For the last 4 weeks, we've had a series of earnings releasesand economic numbers that had upside surprises and helped increase investor confidence in equities and in currency risk trades. Remember, the party started when Citigroupand Wellssaid they were having good quarters. Then we had Ben Bernanke say they would not let any major financial institution fail The Fed then announced a quantitative easing program. We had better than expected housing sales and prices. Lastly, we had China say they were seeing good growth from their stimulus spending.
But this financial/economic "green shoot" growth has run it's course for now. Here's why.
Of the S&P 500 companies that have reported earrings, 67 percent have beaten estimates. Great news, except the levels were very low to beat. Bloomberg reports that analysts expect profits to decline through September, dropping 34% in Q1 and 33% in Q2. The guidance that companies are providing for the future is extremely cautious. The dramatic drops in industrial production globally strongly suggests that the cost cutting by companies is not over.
On top of this, we have the outbreak of Swine Fluor North American Flu that is spreading rapidly throughout the world. The World Health Organizationlate yesterday raised their alert level one notch to 4 which means the germ has moved from animal-to-human transmission to human-to-human transmission. It is still not at the pandemic level, but clearly health officials are very concerned over the developments.
Let's not get our hair on fire about the Swine flu, but during the Bird flu scare WHO ran a study on a full blown pandemic with 70 million people dying. They said $3 trillion in the global economy would be lost and a global recession would ensue. Since we're already in a similar global economic state now, the markets are getting jittery about any situation that could take us down this road.
Another road we don't want to travel is upon us with the bank stress test imbroglio. Could there be a better example of the government making a mess of things? This is why most of us free-market capitalists get fired up when big brother steps in to fix things in the economy. As I've been warning, we have our first official leaks of who needs more capital and it's Citigroup and BofA according to the WSJ. "The capital shortfall amounts to billions of dollars at Bank of America, based in Charlotte, N.C., people familiar with the bank said."
The truly humorous aspect of the article is that the government officials say that banks directed to raise more capital shouldn't be be viewed as insolvent.....like that's going to help.
Lastly, we're getting to economic data that's going to be more mixed and remind the market that housing remains a serious problem for the financial sector. Today, we had S&P CS Home Price Index for February come outat -18.63% and they revised down January to -19.0%. Yes, the February was slightly better than expected. However, the overall point is that home prices continue to decline and this makes the real estate loans (toxic assets) on the banks books worth less. Even if prices decline at a slower rate, they are still declining and banks still need to reduce the value of these assets and raise capital to offset them.
Markets are always about expectations prior to reality. Right now, we've had the expectations greatly reduced for the economy and for earnings. Therefore, it's not too difficult to beat them. This has happened. The newsflow now has shifted to a darker reality.
Let's see how far we retrace.
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