After Worst Quarter Since '08, Key Events to Watch for in Q4
Now that the third-quarter is done, we can review it just this one last
time, never speak of it again, and look ahead to Q4.
If you took a 2-week summer vacation starting at the end of July, you could
have missed the whole Q3 downturn. On July 28th the S&P500 was at 1,300. The
next morning a revision of first-quarter GDP from 1.9 to 0.4% set off a
selling stampede culminating in a test of 1,100 hit on the S&P on August
9th, when the FOMC
announced<http://us.lrd.yahoo.com/_ylt=Apa1NaFncST2hvKwf.urx6Em2YdG;_ylu=X3oDMTFpNGh2cjBkBG1pdANCbG9nIFBvc3QgQm9keQRwb3MDMQRzZWMDTWVkaWFCbG9nQm9keUFzc2VtYmx5;_ylg=X3oDMTM2NnFkM2liBGludGwDdXMEbGFuZwNlbi11cwRwc3RhaWQDMmQxNTA0MzAtZmQxZS0zOGNmLWI4NDItZGEyZGY0YjMwOTY3BHBzdGNhdANleGNsdXNpdmVzfGJyZWFrb3V0BHB0A3N0b3J5cGFnZQ--;_ylv=0/SIG=12pudenfv/EXP=1318676146/**http%3A//www.federalreserve.gov/newsevents/press/monetary/20110809a.htm>
it
would keep rates low "through mid-2013."
A GDP adjustment doesn't typically concern Wall Street in the least. By the
time the final revision comes out the data is so old that traders barely
take notice. But going from 1.9% to 0.4% is huge; it's an entire 1.5%
difference, and this is economic growth we're talking about. The data may be
in the rearview mirror but when a global recession is gaining on you much
faster than previously thought, investors are going to high-tail it out of
stocks.
GDP set the stage for an ugly August which started with the debt
ceiling/default debacle and led directly to the Standard & Poor's downgrade
of US debt, all in the first week. By the time the Fed conceded that the
recovery was worse than expected and 2012 was looking grim as well, stocks
were almost 20% off their 2011 highs. US equities haven't recovered much
since and have been joined in the dumpster by stocks worldwide and nearly
everything related to global growth.
At this point, confidence is the only commodity in demand and none seems
available at any price. The upside is things could have been worse. Really.
The glass-is-half-full view is that stocks have been remarkably resilient
under the circumstances.
Remember, all of the above occurred before Greece reemerged and the
darkening picture in China became evident. Both will factor into whatever
comes of Q4. Here are key dates to watch through year-end:
*October 11th: *Alcoa earnings report after the bell (signals the start of
Q3 earnings season)
**
*November 2nd: *FOMC meeting followed by Fed Chairman Ben Bernanke's
quarterly press conference
**
*November 23rd: *Deadline for Deficit Commission proposals to cut $1.2
Trillion
*December 13th: *FOMC meeting, final one for 2011
*December 23rd: *Deadline for Congress' "up or down" vote on Deficit
Commission proposals
Remember, October is traditionally the month that sees the lows for the
year. The bet here is that 2011 is no exception. I see stocks hitting 999 on
the S&P 500, then finding some sort of base for a year-end rally. What's my
logic? The market likes big round numbers and I enjoy playing guessing
games.
++++++++++++++++++++++++++++
Buy the Broken Down Industrial Stocks: Fund
Manager<http://finance.yahoo.com/blogs/breakout/buy-broken-down-industrial-stocks-fund-manager-140437804.html;_ylt=Aq2KALTdqoNs7r2GcnMV8rkm2YdG;_ylu=X3oDMTFqMGVvY2wxBG1pdANIT1QgVE9QSUNTBHBvcwMxBHNlYwNNZWRpYUZlYXR1cmVkTGlzdEVkaXRvcmlhbA--;_ylg=X3oDMTM2NnFkM2liBGludGwDdXMEbGFuZwNlbi11cwRwc3RhaWQDMmQxNTA0MzAtZmQxZS0zOGNmLWI4NDItZGEyZGY0YjMwOTY3BHBzdGNhdANleGNsdXNpdmVzfGJyZWFrb3V0BHB0A3N0b3J5cGFnZQ--;_ylv=3>
And right now, it takes a pretty serious artist to see their way through the
haze and fog of the markets and auger the confidence to dive in or, if the
case may be, to not bail out.
