VOL. 127 | NO. 15 | Tuesday, January 24, 2012
David Waddell
The Worldly Investor
Keep Close Eye On Indicators
By David Waddell
European Tailwind Markets continued their upward surge over the past week as more participants began trusting in the European crisis containment campaign. The reason we haven’t dedicated much copy to Europe recently is twofold.
First, the moment the ECB committed to provide unlimited liquidity to European banks for three years it became clear to us that there would not be a bank funding panic in Europe. The US financial crisis in 2008 erupted when liquidity evaporated. That will not occur in Europe under these provisions.
Second, the European fiscal environment in total is more solvent than ours is. In other words, they actually have more fiscal ammunition available as a percentage of GDP than we do. Tapping those funds requires fiscal integration, which is a tall order, but every time the crisis seems imminent the political will to avoid it appears.
The deployment of unlimited monetary resources coupled with the availability of fiscal resources provided enough crisis prevention evidence for us, leading us to take a special situations position in European equities in Q4. Lending further support, the developing negotiated default of Greece will demonstrate to the marketplace that default in Europe does not equal the disintegration of Europe.
This will challenge the axiom that any individual country default will accompany the end of the Euro. These two issues have always seemed distantly related to us, just as a default in Vallejo, Birmingham or Harrisburg hasn’t resulted in the end of the dollar. I am not whistling past the graveyard here, as Europe has a long way to go to address insolvency issues at the periphery.
What I am extending is that the liquidity issues that lead to panics and hard stops were addressed with the facilities initiated in October. Coincidentally, the S&P 500 has rallied 150 points since then. Our European holding is our best performer year to date.
Earnings Headwind Earnings season has been a mixed bag so far. Of the S&P 500 companies that have released fourth quarter earnings information, 55 percent of reporting companies have beaten estimates, the lowest number in 10 years.
Next week will produce an avalanche of earnings reports that will make this analysis more meaningful, but for the moment earnings season has been somewhat disappointing. This may say less about corporate performance than it does about analyst performance.
As business cycles age, analyst estimates tend to catch up to actual earnings. For the first quarter, corporate earnings should advance 5 percent over the year-ago period. For 2011, earnings in the S&P 500 likely grew 15 percent. Estimates for full year 2012 project earnings growth of 10 percent.
While constructive, the low hanging earnings fruit has been plucked at this point. Most cycles exhibit a mid-point slowdown as companies’ investment decisions await demand decisions. Therefore, judgment on this earnings season will likely defer to the macro economic data released concurrently. Revenues will drive earnings from here. Watch economic indicators closely for signs of further momentum.
David Waddell, who is regularly featured in the Wall Street Journal, USA Today and Forbes, as well as on Fox Business News and CNBC, is president and CEO of Memphis-based Waddell & Associates.