1) Markets are coming up against some serious headwinds. We are seeing:
--Large number of new offerings coming this week ($8-$10 billion), which will compete with the existing market.
--There's been an unusually large number of cancellation of new cash takeovers (over $40 billion)--remember arbs who bought the deals have to sell when they don’t go through, putting pressure on the market.
--Continuing outflows from U.S. equity funds, averaging $0.5 billion-$1 billion a day.
--Payrolls weaker: growth in withholdings now up 4% in October compared to the same period last year; it had been over 6% in the second and third quarter.
--Home equity extraction is down: it was averaging $45 billion a month the first seven months of the year, and has dropped in half the last two months. Some of that money found its way into the stock market.
(stats from TrimTabs)
2) But there's still plenty of good news.
It's true that third quarter earnings estimates are negative, but again look at what is happening internationally. According to UBS, the 150 firms where international comprises 40% or more of total sales had third quarter earnings growth of 10%, about in line with growth of 11%-12% in the first half of the year.
They are keeping their S&P 500 earnings growth estimate of 6%-7% for 2008 on the strong global GDP outlook, despite slower U.S. The obvious trade for the moment, as UBS notes, is to stay with big cap companies with higher international exposure and secular growth drivers.
3) Fed will cut this week, the question is how much.
Ashraf Laidi at CMC Markets is typical of the consensus, believing the Fed will cut the funds rate by 25 basis points to 4.50% and the discount rate by 50 basis points to 4.75%. While a few are vocally agitating for a 50 basis point cut in the funds rate, Laidi and others have argued that the Fed needs to keep its powder dry in the event there is further deterioration in housing. And--as you may have noticed--the stock market has held up fine since the Fed cut rates September 19th.
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