Even before markets stabilized this week, Portfolio Manager Ted Parrish of
the Hennsler Financial Group was trying to see value when none was around
and that led him to the Industrials. "These companies have very long type
businesses that aren't really affected by short-term actions in the economy"
Parrish says. "You've seen the rout in Industrials we've faced over past
week-and-a-half. I don't think it's going to persist. When the comps come
out with their guidance, Wall Street will see that the numbers are going to
be pretty solid going forward."
And then Parrish gives this caveat to would-be bargain hunters: "I think you
should nibble, not really double-down here. Things could get a little
weaker. If you don't have an overweight position in Industrials right now I
think you should probably take one."
He points to stocks like 3M (MMM <http://finance.yahoo.com/q?s=MMM%2C+&ql=1>)
that had short-term double-digit losses. And Emerson Electric
(EMR<http://finance.yahoo.com/q?s=EMR&ql=0>)
too, which he said had a small revenue miss but overall great numbers and
"is in a really good position in emerging markets for infrastructure build
out in both China and India."
Parrish concedes that Industrials - even globally diversified ones -- aren't
immune from reductions in government spending. As such, he says defense
contractor Northrop Grumman (NOC <http://finance.yahoo.com/q?s=NOC&ql=0>) is
"one position in the Industrial sector that's kind of in question right now
from the portfolio committee. Even though he says Northrop is priced way
below 10x earnings and looks cheap, he "needs a little more visibility to
get more confidence."
As we segued into Tech stocks, Parrish countered Macke's push-back on
Microsoft (MSFT <http://finance.yahoo.com/q?s=MSFT&ql=0>) and Intel
(INTC<http://finance.yahoo.com/q?s=INTC&ql=0>)
with some push-back of his own. "They've both shown pretty resilient
earnings growth over the past 3-5 years, and they both own their markets."
He says Intel not only dominates AMD
(AMD<http://finance.yahoo.com/q?s=AMD&ql=0>)
but "finally paid a dividend so is now a mature growth and income company
that is steadily building cash."
The other slice of his global industrial growth theme includes exposure to
the Materials sector via a basket of stocks like the Materials SPDR
etf (XLB<http://finance.yahoo.com/q?s=xlb&ql=1>),
versus the individual commodities.
Parrish is "comfortable sitting back getting 3.5% from Intel while they
dominate the market" adding that "at some point, they're gonna give it back
to shareholders." He shares similar sentiment on Microsoft, and as much as
he'd like to see a management shake-up or company break up to ignite the
stock, Parrish again says he is comfortable waiting for Microsoft to "do
something wth the cash on their books."
What about you? Would you get back into the market here, into Industrials,
or do you want to see things stabilize more?
++++++++++++++++++++++++++++++++++++++++++
NEXT WEEK
Auto, cement shares will be in focus on monthly sales data
Auto and cement shares will be in focus next week as companies from these
two sectors start unveiling monthly sales data for September 2011. Cement
sales is likely to pick up as monsoon withdraws. On the other hand, higher
interest rates and recent petrol pricehike is expected to adversely impact
sales of cars and two-wheelers during the festiveseason. The timing of the
latest petrol price hike has been bad for auto firms. The
festiveseason started early this month and it will last until Diwali, the
festival of lights, at the end of October 2011. Sales normally pick up
during the festive season every year.
Next week is a truncated trading week. Financial markets are closed on
Thursday, 6 October 2011, on account of Dassera.
The HSBC purchasing manager index (PMI) data for the month of September,
indicating health of manufacturing activity and Business activity index also
for September, indicating health of the services sector activity, are due
next week.
The government will on Friday, 7 October 2011, unveil data on some
wholesale priceindices viz. the food price index, the primary articles index
and the fuel price index for the year through 24 September 2011.
Stock-specific action may be witnessed on the bourses ahead of Q2
result season, which starts during the second week of October 2011. The
advance tax payment by top 100 companies rose a modest 9.9% in Q2 September
2011 from a year ago against 19% growth in Q1 June 2011, suggesting
corporate profit growth is likely to be muted in the second quarter. Among
the big companies that have paid lower advance tax, indicating a drop in
profits, include State Bank of India (SBI), Maruti Suzuki and state-run
Neyveli Lignite Corporation. SBI's advance tax payment declined 14.2% to Rs
1650 crore in Q2 September 2011. Maruti's tax payment fell 55.8% to Rs 120
crore. Neyveli Lignite tax payment plunged 50.1% to Rs 66 crore. But,
Reliance Industries' (RIL) advance tax payment jumped 37.6% to Rs 1800
crore, hinting at good Q2 results from the diversified firm.
