Magicians do it. So do con artists.
In the coming weeks, the focus for most bottom-up oriented investors will be the earnings results. The trend chasing hedge funds will play that momentum game, too.
As I have articulated repeatedly, 2Q10 earnings results are set to come in at to slightly above consensus expectations. Few surprises should emerge. For bottom-up oriented investors and the hedgies, this is where the attention and action will be focused. Stocks will respond accordingly as results and guidance are dissected.
While this quarterly process is underway, another very important process will occur – macro economic data for the third quarter. It is this data that will provide the early indications as to whether the US economy will sustain its recovery or begin the long (and very dangerous deflationary) slide to double dip land.
Sometimes it is lost on the bottom-up oriented crowd that earnings are the END POINT of the economic chain. To be sure, the feedback loop from the micro (corporate earnings) to the broader macro economic environment is an essential part of the economic chain (capex spending, wage increases, new hires). However, most indicators suggest that a positive feedback loop is muted due to concerns about the sustainability of the economic recovery – Alan Greenspan (misguided) speeches notwithstanding*.
Should 3Q10 macro economic data points come in below consensus expectations, the risks of something more than an economic slowdown (which is occurring right now) could develop producing a nightmare scenario that would produce a global economic recession and all its consequences.
What makes all this extra worrisome are the technical signals emanating from the markets.
Markets, countries, regions, sectors, and most industries have gone sideways - in some cases since the fall of last year. Such sideways action can only mean one of two things – consolidation or distribution.
Consolidation is the pause that refreshes the bull market. Distribution is the topping action that precedes a bear market. The resolution will signal the next phase of the market. Frankly, my money is on the new bear primarily for a whole host of fundamental reasons, some of which are noted above and throughout this blog.
Moreover, nearly all of Europe has flipped into bearish territory (Mega Trend reversals) while key emerging markets border on the edge of joining the bear club. Only the US stands in modestly good shape, but it, too, appears to be following in the footsteps of other global markets.
Investment Strategy Implications
Chill until, is the operative strategy. Let the earnings season and the new quarter evolve. It is still a bull market until it isn’t. Warnings signs may abound but until the yellow light turns red, it appears advisable not to jump the gun too soon. Yellow lights can stay yellow for quite awhile. Moreover, while it is rare, strength can evolve from those markets that have not turned bearish (US, for example) thereby helping to reversing those that have (e.g. Europe).
Also, it is advisable not to be too preoccupied with second quarter earnings results. And most definitely do not be lulled into a false sense of security by traditionally trained economists with their trend extrapolating methodologies and notoriously bad track record spotting economic turns. The misdirection of the recent earnings results and poor forecasting tools are substantial risks investors would be wise to avoid.
Finally, as noted last week , determine if you want to take the bold approach (100% invested in equities) or the more cautious (60 to 80% invested). For what it’s worth, Blue Marble managed accounts are in the latter category.
06-22-2010 11:45 AM
Vinny Catalano, CFA