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Market Commentary Earning season has commenced. Earning season has commenced. Consensus is expecting results to fall by 22%, capping a record nine consecutive quarters of decline. However many are expecting results to fall less than the expected amount, similar to the second quarter when 72.3% of S & P companies surpassed the consensus view. This matched the highest proportion on record since the 1993 inception of this data point. [Bloomberg] As written the other day earnings are expected to rise by 26% in 2010 and 22% in 2011. If profits do increase by this amount, the S & P is trading at 11.1x earnings or only 10% higher than the 24 year low based on trailing results reached in March. [Bloomberg] Is this realistic or worse rationalizing market valuation using “what ifs” and extremely forward looking estimates? Several years ago I read excerpts of Hyman Minsky’s work, a noted behavioral economist who passed on about 10 years ago. He coined the infamous term the “Minsky Moment” which essentially states stability breeds instability and instability breeds stability. Can we suggest we are at a Minsky moment as yesterday’s instability will breed stability? Or is this view similar to the Zarnowitz Rule that states sharp rebounds always follows steep declines? Most, including me have not professionally experienced a major recession. Those who have were probably in junior positions essentially serving coffee and emptying ashtrays. It is partially against this backdrop why many think a second dip recession is all but inevitable. Today’s environment is completely foreign, an environment amplified by last fall’s total collapse predicated by the popular mantra and belief that we have eliminated risk via diversification. In fact it was around 2006 when I first heard of Hyman Minsky in an opinion piece suggesting the market is experiencing a “Minsky Moment” where perceived stability has created an extremely instable environment. Too bad no one was listening. Last night Alcoa did not disappoint as profits (operative word) exceed expectations. The company made $0.04/share versus the consensus view of a $0.08/share loss. Are these results a harbinger of things to come? Last night the foreign markets were up. The Dow should open moderately higher on economic and profit optimism. The 10-year is off 4/32 to yield 3.20%. The information is the personal views of Kent Engelke and is not necessarily indicative of those of Capitol Securities Management. The information contained herein has been compiled from sources believed to be reliable; however, there is no guarantee of its accuracy or completeness. Any opinions expressed here are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. Capitol Securities Management, Inc. is a Mid-Atlantic based, privately owned brokerage and investment firm with branch offices in Mclean and Richmond, VA, Boston MA, Hickory, NC, Florham Park, NJ and Tampa, FL. Capitol employs over 170 fulltime investment professionals and independent affiliates in locations from New England to Florida and has been serving the needs of its investors for over 25 years. It is a member of FINRA and SIPC. © Copyright 2008 Capitol Securities, Inc. All Rights Reserved. |
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