CRISIL Research expects corporate India to report a significant moderation
in revenue growth and lower EBITDA (earnings before interest, taxation,
deprecation and amortization) margins in Q2 September 2011, primarily due to
decline in consumer confidence, on account of stubbornly high inflation,
rising interest rates, and slowdown in investment growth. Based on an
analysis of the aggregate financial performance of select companies across
21 industries, excluding banks and oil companies, CRISIL Research expects
around 15% revenue growth in Q2 September 2011, as compared to 19% growth Q1
June 2011 and 22% growth in Q2 September 2010.
Although companies have hiked prices, slower volume growth, along with high
input costs and rising wages, will put pressure on margins, CRISIL says.
CRISIL expects a 100 basis points (bps) reduction in EBITDA margins in Q2
September 2011 from 19.5% in Q1 June 2011. Further, with increase in
interest rates, net margins are expected to fall even more sharply.
According to CRISIL, sales volumes in consumption-linked and interest rate
sensitive sectors such as automobiles, real estate, textiles, and retail
have been significantly impacted. In infrastructure-linked sectors such as
cement, capital goods, and construction, order book/volume growth has
declined.
CRISIL expects real estate players to report a 5% year-on-year (yoy) decline
in revenue and a sharp reduction in EBITDA margins. Automakers, textiles and
steel manufacturers are also expected to see a sharp decline in margins on
the back of slower offtake and high raw material costs. For cement and
construction players too, EBITDA margins are likely to remain under pressure
owing to slowdown in pace of project execution as well as rising input
costs. But, IT services providers are expected to report buoyant revenue
growth of around 17% on the back of strong pipeline. However, EBITDA margins
are likely to decline by around 200 bps due to rising salary costs, CRISIL
says.
Investors will closely watch the management commentary at the time of
announcement of Q2 September 2011 results, which will provide cues on
futures earnings outlook. IT bellwether Infosys kickstarts the Q2 September
2011 earnings season on 12 October 2011. Housing finance major HDFC unveils
Q2 results on 17 October 2011. HDFC Bank and Bajaj Auto announce Q2 results
on 19 October and 20 October, respectively.
Now that the third-quarter is done, we can review it just this one last
time, never speak of it again, and look ahead to Q4.
If you took a 2-week summer vacation starting at the end of July, you could
have missed the whole Q3 downturn. On July 28th the S&P500 was at 1,300. The
next morning a revision of first-quarter GDP from 1.9 to 0.4% set off a
selling stampede culminating in a test of 1,100 hit on the S&P on August
9th, when the FOMC
announced<http://us.lrd.yahoo.com/_ylt=Apa1NaFncST2hvKwf.urx6Em2YdG;_ylu=X3oDMTFpNGh2cjBkBG1pdANCbG9nIFBvc3QgQm9keQRwb3MDMQRzZWMDTWVkaWFCbG9nQm9keUFzc2VtYmx5;_ylg=X3oDMTM2NnFkM2liBGludGwDdXMEbGFuZwNlbi11cwRwc3RhaWQDMmQxNTA0MzAtZmQxZS0zOGNmLWI4NDItZGEyZGY0YjMwOTY3BHBzdGNhdANleGNsdXNpdmVzfGJyZWFrb3V0BHB0A3N0b3J5cGFnZQ--;_ylv=0/SIG=12pudenfv/EXP=1318676146/**http%3A//www.federalreserve.gov/newsevents/press/monetary/20110809a.htm>
it
would keep rates low "through mid-2013."
A GDP adjustment doesn't typically concern Wall Street in the least. By the
time the final revision comes out the data is so old that traders barely
take notice. But going from 1.9% to 0.4% is huge; it's an entire 1.5%
difference, and this is economic growth we're talking about. The data may be
in the rearview mirror but when a global recession is gaining on you much
faster than previously thought, investors are going to high-tail it out of
stocks.
GDP set the stage for an ugly August which started with the debt
ceiling/default debacle and led directly to the Standard & Poor's downgrade
of US debt, all in the first week. By the time the Fed conceded that the
recovery was worse than expected and 2012 was looking grim as well, stocks
were almost 20% off their 2011 highs. US equities haven't recovered much
since and have been joined in the dumpster by stocks worldwide and nearly
everything related to global growth.
