EmailTry as it might, the equity market could not hold its gains yesterday and ended with modest losses. That marked the fourth losing session out of the last five.
The FOMC meeting turned out to be a non-event as the policy directive was basically the equivalent of a cut-and-paste job from the September directive. That was pretty much expected; nonetheless, the major averages faded from higher levels in the wake of the FOMC announcement.
At the moment, the cash market looks poised to reclaim yesterday's lost ground and then some. The S&P futures are trading 0.6% above fair value.
A report from the U.K. that Q3 GDP rose 1.0%, which was the best quarter-on-quarter gain in five years, has provided some support along with speculation Japan might be on the verge of announcing a new stimulus plan.
We wish we could say that the latest batch of earnings reports has provided a healthy dose of optimism, but that would be pushing things. Plenty of beats and misses for the third quarter accompanied by plenty of warnings for the next.
Some will probably point to Procter & Gamble (PG) beating the Capital IQ consensus estimate by ten cents as an uplifting factor this morning.
That certainly doesn't hurt for headline followers, but our enthusiasm for the result is tempered by the understanding that PG's third quarter revenue declined 3.7% while its guidance for the fiscal year calls for net sales to be flat to up 1% and core EPS to be down 1% to up 4% versus the prior year. PG trades at 17.5x expected FY13 EPS, which isn't cheap for basically no growth.
In comparison (though not in an apples-to-apples kind of way), Apple (AAPL) trades at 11.5x expected FY13 earnings, which are projected to be up 20% from FY12 while its revenues are expected to grow by 24%. That might change for better or worse when Apple reports after the close today. We're just saying there is growth at a reasonable price and then there is almost no growth at a not-so-reasonable price.
Moving on, the market has responded favorably to the latest initial claims and durable orders reports. Both wowed the headline followers, even if both were not exactly strong in the true sense of things.
Initial claims for the week ended October 20 declined by 23,000 to 369,000. That was good relative to the consensus estimate of 375,000, but it still leaves initial claims bounded between 350,000 and 400,000, which is a level that has been consistent with only modest job growth that is unable to bring down the unemployment rate.
Continuing claims for the week ended October 13 were fairly flat at 3.254 mln (Briefing.com consensus 3.237 mln).
Durable orders, meanwhile, jumped 9.0%. That followed a 13.1% decline in August and topped the Briefing.com consensus estimate that was pegged at 8.0% growth. Excluding transportation, orders rose 2.0% on the heels of a 2.1% decline in August. Economists expected new orders, excluding transportation, to increase 1.0%.
Beneath the surface of the durable orders headlines, though, was a less impressive picture.
New orders for primary metals (+4.1%) and machinery (+9.2%) were the driver of the gain in orders, excluding transportation. Two important points here: (1) these particular increases followed sizable declines in August and (2) orders declined in September for all other manufacturing sectors outside of transportation.
Aircraft orders, which surged 2,641% (not a misprint) after a 97% decline in August (also not a misprint), drove the overall number.
Strikingly, orders for nondefense capital goods excluding aircraft -- a proxy for business investment -- were flat while shipments declined 0.3%. The decline in shipments will be a drag on Q3 GDP.
Even so, there isn't a lot of drag in the futures market at the moment. Faith in dip-buying strategies and a positive headline tone are overshadowing less exciting information beneath the surface.
--Patrick J. O'Hare, Briefing.com
