‘Draghi Put’ Prevails Over Declining Earnings Outlook

European Central Bank President Mario Draghi testifies before the European Parliament's economic affairs committee in his role as the head of the European Systemic Risk Board on May 31, 2012 in Brussels.
Thierry Charlier | AFP | Getty Images
European Central Bank President Mario Draghi testifies before the European Parliament's economic affairs committee in his role as the head of the European Systemic Risk Board on May 31, 2012 in Brussels.

"Central banker put" prevails over declining earnings outlook.

Despite the clear trend toward reducing second-half earnings outlook, the U.S. markets are not cracking, no doubt because of the global central banker put that is clearly showing its hand.

It was out in full force today. The euro, commodities, and equities all rallied as European Central Bank President Mario Draghi told an investment conference in London: "The ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough."

What does that mean? He made it clear the bank would do more to lower borrowing costs for sovereigns. That could mean several things:

1) A more aggressive program of buying government bonds, reviving the program that buys bonds in the secondary market.

The ECB cannot directly buy sovereign bonds, but there may be a way around that restriction. Draghi is in charge of making sure that the ECB's monetary policy is functioning properly. Here is his comment: "To the extent that the size of sovereign premia (borrowing costs) hamper the functioning of monetary policy transmission channels, they come within our mandate."

In layman's terms: Monetary policy is being hampered by the high borrowing costs, and I have the power to do something about it.

2) An expanded long-term refinancing operation (the third), whereby the ECB provides long-term, low-cost loans to banks;

3) Giving the European Stability Mechanism (ECM), the permanent rescue fund for the euro zone, the right to get a banking license so that it could draw on the ECB, is also being pushed by some, including ECB policymaker Ewald Nowotny.

4) Of course, the ECB could bring out the ultimate bazooka and just start printing money, but that is the bazooka of last resort.

The ECB meets next Thursday, Aug. 2.


1) Greek exit odds are increasing. With the troika (the ECB, the European Union, and the International Monetary Fund) in Athens to assess how the Greek economy is doing, the betting Greece will leave the euro is getting more intense. Willem Buiter, chief economist at Citi, said: “We now believe the probability that Greece will leave EMU in the next 12 to 18 months is about 90 percent, up from our previous 50 to 75 percent estimate, and believe the most likely date is in the next two to three quarters."

He added: "Both Spain and Italy are likely to enter some form of troika bailout for the sovereign by the end of 2012."

2) Earnings: Exxon Mobil saves the day on earnings, but the trend still negative. Exxon's outsize earnings gains — $15.9 billion, which includes a $7.5 billion gain for tax related items (resulting in earnings of $3.41 vs. $1.80 excluding benefits, $1.95 was the estimate) — has skewed the earnings picture for the S&P 500 index.

Standard and Poor's — for the moment — is keeping the earnings with the tax-related items. Look what it's done to total S&P earnings estimates: With about half of the S&P 500 component companies reporting so far, earnings were down 0.4 percent yesterday, but with Exxon earnings beat today overall earnings of all reported companies are UP 2.6 percent.

That's what a nearly $8 billion beat will do for an index.

If S&P went with Exxon's adjusted figure of $1.80, earnings would be DOWN 0.7 percent.

Stay tuned: S&P may change its tune on this. Analyst seem to have known about these tax benefits and chose to exclude them. S&P should go with the $1.80 number, which excluded the benefits.

Third-quarter and fourth-quarter earnings continue to come down: Third-quarter estimates are now FLAT (from up about 6 percent expected a few weeks ago). Fourth-quarter estimates are now expected to be UP 11.7 percent (from about 16 percent a few weeks ago).

—By CNBC’s Bob Pisani

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