At this point, confidence is the only commodity in demand and none seems
available at any price. The upside is things could have been worse. Really.
The glass-is-half-full view is that stocks have been remarkably resilient
under the circumstances.
Remember, all of the above occurred before Greece reemerged and the
darkening picture in China became evident. Both will factor into whatever
comes of Q4. Here are key dates to watch through year-end:
*October 11th: *Alcoa earnings report after the bell (signals the start of
Q3 earnings season)
**
*November 2nd: *FOMC meeting followed by Fed Chairman Ben Bernanke's
quarterly press conference
**
*November 23rd: *Deadline for Deficit Commission proposals to cut $1.2
Trillion
*December 13th: *FOMC meeting, final one for 2011
*December 23rd: *Deadline for Congress' "up or down" vote on Deficit
Commission proposals
Remember, October is traditionally the month that sees the lows for the
year. The bet here is that 2011 is no exception. I see stocks hitting 999 on
the S&P 500, then finding some sort of base for a year-end rally. What's my
logic? The market likes big round numbers and I enjoy playing guessing
games.
++++++++++++++++++++++++++++
Buy the Broken Down Industrial Stocks: Fund
Manager<http://finance.yahoo.com/blogs/breakout/buy-broken-down-industrial-stocks-fund-manager-140437804.html;_ylt=Aq2KALTdqoNs7r2GcnMV8rkm2YdG;_ylu=X3oDMTFqMGVvY2wxBG1pdANIT1QgVE9QSUNTBHBvcwMxBHNlYwNNZWRpYUZlYXR1cmVkTGlzdEVkaXRvcmlhbA--;_ylg=X3oDMTM2NnFkM2liBGludGwDdXMEbGFuZwNlbi11cwRwc3RhaWQDMmQxNTA0MzAtZmQxZS0zOGNmLWI4NDItZGEyZGY0YjMwOTY3BHBzdGNhdANleGNsdXNpdmVzfGJyZWFrb3V0BHB0A3N0b3J5cGFnZQ--;_ylv=3>
And right now, it takes a pretty serious artist to see their way through the
haze and fog of the markets and auger the confidence to dive in or, if the
case may be, to not bail out.
Even before markets stabilized this week, Portfolio Manager Ted Parrish of
the Hennsler Financial Group was trying to see value when none was around
and that led him to the Industrials. "These companies have very long type
businesses that aren't really affected by short-term actions in the economy"
Parrish says. "You've seen the rout in Industrials we've faced over past
week-and-a-half. I don't think it's going to persist. When the comps come
out with their guidance, Wall Street will see that the numbers are going to
be pretty solid going forward."
And then Parrish gives this caveat to would-be bargain hunters: "I think you
should nibble, not really double-down here. Things could get a little
weaker. If you don't have an overweight position in Industrials right now I
think you should probably take one."
He points to stocks like 3M (MMM <http://finance.yahoo.com/q?s=MMM%2C+&ql=1>)
that had short-term double-digit losses. And Emerson Electric
(EMR<http://finance.yahoo.com/q?s=EMR&ql=0>)
too, which he said had a small revenue miss but overall great numbers and
"is in a really good position in emerging markets for infrastructure build
out in both China and India."
Parrish concedes that Industrials - even globally diversified ones -- aren't
immune from reductions in government spending. As such, he says defense
contractor Northrop Grumman (NOC <http://finance.yahoo.com/q?s=NOC&ql=0>) is
"one position in the Industrial sector that's kind of in question right now
from the portfolio committee. Even though he says Northrop is priced way
below 10x earnings and looks cheap, he "needs a little more visibility to
get more confidence."
As we segued into Tech stocks, Parrish countered Macke's push-back on
Microsoft (MSFT <http://finance.yahoo.com/q?s=MSFT&ql=0>) and Intel
(INTC<http://finance.yahoo.com/q?s=INTC&ql=0>)
with some push-back of his own. "They've both shown pretty resilient
earnings growth over the past 3-5 years, and they both own their markets."
He says Intel not only dominates AMD
(AMD<http://finance.yahoo.com/q?s=AMD&ql=0>)
but "finally paid a dividend so is now a mature growth and income company
that is steadily building cash."
The other slice of his global industrial growth theme includes exposure to
the Materials sector via a basket of stocks like the Materials SPDR
etf (XLB<http://finance.yahoo.com/q?s=xlb&ql=1>),
versus the individual commodities.
