at 18 times trailing earnings; The Russell 2000 is 35 times.
Bellwhether General Electric (reporting soon after I write this) trades
at nearly 23 times earnings. Even if earnings come in as consensus,
this market ain’t cheap
If you think earnings are the basis for this rally, then you have not been paying attention. The rally we are witnessing is not fundamentally driven, nor is it forecasting an economic soft landing. It is a liquidity driven effort that I do not expect to last until year’s end.
Happy Friday the 13th . . .
Next week, we will hear from Intel, IBM and Yahoo on Tuesday; Apple, eBay and JPMorgan on Wednesday, Honeywell on Thursday, and 3M on Friday.
UPDATE: October 13, 2006 7:12am
I am trying to get a handle on GE’s earnings today (49 cents share consensus), which has been reported as 48 cents, a one penny miss. But the original headline I saw said 49 cents.
The WSJ writes:
The Fairfield, Conn., conglomerate posted third-quarter net income of $4.96 billion, or 48 cents a share, from $4.68 billion, or 44 cents a share, in the year-earlier period.
CNN is reporting 49 cents per share:
The diversified conglomerate, the No. 2 company in the world in market value, earned net income of $5.1 billion, or 49 cents a share, in the period, up from $4.6 billion, or 43 cents a share, in the year-earlier period. Analysts surveyed by earnings tracker First Call had forecast earnings per share of 49 cents.
I haven’t drilled down yet, and I will be away from the screen for a while, so if anyone can clarify this, please do so in comments.