Market Commentary – October 12, 2009

General Market Comment:    October 12, 2009

Here come earnings!  No need to say much about the market other than Q3 earnings reports are upon us.  Here is what Bespoke Investment Management had to say about the upcoming earnings season last week on their blog.

 Analysts at Most Bullish Level in Two Years  “ . . . analysts are more bullish heading into the current earnings season than they have been at the start of any other earnings season since the recession began.  Over the last four weeks, analysts have raised forecasts for 638 companies in the S&P 500 and lowered forecasts for 391.  This works out to a net of 247, or 16.45% of the index.  While some would argue that bullish analysts are a contrarian signal, we would note that earnings revisions were negative for several quarters and turned much more negative before they became a contrarian signal.

 ScreenHunter_10 Oct. 11 22.04

 In light of all those positive earnings revisions the following chart shows what the quarterly estimated earnings per share looks like for the S&P 500 as updated on the Standard and Poors web site as of last week. 

ScreenHunter_11 Oct. 11 22.05 

The guys who get paid to manage trillions of dollars of your retirement money can all do the math that says something that can grow prospectively almost 30% in the next 12 months is a better deal than holding a money market fund that is yielding less than 25 basis points or a 10 year Treasury bond yielding less than 3.5%.  As the analysts become more positive on earnings, the brokers get more persuasive and the portfolio managers get more anxious to chase the indexes.  Keep in mind that so long as the slope of the blue curve above is pointing up- the odds are the market will point the same direction notwithstanding the occasional panic attack.

 The analysts at the Economic Cycle Research Institute issued a timely and very bullish report last week on the direction and velocity of their series of leading economic indicators in which the stock market is included.  Here is what the managing director had to say . . .

 “We are in the early stages of the recovery and it looks to be a lot stronger” than the consensus for modest 2%-3% GDP growth, says Lakshman Achuthan, managing director of the Economic Cycle Research Institute (ECRI). . . “With WLI (Weekly Leading Index) growth rocketing to a new record high, the economic recovery will prove to be far more resilient in coming months than most believe possible,” . . . “

 Mr. Achuthan was referring to a record new high rate of growth versus absolute level in the weekly leading economic indicators.  I have plotted the numbers back to 2000 below.  This data series says the underlying elements of the economy are “smokin”!

ScreenHunter_12 Oct. 11 22.05 

If the weekly leading indicators are only half right then the optimistic estimates for corporate earnings may prove to be modest.  The outlook for continued very low interest rates for many more quarters in addition to the tendency of earnings to surprise to the upside in conjunction with the huge $9.5 trillion in cash sitting in MZM (money of zero maturity) suggest we confront a prolonged period of upside to the equity market.