Parrish is "comfortable sitting back getting 3.5% from Intel while they
dominate the market" adding that "at some point, they're gonna give it back
to shareholders." He shares similar sentiment on Microsoft, and as much as
he'd like to see a management shake-up or company break up to ignite the
stock, Parrish again says he is comfortable waiting for Microsoft to "do
something wth the cash on their books."
What about you? Would you get back into the market here, into Industrials,
or do you want to see things stabilize more?
++++++++++++++++++++++++++++++++++++++++++
NEXT WEEK
Auto, cement shares will be in focus on monthly sales data
Auto and cement shares will be in focus next week as companies from these
two sectors start unveiling monthly sales data for September 2011. Cement
sales is likely to pick up as monsoon withdraws. On the other hand, higher
interest rates and recent petrol pricehike is expected to adversely impact
sales of cars and two-wheelers during the festiveseason. The timing of the
latest petrol price hike has been bad for auto firms. The
festiveseason started early this month and it will last until Diwali, the
festival of lights, at the end of October 2011. Sales normally pick up
during the festive season every year.
Next week is a truncated trading week. Financial markets are closed on
Thursday, 6 October 2011, on account of Dassera.
The HSBC purchasing manager index (PMI) data for the month of September,
indicating health of manufacturing activity and Business activity index also
for September, indicating health of the services sector activity, are due
next week.
The government will on Friday, 7 October 2011, unveil data on some
wholesale priceindices viz. the food price index, the primary articles index
and the fuel price index for the year through 24 September 2011.
Stock-specific action may be witnessed on the bourses ahead of Q2
result season, which starts during the second week of October 2011. The
advance tax payment by top 100 companies rose a modest 9.9% in Q2 September
2011 from a year ago against 19% growth in Q1 June 2011, suggesting
corporate profit growth is likely to be muted in the second quarter. Among
the big companies that have paid lower advance tax, indicating a drop in
profits, include State Bank of India (SBI), Maruti Suzuki and state-run
Neyveli Lignite Corporation. SBI's advance tax payment declined 14.2% to Rs
1650 crore in Q2 September 2011. Maruti's tax payment fell 55.8% to Rs 120
crore. Neyveli Lignite tax payment plunged 50.1% to Rs 66 crore. But,
Reliance Industries' (RIL) advance tax payment jumped 37.6% to Rs 1800
crore, hinting at good Q2 results from the diversified firm.
CRISIL Research expects corporate India to report a significant moderation
in revenue growth and lower EBITDA (earnings before interest, taxation,
deprecation and amortization) margins in Q2 September 2011, primarily due to
decline in consumer confidence, on account of stubbornly high inflation,
rising interest rates, and slowdown in investment growth. Based on an
analysis of the aggregate financial performance of select companies across
21 industries, excluding banks and oil companies, CRISIL Research expects
around 15% revenue growth in Q2 September 2011, as compared to 19% growth Q1
June 2011 and 22% growth in Q2 September 2010.
Although companies have hiked prices, slower volume growth, along with high
input costs and rising wages, will put pressure on margins, CRISIL says.
CRISIL expects a 100 basis points (bps) reduction in EBITDA margins in Q2
September 2011 from 19.5% in Q1 June 2011. Further, with increase in
interest rates, net margins are expected to fall even more sharply.
According to CRISIL, sales volumes in consumption-linked and interest rate
sensitive sectors such as automobiles, real estate, textiles, and retail
have been significantly impacted. In infrastructure-linked sectors such as
cement, capital goods, and construction, order book/volume growth has
declined.
CRISIL expects real estate players to report a 5% year-on-year (yoy) decline
in revenue and a sharp reduction in EBITDA margins. Automakers, textiles and
steel manufacturers are also expected to see a sharp decline in margins on
the back of slower offtake and high raw material costs. For cement and
construction players too, EBITDA margins are likely to remain under pressure
owing to slowdown in pace of project execution as well as rising input
costs. But, IT services providers are expected to report buoyant revenue
growth of around 17% on the back of strong pipeline. However, EBITDA margins
are likely to decline by around 200 bps due to rising salary costs, CRISIL
says.
Investors will closely watch the management commentary at the time of
announcement of Q2 September 2011 results, which will provide cues on
futures earnings outlook. IT bellwether Infosys kickstarts the Q2 September
2011 earnings season on 12 October 2011. Housing finance major HDFC unveils
Q2 results on 17 October 2011. HDFC Bank and Bajaj Auto announce Q2 results
on 19 October and 20 October, respectively.
