Weekly TA for May 13-17th

Here is a brief look at the TSX, Focus 5 and several ETF’s on how they performed over the week.

Earnings Cliff

Much has been written about the potential “fiscal cliff” faced by the US (click here to read article), but it seems that US equities are currently driving off an earnings cliff (click here to view video).  As of last Friday, only 42% of the 98 companies in the S&P 500 who have already reported their earnings, reported sales figures that beat the market estimate. If this continues, this will be one of the  weakest quarters for sales growth since the depths of the great recession in late 2008/early 2009. Over the past couple of years companies have been able to beat earnings estimates by cutting costs, but you can’t hide from sales declines forever. Europe in a near depression and a slowing China are starting to take its toll on corporate results.

Some of the companies that have reported disappointing results are some of the global economy’s bellweathers:IBM, DuPont, and 3M are just a few of the companies missing sales targest. DuPont also announced job cuts of 1,500, while Dow Chemical said it would cut 2,400 jobs (click here to read article). From the FT article:

                             US corporate earnings have so far been in line with forecasts that quarterly  profits and revenues will fall for the first time since 2009.

                         Jack Ablin, chief investment officer at Harris Private Bank, said: “I give  more weight to fundamentals than liquidity from the Fed.

                             The fact that we are  seeing a 2 per cent drop in profits for the first time since  2009 . . . represents a directional change in the market.”

It is still early, but if this is a sign of things to come out of the US, then Mr. Ablin is probably right in that we are witnessing a major directional change in the makret. In Canada, the earnings season for the TSX 60 is just getting underway, with CN Rail announcing on Monday decent earnings (click here to read article) along with a cautious outlook for the rest of the year. Tomorrow we get a handfull of TSX 60 companies reporting their results. We are likely to see a number of Canadian companies across the commodity landscape report poor results. Keep a watchful eye on your companies.

Chinese GDP On Thursday

In what seems to be a prelude to China’s latest GDP announcement on Thursday, there have been a number of articles on China’s slowing growth over the past couple of days. The extent and duration of China’s economic slowdown is still unknown, and remains one of the biggest risks to the global economy next to the mess in Europe. Here are a couple of the better articles written:

Global Distress 3.0 Looms as Emerging Markets Falter: Bloomberg  - Bloomberg yesterday had an excellent article calling China’s slowdown (and the emerging markets as a whole)  the third leg of the global economic downturn; first the US recession, which was then followed by the debt crisis in Europe. From the article:

China, the world’s second-largest economy, alone accounts for 65 percent of seaborne iron ore demand and 40 percent of copper consumption, leaving producers such as Australia, Brazil and Chile vulnerable, Gustavo Reis, a Bank of America Merrill Lynch economist in New York, said in an Oct. 5 report.

A 1 percentage point drop in China’s growth rate often leads to a 1.5 point decline in commodity prices over a couple of quarters, threatening resource-rich nations such as Canada, while about 80 percent of its imported inputs come from Japan, South Korea and Taiwan, Reis said. Germany may also suffer from weaker demand for its capital goods.

Chinese Exporters Fear Grim Outlook: Financial Times - From the article:

As  China prepares to release growth data this week that is expected to confirm  the slowdown in the world’s second-largest economy, companies around the world  are registering the impact.

US companies such as Caterpillar, the earthmoving equipment manufacturer,  and Alcoa, the aluminium producer, have warned of the impact  on demand. Cummins, the engine manufacturer, last week said it  planned to cut up to 1,500 jobs, in part because of the decline in the Chinese  market.

Shannon O’Callaghan, an analyst at Nomura, said: “At the start of the year most US  companies were saying they thought China would get better in the second half.  But by the summer, it was clear it was not getting better. If anything, it’s  getting worse.”

Bottom line: China still remains the wildcard in the global economy. At the beginning of the year when it was apparent that China was slowing down, the market consensus appeared to be that China’s economy would be picking up at the start of the second half of the year. Obviously this isn’t the case, and the China bulls now feel that the final months of 2012 will be the turning point. Recent inflation data from China shows that the country’s rate of inflation has been falling, giving China’s policy makers more room to increase stimulus further. But so far the response from China has been slow, mainly due to the change in political leadership in China (click here to read article).

