The Problem With These Earnings
The December S&P 500
futures (SPZ and ESZ) lost ground last week, mainly due to corporate
earnings not living up to expectations. The lackluster results weren’t confined
to one specific sector either, as poor reports were seen from companies such as
Microsoft, KLA-Tencor, Merck, Brinker, Colgate, and Amazon.com. Nevertheless,
the losses were held in check just as the advances have been limited on good
news the past few weeks. What it boils down to is that we have a market that
has run out of upside momentum, but there also hasn’t really been a catalyst to
stimulate any sufficient selling pressure.
The December S&P 500 futures closed Friday’s
session with a gain of +1.50 points, at the high of the session, and closed out
the week with a loss of -7.75 points. Volume in the ES was estimated at 644,000
contracts, just below Thursday’s pace and the daily average. On a daily basis,
the contract posted a bullish engulfing line and market structure low with a
bounce off its 50-day MA, and now faces resistance at its 20-day MA at 1,032.50
(see chart). On an intraday basis, with the late gap fill, the 60-min chart was
able to close back above its 200-period MA at 1,027.25 off of buy-side
divergence, with Fib resistance in the 1,031, 35 and 40 areas (see chart), while
the 13-min chart faces its 200-period MA in the 1,034.75 area.
Currently,
we are 3 weeks into earnings season and over 1/2 of the companies in the S&P 500
have reported results. When looking at the bottom-line numbers, or pro-forma
earnings per share, overall they have been pretty impressive. However, the same
can’t be said when looking at the top-line numbers, or revenues, which have come
in roughly 65% below that of the year-over-year bottom-line growth thus far.
This suggests that it’s cost cutting that is behind a large percentage of the
profit gains, and not strong end demand. The problem with this is that
companies can only cut so far to drive profits higher, which would likely
eventually cause profit estimates to fall short of aggressive growth targets for
the future, unless of course demand increases sharply. Make no mistake, it’s
still positive that revenues are growing from last year’s depressed levels, but
their sustainability must be questioned for several reasons.
First, the
U.S. has put forward an enormous stimulus program, which included tax cuts and
rebates. Without a doubt, this stimulus has helped spur consumer demand.
However, as we saw in the case of 2001’s stimulus, once the effects are
exhausted, it can lead to a sharp drop in consumer spending. The second reason
is the sharp decline of the U.S. dollar since late 2002, which has positively
impacted revenues for some companies. In fact, many analysts have suggested
that currency gains have accounted for close to 35% of the growth at many of the
large multi-national companies, like IBM. Consequently, should the dollar
stabilize or rise, all of the growth coming from currency gains would fizzle
out. The final reason is demand in China. It has been quite apparent in many
of the recent conference calls that a large amount of the revenue growth in
corporate America is coming from China. The GDP in China last quarter came in
at 9% and now the Chinese government is taking steps to slow down growth,
because of fears of inflation.
Looking ahead this week, the
remaining earnings reports will get put on the backburner as the economic
calendar heats up again, starting with the Consumer Confidence report on Tuesday
and the FOMC meeting on Wednesday.
Daily Pivots for 10-27-03
| Symbol | Pivot | R1 | R2 | R3 | S1 | S2 | S3 |
| COMP | 1857.88 | 1874.14 | 1882.69 | 1898.95 | 1849.33 | 1833.07 | 1824.52 |
| INDU | 9560.39 | 9623.05 | 9663.65 | 9726.31 | 9519.79 | 9457.13 | 9416.53 |
| NDX | 1362.43 | 1378.85 | 1387.09 | 1403.51 | 1354.19 | 1337.77 | 1329.53 |
| SPX | 1026.01 | 1033.69 | 1038.48 | 1046.16 | 1021.22 | 1013.54 | 1008.75 |
| ESZ | 1025.50 | 1034.75 | 1039.50 | 1048.75 | 1020.75 | 1011.50 | 1006.75 |
| SPZ | 1025.53 | 1034.57 | 1039.23 | 1048.27 | 1020.87 | 1011.83 | 1007.17 |
| NDZ | 1366.67 | 1386.33 | 1396.67 | 1416.33 | 1356.33 | 1336.67 | 1326.33 |
| NQZ | 1367.17 | 1386.83 | 1397.67 | 1417.33 | 1356.33 | 1336.67 | 1325.83 |
| BKX | 925.25 | 931.05 | 934.71 | 940.51 | 921.59 | 915.79 | 912.13 |
| SOX | 455.17 | 461.62 | 465.28 | 471.73 | 451.51 | 445.06 | 441.40 |
| DIA | 95.82 | 96.54 | 96.90 | 97.62 | 95.46 | 94.74 | 94.38 |
| QQQ | 33.97 | 34.46 | 34.71 | 35.20 | 33.72 | 33.23 | 32.98 |
| SPY | 103.11 | 104.05 | 104.51 | 105.45 | 102.65 | 101.71 | 101.25 |
| SMH | 38.27 | 38.87 | 39.20 | 39.80 | 37.94 | 37.34 | 37.01 |
Fair Value & Program Levels
Fair Value — (1.18)
Buy Premium — (0.55)
Sell Discount — (2.15)
Closing Premium – 0.99
Please feel free to email me with any questions
you might have, and have a great trading day on Monday!