FedEx (NYSE:FDX), Walgreen’s
(NYSE:WAG), Best Buy
(NYSE:BBY) – these
companies all recently missed quarterly estimates.
It’s a disparate group of companies, but one could also
make the case that they offer something of a cross-section of spending by
consumers and corporations.
I’ve observed recently that it’s the potential for
corporate profit growth to slow that’s weighing on the stock market. And
while we haven’t seen any profit warnings for 2Q earnings season, which
starts with Alcoa (NYSE:AA) on July 12, the aforementioned misses haven’t
deficit reduction plans in Europe.
Germany is attempting to cut $80
billion in spending by 2014. And Great
Britainis also on the deficit-reduction
warpath with plans to raise the sales tax, hike capital gains taxes and
institute a new tax on bank profits.
Germany and France
have already put a new tax on bank profits.
The euro has weakened over the last couple of days
because investors are worried all these austerity measures will slow
economic growth in Europe.
And even though Europe is not an
overwhelmingly important end market for U.S.
goods and services, investors are still concerned
that Europe‘s growth will
affect the U.S.
If it were only
European growth weighing on investors, that not might be so bad. But we
have a regulatory environment that’s threatening growth.
The financial regulation bill in Congress may be
completed soon. And it’s unclear how much bank profits will be affected
by new regulations.
Then there’s the healthcare bill and the drilling
moratorium in the Gulf of
Mexico. Regardless of how you feel about either
of these issues, they both have the potential to take money out of
hurdles corporations have already overcome to post strong profit growth
over the last few quarters, some of these current worries might seem a
I mean, if Europe wants to cut
off its own growth, it’s free to do so. New healthcare rules are being
phased in over a few years. And BP is on the hook to subsidize the income
of Gulf oil workers and businesses affected by the oil spill.
Now, I can’t downplay the potential for new financial
regulation rules to affect banks’ profits.
But the ultimate point is that, eventually, corporate
profit growth will slow. The question is: is this happening
for the S&P 500 is around 18. That’s slightly above historical norms.
The forward P/E for 2011 is around 13, which is on the low side. I’d say
stocks are pretty much fairly valued at the present time.
Yesterday’s declines probably shook some investors’
confidence that the upcoming earnings season will continue to show strong
earnings growth. But at the same time, volume was on the light side so
it’s difficult to say that there was conviction behind the drop.
Frankly, it’s too soon to say that recent weakness in
stock prices is forecasting an earnings slowdown. There are 13 trading
days until Alcoa reports. And every one of them that passes without a
noteworthy warning increases the odds that we have another good earnings
Oil prices have
moved back to the support/resistance zone at $78 a barrel. Interestingly,
the 50-day moving average and the 200-day moving average are on a
collision course at $78.
As you know, oil prices are a good indicator of economic
growth, because demand increases as the economy recovers.
I expect we’ll see oil prices hover between $76 and $78
for the next few days before moving toward its next trading range.
Seasonal patterns favor that move to be higher into the end of summer.
Despite a judge’s decision to lift the moratorium on
offshore drilling, there seems to be little impact on oil prices from
disruptions in Gulf of
I still say that land-based oil exploration and
production companies are among the most reliable investment you can make
right now. And North Dakota‘s Bakken pool may
contain America‘s largest land-based oil
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Thanks for all
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