Huge Week–Earnings, Analysts & the Dollar
A large week of earnings which means a rash of conference calls, and a number of the analysts I respect and follow closely on wall street, published white papers this week.
I read with delight that the focus of a lot of the articles related to corporate profits, and not only their importance to the direction of the market but how little politics play in the long-term market movements. My old colleague Rich Bernstein published a white paper this week titled “The Three Ps” where he highlighted “P”rofits. “P”olitics and “P”robability. Rich who now runs his own Advisory firm, has always been a highly credible source on macro market issues. He argues that Politics is about what should be and Investing is about what is. I thought that was a good summary. I still prefer the Washington insider Andy Friedman who gives the following explanation of the word politics being Poly (meaning multi or many) and Ticks (which are small blood sucking pests).
I also had the opportunity to dial into a call he hosted last week where he reemphasized how crucially important profits are. My favorite saying is “it’s all about Earnings” is finally getting some ink.
On that note, Bob Doll (another of my ex Merrill colleagues – now at Nuveen) stated that “with nearly 20% of the S&P 500 companies reporting second quarter results, revenues have exceeded expectations by 1.3% and earnings per share have beaten expectations by 5.4%.
The US Dollar recent weakness has also got some headlines in the past week. As the dollar weakens it helps US based companies who have sales overseas. According to Morgan Stanley analyst Michael Wilson, the US Dollar is down 8% this year and he feels that it can drop down to 13%. If that happens Michael believes that there could be a 6.5% boost to earnings in the final quarter.
I’ll finish the way I started with Rich, who stated his biggest fear right now is in long dated bonds. The “P”robability, is that rates will rise. He stated that the Barclays Aggregate index, (which is an index that is a representation of US investment grade bonds ex Municipals and Treasury Inflation-Protected Securities) now has the longest duration in the history of the index. This means that investors have had to buy longer dated bonds to get yield. It shows the investors’ appetite for yield and this is a huge red flag for Rich. To add to Rich’s thoughts, I see that Argentina was able to issue a 100-year bond (WHAAAT) yes Argentina issued a 100-year bond, and it was oversubscribed. According to Forbes, Argentina defaults on its debt every 8 years. Go figure!!!
As for the Buy/Sell, still at the top end of our range, and I’m still comfortable with it.
Source: MG&A
Have a great week and feel free to call with any questions.
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