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Market Commentary Have equities discounted third quarter earnings Have equities discounted third quarter earnings falling under the guise of buy on rumor and sell on fact? All are expecting profits to fall for a record ninth consecutive quarter but the operative question is by how much third quarter results will decline. What are the odds earnings might post only a nominal decline, a view I do not share but is a possibility according to some? If this does occur, it would be consistent with this crisis where the unexpected occurs. As commented many times it is not change that is frightening but rather the velocity of change. Speaking of change, borrowers have sold more than $1 trillion in corporate bonds in 2009, the fastest pace on record. Total corporate bond sales for 2008 were $873.2 billion and $1.17 trillion for 2007, the biggest year on record for bond sales. [Bloomberg] The vast majority of this issuance has occurred since March. In my view attractive yields permitted such strong issuance. Since January 1 Merrill Lynch’s US Corporate & High Yield Master Index, spreads have tightened about 4.6% to around 3.5% over the corresponding treasury producing a 2009 total return of 23%, the greatest rally since 1997. [Bloomberg] The difference between investment grade bond yields and Treasury issues narrowed to 233 basis points, 30 basis points higher than 2007’s average. Spreads for high yield debt are 195 basis points higher than the 2007 average. [Bloomberg] Eight months ago the consensus view was the bond market was completely toast. Issuance regardless of price was close to impossible. Today’s trading will be influenced by earnings and statistics. Retail sales, business inventories as well as the September 23 minutes of the FOMC meeting are released. Will these statistics suggest an economy that is building momentum or one that is stalling? How will the earnings reports be interpreted? All must remember markets are people and people move markets based upon the interpretation of all events, events that change in significance on a daily basis. Last night the foreign markets were up. The Dow should open sharply higher as both JP Morgan and Intel exceeded earnings estimates. The 10-year is off 12/32 to yield 3.39%. 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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