No news is good news, right? Well, maybe not? From what I can tell, the lack of definitive news from either of the two Fed voices yesterday may have been bad news. Then again, maybe the market is, well, just being the market. With nothing to grab onto for a positive catalyst, the buyers simply withdraw, waiting for more news from, you know who, the Fed.
- The Federal Reserve’s FOMC minutes are scheduled to be released at 2:00 p,m. EDT on Wednesday. Like any statement from the Federal Reserve, this release will have the potential to move markets.
Sometimes stating the obvious is helpful, if for no other reason than to jolt a reader to awareness. Be aware, then, a clear statement, or a perceived inclination, coming out of the Fed meeting notes today could send the market screaming in either direction, depending on the statement or the perception.
In either case, yesterday’s market move, and whatever move comes today, has little long-term bearing on the near- and long-term future of the market. What is of greater importance to the future of the market are earnings, and those began coming out last night.
- And they’re off… Alcoa has officially kicked of the Q2 earnings season with their report.
And what a report it was and is.
- Alcoa (AA) reported Q2 earnings per share of $0.18 ex-items, which was well above the FactSet consensus estimate of $0.12.
Adding to the good earnings report is the upbeat message from the CEO regarding the current and future status of the company.
- We are taking the downstream business to new profitability heights, capturing midstream demand as auto lightweighting accelerates, while continuing to relentlessly improve upstream performance. Our strategy of building a lightweight multi-material innovation powerhouse and a highly competitive commodities business is driving compelling and sustainable shareholder value.
Okay, I am not sure what he said, exactly, but I am pretty sure it is good. In any case, for what it’s worth, a major commodity producer such as Alcoa suggesting the future is bright regarding its lightweight metal production for cars speaks to a brighter economic future, yes?
- Consumer borrowing in the U.S. surged again in May as Americans took out more loans to purchase cars.
So, let me see … Alcoa is producing lots of lightweight metal for lots of cars that lots of folks are buying. Yes, I believe that is it. Keep it simple, I say.
Moving forward on this idea of a market on an upward trend for the near- and far-term future, how about the data coming out about jobs? No, not the Labor Department’s monthly employment report; rather the Labor Department’s Job Openings and Labor Turnover Summary (JOLTS).
- Over the 12 months ending in May, the number of job openings (not seasonally adjusted) rose for total nonfarm, total private, and government. Over the year, the job openings level increased in nearly half of the industries and in all four regions.
Put this next to the recent employment report, and all the other positive recent data, and you have one big reason for the rise in consumer purchasing confidence.
- Stronger employment and stock-market gains this year are giving consumers the confidence to take on more debt. The figures coincide with robust auto sales and greater demand for furniture and appliances tied to the real-estate recovery, indicating the economy is rebounding from a first-quarter slump.
So, now we understand why more folks are feeling more confident to borrow money to buy a new car or house, and we know both are selling briskly, more and more each quarter in fact. As well, we know the first company out of the gate to report earnings reported stellar earnings for Q2.
But let me not get carried away here. I expect Alcoa is a signal that earnings will, once again, be good, or maybe better than good. What the market wants to know, though, is it too far ahead of itself? Simply, will earnings bring the P/E ratio and earnings growth of companies closer together? As of the end of the last earnings reporting, the gap between the two was a bit wide.
- Rule of thumb: A stock’s or sector’s P/E ratio should match its earnings growth rate. For example, if a sector’s typical growth rate is 10%, a fair P/E level would be 10.0. An annualized growth rate of 20% can justify a P/E of 20.0.
I don’t know if they need to be that close, but anything in the ballpark of close or getting closer signals the market is coming into balance with earnings, and that, my friends, is what will drive the market higher. Oh, and if it is not clear, Alcoa, car sales, and consumers generally feeling confident to spend is why earnings growth and the P/E ratio will move toward balance.
So, today, whatever the Fed notes tell us about its thinking regarding its easy money policies, and whatever way the market moves, keep in mind, it is not the thing that will move the market meaningfully toward its future. “This too shall pass,” and when it does, look to earnings.
On our way to the San Juan Islands for a bit o’ sailing …
Trade in the day; invest in your life …
