Business News

Earnings ahead

| More

by Peter Switzer

Now for the tricky bit — will company results looming in America deliver for the optimists? That’s the question upmost in the mind for the traders who ultimately determine the direction of Wall Street and related markets.

'Have the bulls overdone their optimism?' is an enduring question being posed. The reporting season will also answer that question. We will hear about it on Thursday, our time, when Alcoa reports. The number crunchers will then wait with high anxiety until the big names deliver their ‘scorecards’.

Small comfort

Be clear on this, the market could head off in either direction. The only positive sign I have seen so far is the fact that there hasn’t be a big sell off ahead of the upcoming news. Insiders have a knack for understanding the wider market implications of, say, GE reporting badly, and so the market’s inclination to end in positive territory, one day after a disappointing jobs number late last week is a little comforting.

Positives and negatives

Against this, the VIX or fear index that measures volatility has gone up from around 25 to 30 and this shows nervousness is creeping in. On the other hand, the Institute of Supply Management’s survey on the services sector, which makes up 80 per cent of the US economy, gave a bit of hope rising to 47 and that was three-point jump. This is the best reading since September last year and when it sneaks over 50 it means the US services sector is into expansion mode. However the 467,000 jobs lost in June still hangs over the market.

Interest rate predictions

In Australia, it would be too optimistic to expect that the Reserve Bank will cut interest rates today. Our cash rate, which the Big Bank determines to influence the rates that banks charge us, is now at three per cent and at the height of the negativity driven by doomsday merchants, who were aided and abetted by short-sellers, it was tipped that the cash rate would fall to two per cent.

Optimistic economists think the rate cuts are over but there are even some of them — including Don Stammer, the former chief economist of Deutsche Bank, who appeared on my program on the Sky News Business Channel last night — who think the Reserve Bank could give us another two 0.25 per cent cuts later in the year so as to offset any negativity that could result from rising unemployment.

He sees a recovery of the economy happening, while unemployment could keep rising for over a year or even two, as this economic measure can be stubborn and a laggard in reversing direction. He thinks unemployment could go as high as eight per cent.

Someone like CommSec’s Craig James thinks it could peak before seven per cent, which would be a great outcome.

June reports due

This is a big week for measuring the health of the Aussie economy with housing finance, consumer sentiment and the latest unemployment numbers out for the month of June.

My guess is that some bad news will eventually come through on the economy, but it won’t be as bad as the bears expect. Don Stammer, who has seen more recessions than most of us, agrees. He also believes the China recovery story and that’s great news for us!

For advice you can trust contact Switzer Financial Services.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

The Switzer Super Report is a newsletter and website for self managed super funds. With exclusive commentary from Peter Switzer and Paul Rickard the Switzer Super Report will help you maximise your after tax investment returns and grow your DIY Super. Click here for a free trial or subscribe today.

Published on: Tuesday, July 07, 2009