Thursday, January 9, 2014

More Actors On Stage, But The Real Curtain Goes Up Tomorrow!

Market Musings...Thursday, January 9, 2014
Lots of news for markets this morning (see below), mostly of the 'good' variety (mostly).
The preponderance of data is seemingly favorable to equity markets, and that's an encouraging way to go into tomorrow's employment data.  Earnings season is already underway, but will kick off unofficially tonight with Alcoa's release, which will be followed in coming days/weeks with a barrage of earnings by other companies that need to be watched closely for top-line growth in sales and bottom-line earnings growth, and in between, what is happening to margins!!  Many market commentators routinely focus on the overall market P/E being at or near historical levels, and conclude that there's plenty of upside for equity markets, even from recent record highs, as long as earnings grow.  But one risk that could unravel that view is if companies face modest sales growth and can no longer squeeze expenses enough to keep margins as high as they've become, and therefore not be able to drop as much to the bottom line.  Furthermore, much of the EPS data is benefiting from the abundance of stock-buyback programs which reduces the number of shares outstanding and in turn raises the EPS ratio which in turn lowers the P/E ratio. 
So when the curtain comes up on corporate earnings for Q4 2013, that's high on the list of things that I'll be focused on:  sales growth, margin compression, earnings, stock buyback announcements, etc.  Stay tuned for more detail, especially on specific portfolio holdings, in coming days, and in the meantime, please share your thoughts either broadly by commenting below, or privately w/me through the 'chat' or 'email' features on the right side of this blog.

  • China's CPI inflation was less than expected.  Inflation has been a persistent yet sporadic problem in China, often led by spikes in food prices.  This abated in today's report and many believe it has to do with efforts that the central government has already made to crack down on everything from inefficiency to fraud.  The markets, however, appeared to shrug off the good news, as some pointed to soft PPI, a measure of wholesale prices, as deflating 1.4% y/y, raising concerns about the real strength in the Chinese economy.
  • Indonesia's central bank held rates steady, which while expected, is in stark contrast to the several rate hikes that the central bank has had to do since June 2013 in order to defend its currency and combat inflation.  Indonesia, and other countries such as India, are important to watch with regard to the impact that US tapering has on capital flight from their countries, depreciation of their currencies, and in turn, the counter-cyclical policy responses that their central banks are forced to do.  Also of note in Indonesia was their successful bond sale this week which met w/huge demand, mostly from US investors.  According to the FT, January is already the busiest month for Asian bond issuance, particularly helpful to countries who are dealing w/current account deficits!
  • Europe is enjoying a plethora of good news, starting with Germany's stronger industrial output data for November.   In addition, there were stronger than expected readings on Eurozone confidence surveys of both consumers and businesses.  Add to that, a bond auction by Portugal that met with enormous demand, allowing the yields to fall further, and raising prospects for Portugal to exit their bailout program on schedule.  A similar statement could be made about Spain's bond auction today:  strong demand and record low yields!  And both the ECB and Bk of England left policies unchanged at their respective monthly meetings today.
  • US, while waiting for tomorrow's all-important Non-Farm Payroll number, got another uplifting employment data point with the decline in Jobless Benefits by 15k, beating estimates.  That comes on the heels of yesterday's stronger than expected ADP numbers.

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(Please note: This article is solely meant to be thought provoking and is not in any way meant to be personal investment advice. Each investor is obligated to opine and decide for themselves as to the appropriateness of anything said in this article to their unique financial profile, risk tolerances and portfolio goals).
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