Here’s the news of the week – and how we see it here at McAlvany Wealth Management:
A Yearning for Real Earnings
So far, about 75% of all US companies reporting for the first quarter this year have succeeded in beating analysts’ earnings estimates – as if it mattered, since revenues and earnings can be contracting on a year over year basis and still beat estimates. But, not to confuse, earnings this season stand to “beat” once again, but it will be in the absence of revenue growth to match (e.g., GE, IBM, and Caterpillar). At last read, S&P 500 revenues have grown 31% and earnings 253% since 2009. That divergence implies that a fair amount of financial engineering (i.e., leverage, dividend increases, stock buybacks, and splits) is at work behind the numbers. This quarter so far hasn’t proven to be any different. In fact beating estimates by a wide margin and blitzing the market with perks to shareholders (á la Apple) seems to have reached its apex in the quest for higher share prices – as if this were the last chance to do so before business conditions worsen.
US Stocks oscillated violently in and out of unchanged during the week, finishing on a sour note Friday amid increased tension between Ukraine and Russia. With the rallies thus far operating on lower and lower volumes, there doesn’t seem to be any real interest in stocks at these levels besides the occasional short squeeze that follows a flashy headline. To finish the week, Treasuries managed a small gain, the dollar was flat, and the precious metals caught a safe-haven bid, while stocks in emerging markets sank along side weaker economic data out of China.
Next Wednesday, we’ll hear from the FOMC on policy. Given the recent strength in stock prices and mixed data on the economic front, it’s doubtful the Fed will divert from its plan of tapering another $10 billion from asset purchases. Escalating food, energy, and rent prices – not to mention interest rates – are also pressuring central banks (e.g., the Bank of Japan) to take a tougher stance on QE.
That said, it looks like next week could be difficult for stocks, since speculation in that market thrives on QE. But that may be precisely what the Fed wants at this point. A healthy correction in stocks is likely to cause funds to rotate into Treasuries and mortgages, where lower rates are needed to stop the hemorrhaging now ongoing across the country in housing. In March, new home sales fell 14.5% and existing sales fell -0.2% – in a post-weather shock to the bullish bent.
As for the precious metals, gold seems to have completed another consolidative round at $1,285 on the charts. Ukraine was tossed around as the main reason for gold’s move to $1,303, but it will be increased inflation expectations and credit risk that drive prices meaningfully higher from here. That may take more than a few days to develop, but with central banks now caught between inflation on one side (if they escalate QE) and a mass de-leveraging on the other (if they stop QE), the argument for higher metals prices appears to be improving.
VP Investment Management