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Goldata Financial
Dedicated to above average returns in the stock market.
STOCK MARKET COMMENTARY
October 19, 2009
From Elliot
Goldberg, Registered Investment Advisor, Goldata Financial
Last week, earnings reports for Q3 (July
through September) dominated the news and provided important new clues as to future
market direction. Most earnings reports surpassed estimates by historically
staggering amounts which would normally be viewed as extremely positive going
forward. The few companies that displayed their ability to continue to grow in
this economic climate reaped continued strength in the stock prices (Google
[GOOG] and Black and Decker [BDK]). Others, such as Intel (INTC), Goldman
Sachs (GS) and JP Morgan (JPM), beat on both the top line (revenue) and
bottom line (earnings) but sold off after an initial spike as questions about
the sustainability of earnings growth seeped into the analysis. Other such as
Johnson and Johnson (JNJ) and General Electric (GE) beat on earnings but came
in light on revenues and felt the brunt of Mr. Market’s disappointment.
Finally, Bank of America (BAC) missed on both and had no chance to fight off
the ensuing sell off. What does all this mean? Simply that the market’s
run up of the previous few months had discounted these mostly positive
results and further gains in earnings will need to be anticipated to proceed
higher. So what are the chances of continued gains in earnings? For
non-financials, the continued improvement in the international economy along
with our government’s continued policy of stimulus should help.
Unfortunately, these positives are weighed down by continued, contracting
consumer credit and the market’s knowledge that the day when our
government will attempt to “take off the training wheels” and let
the economy ride on its own is approaching. For financials, the outlook is
not as bright. While financials are being nursed to health by large spreads
between cost of funds and lending to repair their balance sheets, a deeper
look at the fundamentals point to continued (increasing) credit losses in
credit cards and commercial and
residential real estate. Don’t get me wrong --- the picture is not
bleak as the government’s overwhelming liquidity will continue to mask
these drags. But I believe that the odds continue to increase for a choppy
trading market for the next few weeks, one that should benefit managed
accounts. The dollar continued to weaken, but a decoupling of its link to the
market started the previous Friday and became more pronounced as the week
progressed. It remains on the radar screen only to the extent of monitoring
the rate of decline (an increased rate would be negative). The fallacy of our
government’s installation of a pay czar was on display as it appeared
that the square peg of setting a limit of $1 million salary for a CFO of
General Motors won’t fit into the round hole of any qualified person
that would move to Detroit to take that position. I’m sure
they’ll be able to find somebody, but at what sacrifice of quality?
Seems like a misplaced government mentality to me. Conclusion: The
market’s lack of response to predominantly blowout earnings numbers
signals a discounting of the recovery to date. Pullbacks should continue to
be met by performance-chasers until the end of the year and lead to a choppy
trading market. Harvesting trading gains is on the table and I’m
hungry.
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