Q3 Earnings is Front and Center on Wall Street

George Brooks |

Friday’s market action raises minor support to DJIA: 13,565 (S&P 500: 1455). Breaking that, look for a drop to DJIA 13,520 and S&P 500 1450.

Q3 earnings take center stage this week along with the elections, Europe and fiscal cliff. We will know how much of Q3 earnings are already discounted in stock prices within two weeks. European tensions could lessen with key meetings taking place this week and next. But the elections and especially the fiscal cliff won’t be resolved as quickly. That’s a lot of uncertainty to cut through.

Investor’s first read - an edge before the market opens
DJIA: 13,610.15
S&P 500: 1460.93
Nasdaq Comp.: 3136.19
Russell 2000: 847.86
(Monday, October 8, 2012 (9: 09 a.m.)


Q3 earnings reports will begin to flow this week with Alcoa’s(AA) report on Tuesday. Analysts are projecting a 1.7% decline for the S&P 500. It became obvious Q3 reports were suspect when the world’s biggest package-delivery company, UPS, lowered 2012 guidance in face of a global slowing. FedEx followed suit, as did more than three-quarters of companies tracked by FactSet that issue pre-announcement.*

Each quarter, it becomes more difficult to beat the year-ago quarter, and companies are now about as lean as they can get, without jeopardizing their ability to take advantage to compete once the global economic scene improves.
Softness in Q3 earnings is not “breaking news,” and much of it may already be factored into the level of prices. Just be alert to cases where it is not.


The 5-year charts of key economic indicators last week posted by www.mam.econoday, aren’t overly bearish. In most cases the key economic indicators rebounded sharply from recession lows, then ranged sideways for two years, much like a stock that rises sharply, then goes into a consolidation pattern as it digests the big move.

All this is graphically illustrated by the econoday website. As I have noted repeatedly, economic recoveries that follow severe recessions take a longer time to recover than ones that follow brief recessions. Clearly this is no exception.
The ISM Manufacturing and Non-Manufacturing Indexes post a similar pattern – a big break in 2008, a rebound in 2009, then an erratic, saw-toothed, sideways range as the economy struggles for direction from the recovery point.
Monthly, private nonfarm payrolls traced out a similar pattern, however the Unemployment rate declined steadily since Q4, 2009.

Construction Spending rose steadily since February 2010 but didn’t begin to consolidate until early 2012.

New motor vehicle sales actually increased steadily with a setback in mid-2011. Of importance here is that imports comprised a decreasing percent of the since 2008. Obviously, this would not be the case if GM and Chrysler were not rescued, not to mention the devastating fallout in related industries as a result of their demise.

One of the reasons the Spain issue is causing angst in European financial circles was highlighted by yesterday by European Central Bank (ECB) president Mario Draghi. He said that the ECB won’t start intervening in bond markets until governments like Spain request a bailout and agree to terms. He also ruled out letting the ECB take losses from Greek debt restructuring.*

But European leaders of the 17-nation euro-zone plan to discuss Spain’s indecision to opt for a bailout today and ministers from all 27 European Union nations will meet next week (Oct.18-19).

Last month ECB President Mario Draghi proposed the unlimited purchase of bonds of troubled countries to prevent their cost of raising money from soaring but with strings attached. So far, leaders have not agreed on conditions for thethe ECB’s action.

FACEBOOK (FB - $20.91):

FB looks like it has traced out a double bottom and possibly a “Head and Shoulders” reverse pattern with the potential of returning to the mid-20s. Thursday, FB dropped below $21.70 support and closed at $20.91 Friday.

The Head & Shoulders bottom reversal and double bottom are now at risk.

Sellers came in at $22.25 to put a lid on the stock. Formidable resistance now starts at $22. Down sharply in pre-open trading, FB looks like it will test the 20-level. Once again, it needs a big buyer

I don’t own, nor have I ever owned FB. Generally, I don’t recommend or comment on individual stocks. I started covering FB technically after its IPO because on May 21, I felt at $34 it was very vulnerable in face of all the misunderstanding and hype. I warned of a drop to $24-26, which it did shortly thereafter. Following a rally back into the 30s, FB dropped into the low 20s where on August 2, I forecast a low of $16.88. On September 4, it hit $17.55, its low since its IPO at $38.


NFIB Small Business Index (7:30) – Rose 1.7 points in August to 92.9

Wholesale Trade ( 10a.m.) –Wholesale inventories advanced 0.7% in July against a 0.1% drop in sales. Inventory/sales ratio was up for third straight month to 1.21.
Beige Book (2:00 p.m.) - Released eight times a year by the FEB, it comments on the economic conditions in each of 12 Reserve Bank districts.

Jobless Claims (8:30 a.m.) – rose 4,000 to 367,000 in the September 29 week. The 4-week average was unchanged at 375,000

International Trade (8:30 a.m.) –The trade deficit widened a bit to $42 billion in July from $41.9 billion in June due to a small increase in the trade gap in non-petroleum goods to $35.8 billion from $34.2 billion.

Import/export Prices (8:30 a.m.) –Import prices rose 0.7% in August due mostly to petroleum prices. Excluding petroleum, the rise was 0.2%.

Producer Price Index (8:30) – Jumped 1.7% in August after a 0.3% increase in July. Excluding food and energy, the increase was, the Index rose 0.2% .
And 72.3 in July. –The final September reading was a drop to 78.3 from 79.2 in mid-month vs a 74.3 reading in August.

If you want a good summary of current economic indicators including stack and line charts of each go to www.mam.econoday.com. I can only touch on these here, but this site gives you a much more detailed picture. Very well presented – comprehensive, but a quick read. Refreshing ! The charts and the calendar of releases for the following week are posted Sunday morning. Be sure to access its “Resource Center – U.S. & International Recaps at the top of the home page. Excellent recaps ! It’s presented by the author of “The Complete Idiot’s Guide to Economic Indicators” – R.Mark Rogers.

George Brooks
The writer of Investor’s first read, George Brooks, is not registered as an investment advisor. Ideas expressed herein are the opinions of the writer, are for informational purposes, and are not to serve as the sole basis for any investment decision. Readers are expected to assume full responsibility for conducting their own research pursuant to investment decisions in keeping with their tolerance for risk.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer


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