It’s incredible to have witnessed the volatility in the markets the past few days. To be honest, not much has changed with respect to fundamentals since a few weeks ago, a time when companies were reporting fantastic second-quarter results. In fact, according to this Reuters report, more than 70% of companies in the S&P that have reported have beat earnings estimates on 11% bottom-line growth–and that growth number includes a 27% fall in financial/bank earnings and relatively flat performance from utilities. Recessionary? We don’t think so.
And do we think the fact that companies reporting prior to August 2nd have been cautious on providing outlooks due to the ill-timed debt-ceiling deadline? Yes. Does this mean that the third and fourth quarter will be weak, even in the face of record backlogs from industrial giants like General Electric (GE) and solid order growth from the likes of United Technologies (UTX), International Business Machines (IBM) and a host of other companies and resilience in the consumer as witnessed by Apple (AAPL), McDonald’s (MCD), and Disney (DIS)? We don’t think so. But what about the poor orders indicated in the July ISM data? Did we mention companies took a short-term pause as they waited for Washington to discover reason and raise the debt ceiling toward the end of July.
And what about the downward revision in first-quarter GDPto negligible expansion and the likelihood that second-quarter GDP may also be revised downward from the advance estimate of 1.3%. Umm, did we mention that S&P earnings have advanced 11% in the same quarter the market is expecting a downward revision (including poor performance in financial/bank earnings) and most were driven by higher revenue expansion. What about the speculative short attacks on the French banks—Societe Generale, BNP Paribas, and Credit Agricole—which was prompted by unfounded rumors that a particular credit rating agency may downgrade France’s debt rating, despite comments by that particular credit rating agency suggesting that it won’t. Rumors, speculative short attacks…yes, no kidding. Are the US banks concerned? Well, if Jamie Dimon is any indication, he’s still enjoying his bus tour in California.
And what about “The Bernanke” and the Fed’s comments about holding rates low through mid-2013? We don’t see how this can possibly be bad for consumers or businesses, as money flows into riskier assets — whether it be longer-dated corporates (further reducing borrowing costs), emerging markets (pushing the dollar lower, helping exports, GDP), or equities (and gold). And has the risk of the United States government defaulting on its debt really increased 50 basis points, as measured by CDS spreads, since 2007 — as this report suggests? Yes, and again, we’re not joking–ridiculous. It’s probably worth noting that the US government has debt in dollars and it owns a printing press — we should expect long-term inflationary pressures, not a US default.
Perhaps the best way to explain all of the volatility in the past several trading sessions is to look at the market’s reaction immediately following the FOMC’s release — up, then down 200 on the Dow only to finish 400 points higher in a matter of minutes (a 600-plus point range). The answer is that investors aren’t thinking clearly (who’s managing your money?) — they’re not only getting misinformation but it is being exacerbated as they are hearing it from people on CNBC with fancy titles (are these people managing your money?). It’s quite clear that the market is searching for the next crisis and paying little attention to what’s actually happening — strong and better-than-expected corporate earnings, continued lower borrowing costs for some time to come, and falling oil prices to buoy consumer spending.
It is a shame that we’re dealing with speculative attacks on banks again (this time in Europe though) as the sole source of concern and uncertainty. We firmly believe that this is the only unfounded concern that is shaking the global markets. Do investors really believe Europe is not ready to deal with this, or that Bernanke, schooled in Depression economics and with first-hand experience dealing with the events of the US financial crisis just three short years ago (which claimed Bear and Lehman), is not ready to act to silence the shorts? Just as we nearly recovered all of the gains lost in the US financial crisis before this recent correction, we will again make new highs in the S&P once this crisis-of-fear and uncertainty passes. And dare we say, even if the economy remains sluggish. Stay the course.