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READING THE TEA LEAVES – PART 2

14 July 2010 by BondSquawk 2 Comments

By Bondsquawk:

You have to love the media and the stock market sometimes.  Stocks have had an impressive rally yesterday, taking bond yields higher.  The reason?  According to a few mainstream media sources, the headlines show that the gain in the S&P 500 points to the positive earnings surprise of the aluminum giant, Alcoa.  After yesterday’s close, Alcoa reported a second quarter earnings per share of $0.16 per share versus analysts surveys of $0.11 per share.  This surprise has “emboldened” investors into riskier assets, driving today’s rally.

While it is a good sign (generally speaking that is), the fact remains that estimates have been significantly declining over the past weeks.  Here’s a graph to illustrate the point.

Data Provided by Bloomberg

So beating already beaten-down earnings estimates is hardly worth celebrating.  It’s like the New Orleans Saints trouncing the Indianapolis Colts in the Super Bowl, only to find out later that the Colt’s roster consisted of nothing but guys from the Detroit Lions.  On the surface, it looks great but it’s hard to say whether or not if Saints are the better team.

As for the markets, there’s a lot of football to be played and the potential for more surprises, upside or downside, are high.  However, as we have discussed, the problems of the economy are still there and we need to keep our eyes on the ball in order to determine where we are going.  Stay tuned

BondSquawk

BondSquawk

BondSquawk is written by a team of bond market experts whose aim is to provide an unbiased view of one of the largest (but under reported asset classes in the world) – The world of bonds.

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Comments
  • PokerCat

    “So beating already beaten-down earnings estimates is hardly worth celebrating.”

    Is it? Considering many investors use earnings as a way to value a stock, doesn’t this indicate that all this doom and gloom has been overdone?

    07/14/2010 at 11:19 AM
  • billw

    You have not even gotten to the end of the month yet Pokercat, wait until the Q2 GDP is announced at least. Then wait for the first revision. If it is anywhere below 2 you can kiss this market good-bye. Q4 2009 5.7, Q1 2010 2.7 ( 2nd rev.), Q2 2010 ? You draw the trend line and tell me who is going to stay long equities if it is slanted down. PS the ECRI’s LEI has been telling us for the last 14 weeks where we are headed and it is not up. So investment money will be heading to places where it can make more money, and I don’t believe that will be equities.

    07/14/2010 at 9:57 PM