"It seems we are finally hitting the point of diminishing returns for earnings. Expectations have finally gotten so high that even big beats aren’t enough to keep the momentum going.
Last earnings quarter, we were down from 8,900 in June to 8,100 on July 9th as companies began reporting and we had a nice, 1,000-point relief rally over the first two weeks of earnings.
The Beige book is an anecdotal view of the economy gathered roughly through the middle of October and we’ve seen no improvement in Jobs since the Sept 9th report, Cash for Clunkers ground to a halt and, just this morning, we got a horrific 13.7% decrease in the number of mortgage applications from the previous week. That number includes "seasonal adjustments," without adjustments, morgage apps plunged 22.4% despite record low rates as government assistance begins to peter out. The Refinance Index, also adjusted for the holiday, decreased 16.8 percent from the previous week and the seasonally adjusted Purchase Index decreased 7.6 percent from one week earlier. The unadjusted Purchase Index decreased 16.7 percent compared with the previous week and was 3.4 percent lower than the same week one year ago.
Clearly the earnings reports that are coming in are still doing so mainly on cost cutting, not any underlying improvement in sales.
We have to willingly suspend our disbelief in order to play these markets and our play mix, though still cautious, is reflecting that forced change in attitude. Sure we still look at the data, but we do so while keeping in mind the great Bill Murray’s advice - "It just doesn’t matter!" As fundamentalists, of course we believe it will matter, A LOT, one day, but we’re well prepared for that turn. Meanwhile, let’s keep playing the cards we’re dealt.
So what if no one is buying houses - they don’t have jobs anyway so that’s just 13.7% less people who are likely to default on their mortgage. That must be good for banks right? Goldman Sach’s International Advisor, Brian Griffiths had the same advice as he spoke yesterday defending compensation in the finance industry as his company plans a near-record year for pay, saying the spending will help boost the economy. “We have to tolerate the inequality as a way to achieve greater prosperity and opportunity for all.” So don’t complain about GS taking record bonuses less than a year after we bailed them out for wrecking the US Economy, they are only making this money FOR YOU!
This is the same logic under which the entire market is celebrating our drastic reduction in the workforce. For more than a decade, we’ve been shifting millions of jobs overseas and it made companies more profitable but there had always been a fear of a backlash against outsourcing if the companies slashed workforces as well. Our little collapse last year took the stigma out of layoffs and suddenly they were in vogue - everyone is doing it and now the corporations have gotten rid of the "dead weight" of the American workers and now their plans are to focus more on the foreign consumers as these losers in America are all tapped out. This is just the same sort of slash and burn capitalism that US multi-nationals have practiced globally for decades only now it’s the US that’s being cut loose as the corporations move on to greener pastures."