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Monthly Archives: October 2009

Q3 Report Card Due This Week

Not surprisingly, in a week dominated by the first full week of the Q3 earnings reporting season, the economic data took a back seat to all the headlines on earnings. On balance, the week’s economic data was mixed, with a few reports beating expectations, a few in line, and a few disappointments. Importantly, none of the data changed our view that the U.S. economy will experience 2.0 to 3.0% GDP growth in the second half of 2009, and that the consensus forecast for 2010, at 2.4%, is still too low.

This week, there are even more Q3 earnings reports (150+) than last week (137), but the market seems almost immune to all the good news there. Thus, we expect there to be more focus on the week’s full slate of economic data which include reports on:

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Back to the Future: Will 2010 Look Like 2004?

While some forecasters are reaching back to the 1930s to find comparisons to the environment the markets are likely to encounter in 2010, we find a more recent comparison to be compelling. We believe that 2004 could be a useful guide to what may happen in 2010.

The idea that 2010 could be similar to 2004 in many ways may not be as far fetched as it may seem. After all, 2009 looked a lot like 2003. Consider that in both 2003 and 2009.

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Persistent Pessimism

After crossing the 10,000 for the first time in a year, the Dow finished the week just below that threshold – but up for the second straight week, gaining 1.3%. The S&P 500 added a similar 1.5% on the week, up 61% since early March but still off 31% from the October 2007 peak.

The stocks market gain was solid, but clearly reflects lofty expectations for earnings since a record-breaking 79% of the 61 companies in the Standard & Poor’s 500 that have reported third-quarter earnings so far managed to beat analysts’ profit projections. Based on last week’s reception, companies appear to have to present revenue growth combined with much better than earnings expected results to generate anything more than a yawn from the stock market – which appears to be nearly saturated with good news.

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How, Why, and When?

After a long month- long respite in  September, the economic data is once again beating expectations in October, returning to the pattern seen in June, July, and August, when nearly 70% of economic reports beat expectations. This past week, only the early October University of Michigan consumer sentiment report failed to match what are now raised expectations for the economy.

This week, the economic data calendar is dominated by housing, with reports on homebuilder sentiment for October, housing starts, building permits, existing home sales for September, and housing prices for August. The Federal Reserve (The Fed) also releases its "Beige Book" – a qualitative assessment of the economy in the 12 Federal Reserve districts – ahead of the November 4 Federal Open Market Committee (FOMC) meeting. The FOMC is the policymaking arm of the Fed.
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Setting a Higher Standard

Our mission is to offer the best advice, tools, and resources available to help you meet your financial goals. Guided by three tenets, performance, service, and transparency, the team is committed to delivering to all three through conflict free, actionable manager guidance, effective assett allocation positioning, timely economic and market perspectives, and visibility into our process.

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Renewed Rally

Last week’s 5% stock market rally, as measured by the S&P 500, was driven primarily by a positive start to the third quarter earnings season. While we cautioned last week about drawing conclusions on third quarter results too early, we can’t help but note that a number of companies gave us just what we were looking for by posting better than expected sequential revenue growth and a high 74% of companies are beating expectations.

We had expected a renewed rally to begin last week after stocks have been in a range of 1025 to 1075 on the S&P 500 for the past month. We raised our recommended stock weighting just prior to last week as the earnings reporting season was about to get underway. During the past two quarters, the stock market moved sideways in the two weeks prior to the start of the earnings season then rallied as the reports came in. This pattern appears to be unfolding again this season.
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2010 Consensus GDP Forecast Still Too Low

The data this past week was sparse, but the data that was released was generally above expectations, including the:

* Service sector ISM report for September

* Jobless claims for the week ending September 26

* Chain store sales for September

* September trade balance

In addition, we saw a spike in mortgage applications in early October and a better than expected reading on the nation’s trade deficit in September. Financial markets reacted accordingly, with the S&P 500 rising 4.5% in the week, while the yield on the 10 year Treasury note rose nearly 20 basis points, to 3.38%, from under 3.2% a week earlier.

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Third Quarter Earnings Preview

Four times a year investors focus on the most fundamental driver of investment performance: earnings. The third quarter earnings season gets underway this week. However, the companies that report early in the season are most often not the bellwethers they are commonly thought to be. We will not really know how results are shaping up until the end of the month, when about half of the companies will have reported.

The analyst consensus estimates for the earnings of S&P 500 companies in the third quarter fell sharply in the first five months of the year. Then, they stayed relatively flat despite a steady improvement in leading indicators of profit growth that we have highlighted in prior weekly commentaries, such as the ISM index and even our own Current Condition Index.

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Labor Market Improvement Stalled Out in September

The weak September jobs report, released on Friday, October 2, brought a disappointing month of economic data to a close. In June, July, and August, about 70% of the economic data came in above expectations. In September and early October however, the vast majority of economic releases were below (raised) expectations. As noted above, the much anticipated September jobs report also came in below expectations, and there were few “silver linings” in the report. (see below for details). Our key take away from the September jobs report is that the steady improvement in the labor market (from horrendous, to horrible, to awful, to bad) over the last eight months seems to have stalled out at “bad” in September. This calls into question our forecast that the economy will begin to generate job growth by year end. It does not, however, alter our overall views on the economy, inflation or the Fed.

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Investment Commentary

After advancing 8 of the previous 10 weeks, stocks experienced a correction last week, with the Dow Jones Industrial Average losing 1.6% to close at 9,665, the S&P 500 Index declining 2.2% to 1,044 and the Nasdaq Composite falling 2.0% to 2,091. Nevertheless, barring disastrous market activity over the next few days, September should mark the seventh consecutive positive month for stocks.

The Federal Reserve met last week and kept the benchmark Federal Funds target unchanged at a range of between 0% and 0.25%, but indicated that economic conditions have to conitnued to improve. The Fed also retained the message that "economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period". As such, we have no expectation that the Fed will begin tightening policy anytime soon. 

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