Growth - What Growth?
Hopes of economic rebound both in the U.S. as well abroad have pushed stocks to new highs, but ground realities haven’t caught on with the soaring sentiment yet. We now have data showing that GDP growth in the entire developed world – Europe, Japan, and the U.S – was in the negative territory in the final quarter of 2012.
Granted, the U.S. negative GDP surprise was caused by transitory factors that will partly get reversed in the current period, as this morning’s seasonality-distorted but nevertheless positive Jobless Claims data would indicate. Some optimism about Japan may also have a basis given the new government’s plans for activist monetary and fiscal policies. But it’s hard to discard the nagging feeling that the market has likely gotten ahead of ground realities. Today’s trading action will likely reflect the downbeat GDP data out of Europe and Japan, with the sharp drop in U.S. Jobless Claims likely getting chalked up to the effects of the East Coast snow storm.
Fourth quarter GDP reports from Europe this morning show that region’s collective economy contracted more than expected in the final quarter of 2012. This is the third straight quarter of negative GDP growth for the region and the fifth since the region has had any growth. Even Germany, the region’s core and engine, and France were not immune from the forces pulling the region down. The pain in Italy, Spain, and Portugal deepened from the preceding quarter.
The consensus expectation is that the region’s economy will start stabilizing in the second half of the year and produce a modest growth next year. There is some evidence to suggest that the German economy could get out of its slump in the current period, but conditions appear to be worsening for the rest of the region. The outlook for France is definitely not getting better and political instability in Spain and Italy threaten the reform gains of the recent past. The Spanish prime minister’s fast dwindling political capital limits his ability to implement the tough austerity measures demanded by Germany. And the growing popularity of Silvio Berlusconi in the coming Italian polls threaten the reform gains under the technocratic Mario Monti government. Bottom line, the region’s outlook is far from satisfactory. And that’s a major headwind not only for Germany, but also for China and the U.S.
In corporate news, Berkshire Hathaway’s (BRK.B) purchase of Heinz (HNZ) this morning adds to growing list of corporate transactions in recent days. This follows Comcast’s (CMCSA) purchase the other day of the remaining 49% of NBC Universal from General Electric (GE) that it didn’t own already. These multi-billion deals are another reflection of the all around optimism in the market. High stock prices and dirt-cheap credit makes it easy for companies to buy growth instead of generating it organically.
On the earnings front, Cisco (CSCO) came out ahead of expectations on in-line revenues after the close on Wednesday, though its outlook for the current quarter left many underwhelmed. John Chambers, the company’s typically upbeat CEO, appeared to be cautious about China, Europe and purchases by government purchasers, highlighting the continued challenging Tech spending backdrop. Of the major earnings results this morning, Pepsi (PEP) came out with ahead of expectations, while General Motors (GM) missed.
The fourth quarter scorecard as of this morning is showing Q4 results from 387 S&P 500 companies or 85.4% of the index’s total market capitalization. Total earnings for these companies are +2.7%, with 66.4% of companies beating earnings expectations. Revenues are up 1%, with a much stronger 61.8% of companies beating revenues expectations. This has been a better than expected earnings season, largely due to the subdued expectations ahead of the reporting season. Expectations for the coming quarters been coming down, particularly for the first half of the year. But there is still plenty of room for further downward adjustments.
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