Market Commentary – November 16, 2009

General Market Comment:    November 16, 2009

 Earnings season is drawing to a close.  As of last week, 80% of the 463 S&P 500 companies who had reported beat earnings estimates. Here is an update of the number of companies beating the estimates as prepared by Thomson Reuters.  You will note how strong technology and healthcare – our areas of focus – performed.  Given that 93% of the companies have reported it is increasingly probable that Q3 will see the biggest margin of companies beating estimates on record.

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 Of course analysts have been adjusting their estimates upward.  Here is what the next 12 months look like for the S&P 500 earnings as displayed by

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The estimates for earnings over next 12 months are strongly suggesting operating earnings (adjusted for write offs etc.) will start to turn upward – and steeply at that.

 One newsletter I monitor is the Changewave letter by Toby Smith.  His chief asset is a network of several thousand active operators at technology companies that respond to periodic surveys on business conditions in the tech sector.  I have excerpted comments and a chart addressing the outlook for software purchasing.

 Our confidence is reinforced by the 90-day spending outlook for corporate software. It’s the best we’ve seen in two years and is occurring across most major software categories. . . . the results show corporations are more willing to spend on what is, in fact, largely discretionary for them . . . , the outlook for corporate software buying is improving. And that’s further confirmation that confidence is building about a return to sustainable economic growth

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 Software is essential in our knowledge based economy.  We need to see the blue line head toward 20% in the next 90 days.  Fresh 2010 budgets should have plenty of room.

 The next chart comes from the The Liscio Report.  They track state sales tax revenue among other things to monitor the economy.  I particularly liked this view on the status commercial & industrial loans.

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You can see that the survey of banks tightening or easing lending standards logically leads the trend in loan growth.  It would seem reasonable to expect banks will return to loan growth as we move into 2010.  This will coincide well with the anticipated profit recovery and need to restock inventories.  All of this will lead the recovery in employment.  It also suggests we remain in the early phase of stock market recovery.

 I suspect we will see even more economic data in the coming weeks that point to a confirmed view of economic recovery in 2010.  The pending holiday spending season will be watched closely.  Early signs are encouraging.  Favorable retail sales reports would be consistent with an early “January Effect” favoring small cap stock as we move into December.

 We are in a historically benign time for the market.  It only occasionally drops leading into Thanksgiving.  The strong earnings reports, upward tilting survey and other leading indicators and the mountain of cash remaining on the sidelines suggest this year shouldn’t be an outlier i.e. fall.   Remember that November is the best month of the year for the S&P 500 and the 2nd best for the NASDAQ.