Tuesday, May 08, 2012

The Morning Call-First quarter earnings 'beat' rate tanks

The Market

The indices (DJIA 13008, S&P 1369) had a volatile day but closed near the flat line. The Dow remains within its short term trading range (12919-13302) and its intermediate term uptrend (11570-16570). The S&P closed below the lower boundary of its short term trading range (1372-1422) for the second day but is still within its intermediate term uptrend (1215-1782). Both the Averages stayed below their 50 day moving average (13047, 1386) for the second day.

Volume was flat; breadth mixed. The VIX fell but continues to trade above the lower boundary of its short/intermediate term trading ranges.

GLD declined slightly but remains above the lower boundaries of its short and intermediate term trading ranges.

And (short):

Bottom line: the indices continue to challenge the lower boundaries of their short term trading ranges. While this process is going on, I see no reason to step into the fray. If they break, then the next level to watch is 12744, 1338. If 12919, 1372 hold, then the strength of this support level will be enhanced.

The latest from Trade Mike (short):

Update on ‘best stock market indicator ever’:



No economic news yesterday; though it probably wouldn’t have mattered. All eyes were on the French and Greek elections in Europe over the weekend. The outcomes---socialist win in France, anti bailout parties in Greece---were pretty much anticipated. Friday’s pin action anticipated those results and yesterday’s flattish performance confirmed it.

However, I don’t think that means the investors have discounted the longer term consequences of these events---primarily because I don’t think anyone has a clue what they will look like. Not that we don’t know what Hollande or the Greek anti bailout parties have said that they were going to do. But we don’t know (1) if they are actually going to do them and (2) how the Germans are going to react if they do, do them. This act of the play has just started, so there is much more to come. I am not suggesting that what follows will be all bad; I am saying no one knows how good or bad it will be.

The latest datapoints out of Greece (medium):

Bottom line: the $64,000 question is, given the fiscal train wreck that is Europe will the newly elected governments of France and Greece really be able to deliver on their campaign promises and drive their economies off the cliff in short order or will the Germans and the markets impose sufficient discipline that those promises are rendered empty and the EU economic crisis remains a Chinese water torture test but with a stick of dynamite stuck up its ass?

Neither alternative argues for an upward revision in Valuations.

Mohamed El Erian gives the positive case (medium):

Stratfor the negative (3 minute video):

And David Rosenberg (short):

The latest from Jim Grant (9 minute video):

A look at current valuation levels (short):

As of the close Friday, first quarter’s earnings ‘beat’ rate has declined from 73% to 60%. Average for all quarters is 62%. So what seemed at first to be a positive economic indicator is now negative; and that doesn’t even address the much lower expectations built into the forecasts.

Steve Cook received his education in investments from Harvard, where he earned an MBA, New York University, where he did post graduate work in economics and financial analysis and the CFA Institute, where he earned the Chartered Financial Analysts designation in 1973. His 40 years of investment experience includes institutional portfolio management at Scudder, Stevens and Clark and Bear Stearns. Steve's goal at Strategic Stock Investments is to help other investors build wealth and benefit from the investing lessons he learned the hard way.