I noted yesterday the miserably bearish mood Wall Street has been in recently. The market has been having problems because the central assumption of bulls--that the second half of the year would see a rebound in earnings--is coming under attack. As a result, traders have been taking every opportunity to sell into rallies in June.
The number of companies actually pre-announcing lower for the second half of the year is still small--FedEx , CarMax (which suspended guidance), and Coventry are the most prominent. But it is early, and the Street is not waiting for companies to announce.
Even analysts--historically well behind stock traders--have been taking numbers down. For example, estimates for the S&P 500 for the third quarter are now expected to be up 13.9 percent. That's pretty good, but it is down from 17.3 percent on April 1. Why is it even that high? Because the Street has been assuming that the economy would improve modestly, and that third quarter comparisons would be considerably easier than the second quarter.
Why are traders assuming earnings will be lower than they thought in the second half of the year? Because if you talk to any trader about any part of the market they trade, they're bearish. They hate their sector! How do I hate thee? Let me count the ways.
HMOs are having trouble because membership growth is either down or lower than expected, costs are rising, and estimates for Medicare costs vs. payments have been wrong recently;
PHARMACEUTICALS have been hit by blockbuster drugs going generic, and a lack of new drugs in the pipeline;
AUTOS have been hit by a dearth of exciting new products (in the U.S. manufacturers), a slower economy, and a mismatch between what consumer want to buy (fuel-efficient cars) and what dealers have to sell (gax guzzlers);
RETAILERS and HOMEBUILDERS cannot advance because the consumer is stuck;
FINANCIALS continue to see selling into any rally under the belief that the fallout from the credit crunch is not over, and that even after that a much-smaller, potentially more regulated industry will have trouble growing soon;
TECHS have outperformed the broader market in the past month; earnings are very back-end loaded (meaning much of the earnings are expected to be in the second half of the year), so as we enter earnings pre-announcement season the anxiety is rising;
TELECOMs are weak because a weaker consumer means wireline and broadband growth will be slowing;
AIRLINES have been hurt by higher fuel costs and the need to shrink capacity;
BONDS have been weakening because of concerns over inflation and a belief the Fed will be raising rates later this year.
What's left? Commodities and energy, and the big global industrials like Caterpillarthat are riding the infrastructure boom. And the hope that stocks will be washed out enough soon (second half of 2008?) to make them compelling.
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