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Sweating on growth

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by Peter Switzer

Even with the ‘best’ efforts of some US officials of questionable intelligence and with some uninspiring economic data over the past few weeks, the bears can’t get Wall Street to really spit the dummy. However, the big test comes tonight as the Yanks get their first look at the second quarter economic growth number for the USA.

The Dow finished down 0.3 per cent, while the S&P 500 slipped 0.4 per cent. Part of the story that did not help the indexes was from Kellogg’s and Colgate-Palmolive, which both failed to impress the market with their earnings reports.

Deflation threat?

Before these were some other company reports that actually had the market go higher in early trade. Then along comes the St Louis Fed President, James Bullard, who thought it was a good idea to suggest that the US is at risk of having a Japanese-style recession bringing the threat of deflation.

But even with this dumb observation — why would he need to say that? — the market crept up from a triple-digit loss to only be down about 4.5 points on the S&P 500.

On the good side, ExxonMobil reported pretty favourably adding to the picture that this reporting season is setting up the market for a rally.

Favourite indicator

On my Sky News Business Channel program last night, Michael Knox, the chief economist at RBS Morgans in Brisbane, gave us his assessment on the US economy and this current reporting season and then tipped what the S&P 500 should do.

He says we’ve been suffering a perfect storm of over-information with economic data readings going in different directions, though it has been the negative readings that have hogged the headlines.

Knox has a favourite economic indicator for the US called the Chicago Fed National Activity Indicator. In 2003, this outfit used the methods developed by the National Bureau of Economic Research. These guys have the official job of declaring recessions in the States.

Now this indicator ‘hoovers’ all of the important readings on the economy — 85 in total — and so is the one-stop shop for US economic indicators.

“What it told us in June is that it slowed to trend growth rate and in May it was growing at the best rate since March 2006,” he pointed out. “And the June reading was a long way above the recession level.”

He said there was some easing in May to June in many of the 85 indicators with two-thirds of them growing more slowly but only 13 went down while 72 went up.

“The US is not looking like its falling into a double dip recession anytime now,” Knox emphasized.

The earnings front

On US company earnings, he reminded us that top-down analysts expected the S&P 500 earnings per share number was tipped to be $17.40. (This is an aggregate figure so imagine all 500 shares barrelled into one big share and this is the earnings per share.)

Bottom-up analysts were more optimistic before the reporting season and they tipped the figure to be $19.68.

“Well, both were wrong,” Knox explained. “With over a third of the earnings season through, operating earnings per share is looking like $20.03 per share and that’s about 5.5 per cent better than the bottom up analysts predicted.”

Throw in some very good outlook statements and there is reason to be optimistic about coming months. In fact, Knox says with these figures thrown into his model for fair value on the S&P 500 index, it should rise 30 per cent from where it is now!

I asked by when? His guess was by March next year.

Better times ahead

Now all we need is these economic growth numbers tonight to come in on the better than expected level and it could be a good week for the bulls ahead.

Personally I am not sure we will get great news but I live in hope, however, I do believe, on Michael Knox’s analysis, better times lie ahead.

For advice you can trust, contact Switzer Financial Services.

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Published on: Friday, July 30, 2010