Fitch's ominous US warning; earnings show shutdown strain
Last night, when Fitch put the credit rating of the U.S. on negative watch, they issued this statement: "In the event of a deal to raise the debt ceiling and to resolve the government shutdown, which Fitch expects, the outcome of a subsequent review of the ratings would take into account the manner and duration of the agreement, and the perceived risk of a similar episode occurring in the future."
This is a very broad statement. To repeat, in taking into account whether they will downgrade the debt outlook, they will look at the "manner and duration" of the current agreement and "the perceived risk of a similar episode occurring in the future."
In effect, Fitch is saying: 'If all you're doing is kicking the can down the road you're not changing anything, you're not reducing any of the risks that we are raising red flags about. If you don't address these problems than it's doubtful you deserve a AAA credit.'
In plain English, kicking the can down the road will not save the U.S. from a downgrade.
1) The government shutdown is starting to show up in earnings reports. This morning, Stanley Black & Decker lowered its full year earnings guidance to $4.90 to $5 a share, from $5.40 to $5.65. They cited slower margin rate recovery within the security segment, weakening emerging markets and the impact of the U.S. government shutdown on organic growth.
Separately, Linear Technology reported first quarter earnings below expectations, and said second quarter revenues would be flat to down 4 percent as the U.S. government shutdown might affect their business.
This is what Wall Street is really worried about: that corporations will use the shutdown as an excuse to lower earnings guidance even more than usual. Fourth quarter earnings estimates for the S&P 500 are high (currently about 9.8 percent growth is expected), and will come down quickly in the next couple weeks. The Street will be fine if it goes down to 4 or 5 percent, but if it goes to zero or negative, the reaction will be negative.
2) Another big day for IPOs; largest IPO of the year prices. Plains GP Holdings (PGAP), a Limited Partnership (oil and natural gas pipelines), priced 128 million shares at $22, the low end of the price talk of $22-$25, a $2.8 billion offering, far and away the largest IPO this year.
Separately, Veeva Systems (VEEV), another business enterprise cloud computing deal, priced 13.1 million shares at $20; that is well above the initial price talk, which first was $12-$14 than raised to $16-18. The deal size was increased as well. They enable pharmacies and other life sciences companies to put their data in the cloud.
An exchange-traded fund (ETF) for IPOs starts trading today. The Renaissance IPO ETF (IPO) will track the Renaissance IPO Index, which is a portfolio of the largest, most liquid U.S. listed IPOs in the last two years. New companies are included in the index on the fifth day of trading and are removed after two years when the IPOs become seasoned stocks.
Among its top holdings as of September 30, 2013 are an 11.0 percent position in Facebook, a 9.8 percent position in Michael Kors Holdings, and a 4.5 percent position in cloud-based HR platform Workday.
I will have Kathleen Smith from Renaissance Capital on Squawk on the Street at 11:20 ET today to talk about the IPO market and about the new IPO ETF.
3) Has the bear market in bonds begun? Not yet, according to respected market analyst Ned Davis, who says four conditions are necessary for a true bear market for bonds:
a. Rising yields;
b. Weaker demand;
c. Increased supply; and
d. Higher inflation.
The first two have been satisfied: ten year yields have risen from 1.40 percent to as much as 3.00 percent, and demand has weakened, as the public has taken to selling bonds through ETFs and mutual funds.
But supply has remained subdued--debt outstanding in the U.S. bond market grew only 3 percent in 2012--and, most importantly, inflation has also remained subdued.
But that doesn't prevent Davis from noting that bond yields are moving in an upward direction: "We see no reason why 10-year yields shouldn't gravitate back toward the 3.25 to 3.50 percent area, where yields were trading before the S&P downgrade of the U.S.'s credit rating in 2011. Eventually, yields should move up to the 4.50 to 4.75 percent range.
That may not be a "bear market" but the bull market in bonds is certainly over.
—By CNBC's Bob Pisani