QE ‘Forever’ vs The Global Economy

It has been a week now since the Federal Reserve announced its latest round of quantitative easing (QE). After the initial pavlovian response that lasted two days, the global markets have been wavering somewhat (click here to watch video). I don’t want to get into too much detail here, but here are a couple of random thoughts:

• This latest edition of QE is anticipated to have a smaller impact than the previous editions, and that has been the trend. Each subsequent attempt by the Federal Reserve to goose the markets/economy has had a smaller impact on the equity markets. But you have to ask yourself where would the equity markets be if the Fed stopped after its first QE program?

• While there is a growing number of investors who are doubtful that the Fed’s latest plan is going to have any significant impact, and the anger level directed towards Fed Chairman Ben Bernanke has reached epic proportions; Mr. Bernanke feels he had no choice (click here to watch video). Fed Chairman Ben Bernanke is looking around at the U.S Congress and the White House where both are doing nothing due to political deadlock, which is likely to continue even after the elections in November (click here to read article). The sad reality is that if the Federal Reserve didn’t embark on all of its QE plans, or stopped after the first QE,  the equity markets would be far lower than where they are now, and the US economy would be doing a bit worse. Then these same detractors of Mr. Bernanke today would be vilifying him for not doing enough.

• During the first QE back in 2009, the U.S was staring into the abyss: its financial system was still teetering after the bankruptcy of Lehman Brothers. With the implicit assumption that the U.S was going to backstop its financial institutions no matter what, along with the Fed embarking on QE, the dramatic rally of 2009 began. Today, the health of the US economy is the least of the world’s worries. Yesterday morning’s manufacturing data reminded us that the European Union is staring a near depression in the face, and the severity of China’s economic slowdown is still the biggest wildcard for the global economy (click here to read article). Toss in geopolitical hot button issues such as a potential military strike on Iran, another possible Arab uprising, and the world’s second and third largest economies fighting over deserted islands (click here to read article), and the world has more to worry about than the US economy growing at 2% clip.

• We might be at the start of a battle between global central banks and global macroeconomics. In a market environment like this, it is hard to ignore the old market rule of  ”Don’t fight the Fed”; especially since the Federal Reserve is being backed up by the European Central Bank, the Bank of England, the Bank of Japan, and the People’s Bank of China. But given all of this activity by the world’s central banks, there are still legitimate concerns about global economic growth for this year and next.

• As an individual investor, you can have your opinion as to whether you agree or disagree with what the US Fed and the other central banks around the world are doing, but you can’t let your views cloud your judgement. It is what it is, and you have to decide what to do with your investments. Selling everything you own and buying all the gold you can muster and then burying it in your backyard while getting a pit bull to guard it because all of this ‘money printing’ is going to destroy everything is one option, but probably not the best (believe me there is at least one person in the US doing precisely this as you read this). Our job is to educate our clients on what are the best options available so that they can make intelligent investment decisions themselves.

• Given the likelihood that low interest rates will persist over the next couple of years (despite all of Mr. Carney’s threats), investing in high paying dividend stocks that have stable businesses is still a viable option . With this, we are offering a complimentary webinar on Thursday, September 27th  to all who are interested. The webinar will cover a handful of major Canadian companies in the pipeline and utilities sector. If you would like more information, please email admin@train2invest.com.

Weekend Reading

• Going platinum (The Economist)
• Apple vs Enbridge (The Globe and Mail)
• Series of data raises fears of US spring slowdown (Financial Times)
• Volvo is yet another company telling us that China is slowing down fast (Business Insider)
• Haste makes waste: How investors are led astray by their irrational biases (Financial Post)
• Gold producers in tough on higher costs (Financial Post)
• Nightmare week for Angela Merkel as austerity bloc crumbles (The Telegraph)
• Yedlin: ‘Encana twins’ don’t look alike (Calgary Herald)
• GDP won’t sway Bernanke’s stance on QE3 (Real Time Economics)
• How corn keeps fertilizer costly (Real Time Economics)