Today, the markets are all about patience. Would the Fed or wouldn't the Fed remove that soft, yet now excruciatingly powerful word from its guidance? Hawkins has been circulating rumors that Ray Dalio of Bridgewater Associates has been quietly humming Guns n' Roses' epic ballad titled the word of the day into Janet "Ain't Tellin" Yellen's wee ear,
"Said, woman, take it slow
It'll work itself out fine
All we need it just a little patience..."
Yellen has plenty of reasons to take it slow, with the Bloomberg economic surprise index sliding to its worst level since the 2009 recession. The seemingly endless stream of economic data surprises to the downside can no longer be shrugged off to the weather, yet today the Fed did indeed remove that tantalizing word and left the door open for a rate hike as early as June.
Last Friday we learned that not only did the producer-price index again come in shy of expectations, but fell again in February, this time by 0.5% from January. This is the fourth consecutive month and the latest sign of weak inflationary pressures. Earlier this week, the National Association of Homebuilders' U.S. Housing market index dropped to an eight-month low of 53 in March, missing expectations for 56. Housing starts fell 17%, month over month, in February, for the biggest one-month decline since February 2011. Granted, weather played a role, but this report is awfully consistent with the trend of the below-expectations reporting.
This is not good news for shareholders of Toll Brothers (TOL), D.R. Horton (DHI), Lennar (LEN) and the other publicly traded homebuilders. Even adjusting for the weather disruption, one has to wonder just how long the one outlier, payrolls, can continue to go against trend. We'll be watching this closely as the Fed specifically mentioned the labor market and price stability in today's notes.
All the economic data jitters combined with an increasingly intense level of geopolitical tensions has pushed all the major market indices down for the month of March. The Dow Jones Composite is negative for the year, the S&P 500 index is essentially flat, while the Russell 2000 and Nasdaq are up more than 3% and nearly 4%, respectively.
Hawkins stifles a bit of a yawn until... she took a look at the change in consensus earnings per share estimates for the first quarter! Holy whiplash Batman, can you believe there has been a massive nine percentage point swing in EPS estimates from 4% growth for Q1 as we kicked off the New Year to current expectations for a 5% year-over-year contraction. Taking a slightly longer view, expectations now have earnings growth contracting 2% for the first half of 2015 compared to year ago level -- and we have not seen the last of oil -related destruction. Makes us wonder how long until the "aggressive" call for 6.5% year-over-year earnings growth for the second half of 2015 will last.
All our kvetching starting last fall isn't looking so negative now, is it? We may as well double-down on the handwringing and point out that every time EPS growth has gone into negative territory two quarters in a row when the trailing price-to-earnings ratio (P/E) was above 16, things did not go well: 2007 (Great Recession), 2000 (Tech collapse) 1997 (Long-Term Capital Management/Asian Crisis), 1969 (recession), 1961 (recession).
Yesterday, Oracle (ORCL) joined the ranks of companies disappointing Wall Street, announcing sales of $9.3 billion -- exactly what it delivered last year and far below expectations of $9.46 billion, while profits actually fell. Yes, you read that right, sales were flat and profits were down. What drove such painful results? According to Oracle, the strengthening dollar cut 6% off revenues last quarter.
Just last week, Intel (INTC) warned that its sales will likely be well below its forecast, citing the dollar as one of the causes. We think this is only the beginning of a trend that will continue to be brutal for those that derive much of their sales outside the country, and many of the largest tech companies derive the bulk of the revenues internationally.
Along with a strong dollar, continually plunging oil prices have led the fourth oil company in the past few weeks to declare bankruptcy: Quicksilver Resources (KWK). Previously, BPZ Resources (BPZR), Dune Energy (DUNR) and Cal Dive International (CDVI) had declared bankruptcy as well. We'll be keeping a close eye on how this inevitable trend plays out in the debt markets, given the preponderance of high-yield corporate debt used to fund many of these oil companies.
Digging into the Fed's FOMC statement, the key takeaway line for us was: "This change in the forward guidance does not indicate that the Committee has decided on the timing of the initial increase in the target range." Not only does it give the Fed ample wiggle room to push off a potential interest rate hike until the second half of 2015 or later, but it reminds Wall Street that any such decision will remain data dependent. Given yesterday's February Housing Starts miss and the slew of mounting evidence of slower growth in the near term, as well as deflation, we're not surprised by the Fed's lack of action and hedging. The bad news is, just like Groundhog Day, before too long we'll be back in the lather, rinse, repeat cycle of Fed watching and speculating all over again.
It appears '80s rock is still kicking strong across the pond, with Germany insisting that Greece won't stop blasting Poison's "Nothin' But A Good Time" all over Brussels,
"I'm always working slaving every day
Gotta get away from that same old same old
I need a chance just to get away."
While Greece is insisting that it is in a real-life version of Soft Cell's "Tainted Love",
"Once I ran to you (I ran)
Now I'll run from you
This tainted love you've given..."
While Germany and Greece do the political dance in the headlines, European Central Bank President Mario Draghi is likely to keep pedal to the metal on monetary stimulus, "QECB," which means European equity indices have a powerful tailwind. European equities are already off to one of their best yearly starts ever, and with all this liquidity pouring into the markets, stocks could go much higher. Investors who think this is likely can go "all-in" with ProShares Ultra FTSE Europe ETF (UPV), which is a double-leveraged ETF.
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