The fall rally has been
sputtering after a promising if unexciting start. Q3 2012 earnings season was
expected to show a few percent decline in earnings across the S&P 500.
Not the sort of thing to have traders on the edge of their seats.
So far the overall
earnings projection has been fairly accurate. What traders were not prepared
for was the companies that were missing estimates.
It wasn’t the
obscure names at the bottom of the list this time. The largest companies,
historically most dependable about hitting or exceeding guidance are the dogs
this time. If companies like Google, GE, Microsoft and (egad!) Apple
can’t see forward well enough to hit targets what chance does anyone
In addition to some
headline misses there has been a singular lack of transparency in forward
looking statements from management. Companies that do a lot of their selling
to other companies like GE and Microsoft have repeated the refrain that
overall uncertainty is thinning their order books. Companies in Europe are
waiting for resolution on several fronts and US based companies are fretting
about the Fiscal Cliff. CEOs are unwilling to commit to new investment or
hiring while the uncertainty remains. We’re all left waiting, again, for
news on several fronts. Here’s a selection of this month’s
US Election/Fiscal Cliff
Though HRA suspects many
are waiting for the outcome of the US election we don’t see how it
would change much in the short term. Unless there is a swing large enough
give one party or the other control of both houses and the Presidency
we’ll still be dealing with gridlock. There is a slight chance the
Republicans could pull off a sweep and almost no chance the Democrats could.
For all the bluster by
both parties there won’t be a wholesale change in spending or revenue
collection in Washington. How the Fiscal Cliff gets dealt with will depend on
who has the majority and how much blame politicians think they can assign to
their opposite members if the negotiations go wrong. It seems amazing that
representatives would try to game something as serious as the automatic cuts
that kick in on January 15th but we won’t be shocked if they do.
If one of the parties
does particularly badly in the election and thinks they can get voters to
blame their opponents they might be willing to let the US economy go over the
cliff. There have been rumors for a couple of months that the Democratic
caucus was thinking about doing this.
HRA still believes the
can will get kicked down the road no matter who wins in November. Politicians
in Washington have never shown a willingness to make tough budget decisions.
Far simpler to just pass a Band-Aid plan that puts the decisions
Greece Again, Pain in Spain—Still;
Send in the Clowns in Rome.
It is now at least a
month past the expected timing of a decision on the next tranche of Greek
aid. Clearly, things are not going well. HRA stopped caring about Greece a
long time ago. It’s only important because it impacts the mood of EU
politicians and the electorate. The more Greece annoys everyone the harder it
gets for European politicians to convince their voters to grant aid to other
countries that deserve it more.
Our main interest in the
Greek situation is the impact it may have on a Spanish bailout. Spain’s
Prime Minister continues to insist his country doesn’t need a rescue
but no one is buying that.
With a 25% unemployment
rate and a contracting economy Spain needs a break on debt payments or
stimulus spending, and probably both. Spain doesn’t want new debt
conditions and it may be waiting for provincial elections to be over. Most of
the debt issues are at the provincial level.
The political capital
needed to force through a rescue package is dissipating in most of the
creditor countries. If rumors are true, there will be a deal with Spain as
soon as there is one with Greece so that only one omnibus deal has to be
voted on, especially in Germany and the Nordic countries. Politicians fear
they will only be able to get one more vote on a new package through before
the population revolts and refuses more funds for any reason.
The Greek decision is
being held up by a minority party in the coalition that doesn’t want to
vote for labor law changes. The vote can be won without it. Apparently, they
want to scrap the law that gives everyone a 10% raise when they marry (you
can’t make this stuff up).
Confidence levels in
Europe remain low. We don’t know when decisions about Spain and Greece
will be made but it has to be November in the case of Greece. They run out of
money again next month unless the next tranche of EU money is released.
In Italy, Prime Minister Monti is threatened by a vote of non-confidence by the
party of Silvio Berlusconi. Yes, the guy booted out earlier this year and
just sentenced to five years for tax evasion (see “you can’t make
this up” above). Some decisions will get made in Europe because they
have to be.
The best case scenario
for gold is a Greek/Spanish debt deal that unleashes ECB bond buying. In a
rational world this would drive down the Euro. We’re not in one. HRA
expects monetary expansion would lead to a higher euro thanks to
relief buying. That would have traders going short Dollar and long gold.
Chinese Hand Off
The new Chinese Central
Committee will be announced in two weeks. Most of the members are known
already, including Premier-in waiting Xi Jinping.
Xi has a reputation for being tough on corruption and straightforward about
the need for more economic reform in China. Whether those traits survive his
ascension to top job remains to be seen.
Like most of the top
power brokers in China he is a descendent of Long March communists and has
had a charmed life and rapid rise to power. He ran Shanghai, one of the most
successful cities in China, property bubble notwithstanding.
It remains to be seen if
he will open the spigot and increased spending to goose the Chinese economy.
The most recent statistics out of Beijing already show some acceleration.
Bank lending, exports, retail sales and purchasing managers indices all rose
more quickly in September. While Q3 growth came in at the expected 7.4% the
quarter over quarter GDP growth of 2.2% was the best in a year. Beijing may
add some stimulus to ensure a smoother power transition but a soft landing
already appears underway.
People, Come on, Get Happy!
In the face of so many
uncertainties, one would expect consumers to follow the example of
corporations, stop spending and put off buying decisions until some clarity
is achieved. That seems logical but it’s not what happened, in the US
Consumer spending in the
US increased 0.8% in September, far higher than the 0.5% consensus. It was
also a lot higher than the 0.4% growth in incomes. US consumers were dipping
into savings to make purchases. That implies some confidence things will get
accounted for the slight pickup in growth in the US in Q3, coming in at 2%
rather than the expected 1.8%. The biggest of big ticket items also finally
showed improvement. Sales of new houses were at a two and a half year high
and existing home sales stayed near a two year high. Outside of a bump in
equity and gold prices this may be the most concrete example of the effects
of QE3 driving down mortgage rates.
It’s unlikely the
housing sector will ever see its pre-crash size. If estimates about housing
adding a percent to growth in the US next year prove true that will be a
After the Credit Crunch,
company spending and investment did all the heavy lifting for the economy
while consumers repaired their balance sheets. The situation is reversing,
with consumers buying and companies fretting. If the dysfunctional political
system can remove some of the uncertainties holding companies back we might actually
see a decent growth rate for the first time in five years.
2012 hasn’t been an easy year for
explorers but HRA has been calling for a fall rally since early in the
summer. Thanks to a surging gold price that rally appears to have arrived.
It’s not a broad rally yet. Traders are looking for companies with
discoveries and management that knows how to add shareholder value. HRA is your key
to uncovering and profiting from extraordinary resource shares by getting
ahead of the crowd. At HRA, we look for companies with
the potential to at least double over one or two years based on asset growth
and development of metals deposits for production or take over by larger
To watch Eric Coffin’s latest video presentation titled “Fall
Rally Falling Into Place?”, from the
Vancouver 2012 Subscriber Investment Summit, click here now.
To download our latest HRA Journal for free--which includes a recent new recommendation that is making gains--click here now!
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