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Should share buyers be optimistic?

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by Peter Switzer

With the start to the 2010 share-buying season dancing with a correction which then has been partially ‘recorrected’ such that Wall Street’s S&P 500 is down around half-a-per cent while our S&P/ASX 200 is off 4.7 per cent, the question is: “Should we be optimistic on shares?”

Over the weekend, a Reuters article pointed out that “despite raised outlooks, positive comments from company executives and quarterly results that beat expectations, Wall Street analysts have pared back forecasts for 2010 as worries about the recovery's sustainability dominate".

And this is despite the fact that of the 84 per cent of the S&P 500 companies that have reported so far in this reporting season, 72 per cent have beaten the estimates. And earnings growth was around a huge 212 per cent! However, Reuters says that 2010 earnings growth estimates have declined from the beginning of the season.

This means following what companies have been saying, analysts have done the numbers and it looks like for this year earnings, which was tipped to grow by 30.6 per cent in January, has now been pared back to 26.3 per cent.

Revenue growth has been slower than expected. Reuters quoted Len Blum, managing partner at Westwood Capital in New York.

"I don't see robust earnings growth going forward," he said. "At some point, you really have to start driving that top line and to drive that top line, you need to have a robust economy."

Growing pains

Worries about European debt defaults, cautious reports from the likes of Wal-Mart, China trying to slow down and the Fed possibly closer to raising interest rates in the US after it hiked its discount rate of interest it charges banks to borrow from it from 0.5 per cent to 0.75 per cent, all could hurt economic growth in the USA this year.

However, it could be argued that the Fed wanting to look at raising interest rates means it’s getting more confident that the US economy can progressively be taken off economic life support.

Against this, Reuters says 29 per cent of companies missed on the estimates for revenue and while 71 per cent delivered, the duds have some experts worried about the potential for the US economy to grow strong enough to please Wall Street. And if Wall Street is down, it would make it hard for share players here to get too positively excited, despite the RBA’s bright 3.25 to 3.5 per cent economic growth target for Australia this year.

Negative on banks

Adding to the gloom is famous US banking expert Meredith Whitney — who got the March 2009 rebound right for the big banks, which sparked the big rally over the year — but who now is negative on American banks.

She told CNBC that increased regulation and a 20 per cent fall in lending portfolios will hurt their bottom lines.

"Your good borrowers don't want to borrow, and your bad borrowers you're trying to kick out of the system," she said. "So on average lending portfolios are down four to 20 per cent and we think they're going to be down another 10 to 15 per cent for all the big banks this year."

Good week ahead

So what could rescue the banks in the US? Try economic growth stronger than Whitney expects. But is this possible?

David Darst, chief investment strategist at Morgan Stanley Smith Barney (MSSB), again on CNBC gives the optimist a reason to believe in the positive.

This guy always uses weird analogies but I like his oddball imagery.

“To me it says the patient can now get around with the aid of a cane — the patient is out in the sunshine walking around the courtyard of the hospital."

More importantly, I love his growth forecasts and I hope and the team at MSSB are right. Friday (US time) will actually reveal the latest growth story for the Yanks.

“We think it’s going to be revised upward from 5.7 to 5.9 on more inventories,” Darst revealed.

He likes Asian equities, which should be good for our shares too, and he likes commodities, which again is good for us.

This week should be a good one for assessing how the US economy is coping with the economic challenges out there with consumer confidence, durable goods orders and the GDP numbers due out.

The optimists need to see a good growth story.

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.

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Published on: Monday, February 22, 2010