Market Commentary

Stocks rallied handsomely on better than expected earnings
October 09, 2009

Stocks rallied handsomely on better than expected earnings.  Each quarter this year we have seen the percentage of companies beating estimates increasing.  Given the collapse of the economy in 4Q08 and Q109, the environment should naturally improve with results surprising the analyst community.  Perhaps the unspoken philosophy is to under promise, an under promising predicated by lack of clarity, and over deliver.

Some will point earnings gains are only a function of cost cutting not revenue growth.    In fact as per the New York Times, overall selling and administrative costs fell by 5.7% in the second quarter as compared the same period last year.  The NYT further stated today’s cost cutting “is more drastic than were untaken in the recessions of 1991 and 2001.” 

I think these drastic cuts were to be expected given the events of last year when all feared for their survival.  Moreover earning increases via cost cutting is to be expected and is actually steeped in historical context.

At some juncture companies will have to drive earnings growth from increasing revenues rather than decreasing costs.  Will this occur in the fourth quarter or perhaps by the first?  What I will write any incremental increase in revenue will be look great and propel earnings considerably higher given the drastic cuts in overhead.

And then there is the dollar.  Unless someone is living on Mars, all know the dollar is getting killed.  I can write a gazillion reasons why this is occurring but will like to instead focus upon two simplistic issues.

First I believe the dollar will not be replaced as the reserve currency in the foreseeable future.  There is simply no nation or group of nations that can remotely match America’s strength.  The banter might be great for media pundits on both the left and right but in my view macro economically the odds are extremely low.

Secondly a weak dollar aids American exports where companies with big overseas sales should do extremely well.  This is not a one off quarter event but a condition that should last for at least another two quarters.

What will happen today?

Last night the foreign markets were mixed. London was down 0.08%, Paris down 0.17% and Frankfurt down 0.04%.  Japan was up 1.87% and Hang Sang up 0.03%.

The Dow should open flat.  FRB Chairman Bernanke stated interest rates would rise once the outlook for the economy has “improved sufficiently.”  Is the Fed chief only stating the obvious or is the Committee attempting to warn the markets of change occurring at pace faster than expected?  As written many times the consistency of this crisis is its inconsistencies and the velocity of change.  The 10-year is off 5/32 to yield 3.27%.