Morning Call: Monday, July 6th, 2009
As we start Q3/09 it feels like “Back to the Future”. The trade that has dominated since March has been the second derivative. Are things less bad? These were the green shoots that now some wonder if they should be pruned. US Payroll data could be interpreted as showing the economy is getting worse. History suggests that the economy won't turn until the unemployment numbers have turned but the equities will lead that by a fair distance. The question is have they already done that, or was a lot of the move because severely compressed valuation?
The market has begun to hear the bad news and earnings season is upon us. Alcoa kicks it off on Wednesday and the combination of EPS and guidance will determine where we go. The S&P is potentially making a head and shoulders with the head at 950 and the neckline at 880 which if it breaks would give you a target of 810. Interestingly gold is tracing a reverse head and shoulders.
The call is on earnings season. The very wet May and June will pretty much guarantee that retailers' numbers will be bad. The macro call that we make is that the decline in the US $ has been sufficiently large to have the multi-nationals report good numbers. It is already showing up in the current market leadership of Coke, General Mills, Kraft, etc. The other reason to be bullish is because of those unemployment numbers. The US economy reacted quickly to cut costs and the combination of lower $ and lower costs should work.
So if we are right, we are moving on the road from where valuations were absurd, past where valuation was suspect because no one could forecast (especially company managements) where the EPS would be, toward a new level and greater certainty of delivered EPS, though we aren't there yet.
The flush of bailout money seems past us now. The flow of funds argument we used to be bullish will diminish in 2H/09 and somewhere out there it will be "Back to Basics."
Our call is for a better than consensus earnings season and so we…………. Invest the money.
Quote of the Day:
– Lichty and Wagner
Ed Pennock, CFA, Managing Director
416-369-6921, epennock@dominick.ca
Graham Farrell, Institutional Equity Trading
416-369-4208, gfarrell@dominick.ca
416-369-6921, epennock@dominick.ca
Graham Farrell, Institutional Equity Trading
416-369-4208, gfarrell@dominick.ca
The above note is prepared by an Institutional Salesperson based on morning meeting comments and general Institutional desk discussion and should not be construed as a research report or a solicitation. For information purposes only. D&D Securities, its clients, and principals may have positions in these securities.
