Will the U.S. Lose AAA Status
The
market sank barely less than 1% in a choppy
environment last week. Volume was also surprisingly low considering it
was both options expiration week and the start of earnings season.
Although earnings season hits full stride this week, the reports from
Google (Nasdaq: GOOG), Alcoa (NYSE: AA) and JPMorgan (NYSE: JPM) should
have raised the weekly volume to above average levels, at minimum.
To be honest, I am not thrilled about the earnings results thus
far. But much like the market, I will give the non-reporting companies
the benefit of the doubt until proven otherwise. But given the pace of
the economic recovery as well as stock price appreciation, I would expect
businesses to be firing on all cylinders this quarter. But so far, the
reported companies like GOOG and JPM, sounded excited, but not overly
optimistic, about the future quarters. And the decline in sales for JPM
and margin for GOOG, have me and other analysts concerned about what the
future earnings of these two market leaders will be, and how that will
also impact the market.
Last week
I discussed how I believed that investor reaction to the financial
results in this quarter will be very much dependant on current margins.
Analysts always pay attention to margins, but they tend to focus on EPS
or EBITDA results more intensely than just the margin alone. In the first
quarter of 2011, crude oil price, a major raw material expense, increased
32% from $84 to $113. Active shareholders will want to know how that jump
in cost will impact profitability for each business - and not just in the
current quarter. They will want to know how excessive energy costs will
impact the margins down the line for the rest of the second quarter, the
full fiscal year 2011 and next year.
While the earnings data increases in frequency
this week, the economic data outflow slows down – at least in the U.S.
Although a potential downgrade of the U.S. credit rating stirred the
market this morning. The news overseas is a bit more active than normal
this morning as well. The People’s Bank of China raised its reserve
requirement to 20.5% today. The raise came after inflation sky rocketed
in March and is intended to reduce speculative loans.
Also, in Europe, Spanish and Greek rates soared. The Greek yield is
at a new high of 13.92%, which is a sign of doubt from investors that
Greece is on a path to prosperity. A Spanish debt auction this morning
also reported that interest rates had increased unexpectedly. The EU
claims to have Europe’s problem nations under control, but investors
clearly disagree. The higher yields demanded by creditors will make
interest payments on debt unaffordable and dampen the hopes of a stable
recovery. The euro will not like that news, and it should fall
dramatically today. Of course, in a normal world that would increase the
dollar, decrease commodities, and decrease stocks in the near
term.
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