Here is another input by Briefing.com on the market performance today.
<<As is often the case, the market's knee-jerk reaction to news or an event is the wrong one... An obvious example was the market's severe sell-off in the aftermath of 9/11... We are now seeing an overreaction (much more modest in scope) by traders to the prospect of Fed tightening.
The reaction stems from the basic notion that higher rates are bad for stocks. While Briefing.com won't argue that a high real rate (funds rate minus core CPI) is a negative for stocks, we do find fault with the logic of bailing out on stocks at the first sign that the Fed is about to reverse a long string of aggressive rate cuts.
Though the Fed's decision to adopt a symmetrical policy directive is the first step toward eventually raising the funds rate, Greenspan & Co. still have their doubts about the degree of strengthening in final demand over coming quarters. The Fed acknowledged as much in yesterday's policy statement, and because it did, one would think they would want to analyze more than just the next 6-weeks worth of economic data before instituting an aggressive policy move. Should also be noted that the benign inflationary backdrop gives them the luxury of taking their time.
More importantly, Greenspan has said repeatedly that a pickup in business spending is a necessary component of a sustained recovery. Suffice it to say, a swift increase in the cost of credit would dilute the rebound potential of the anticipated profit recovery; and without a renewed surge in profitability, business spending will continue to be lackluster. To avoid squashing the recovery before it even gets going, the Fed will maintain his gradualist approach. Anything else would be foolhardy and reckless, and those are two words that rarely are associated with Fed Chairman, Alan
Greenspan.
Now that we've established our case for why any rate hikes will be gradual in nature, we move to the discussion of why the early transition from an easing to tightening cycle isn't a bad thing for stocks. In moving to a symmetrical policy directive, the Fed confirmed what most of us have known for weeks, if not months -- the economy is on the mend. And a rebound in the economy is anything but bad news for stocks - especially tech stocks.
Lower rates have taken the market about as high as it will go... For the rally to continue building momentum, we need to see a rebound in corporate profits... Early indications on earnings are encouraging, as the ratio of negative to positive preannouncements for Q1 is the best we've seen in two years, and for Q2 the number of companies raising their earnings targets is actually greater than the number of companies issuing warnings -- something we haven't seen in nearly three years... Interestingly, the much maligned tech sector has accounted for nearly 20% of those positive Q2
preannouncements... In order for this positive earnings trend to continue, we need a strong economic recovery.
So we say rate hikes be damned (at least initially), bring on the strong recovery and renewed profit growth. Without it, the rally will run out of gas faster than my Mitsubishi Montero.
Don't want to close today's commentary without addressing news that Salomon lowered its earnings estimates for Intel (INTC)... First, this was the third such move by a brokerage firm in the past several days - so it should have come as little surprise... Note that Briefing.com issued a cautionary Brief on the company on Monday... Second, Solly's old estimates were slightly above the consensus... Changes bring them in line with to slightly below consensus... In other words this appeared to be a minor adjustment... Finally, the overall outlook for the chip and chip equipment
industry is showing signs of improvement, which is reflected in the relative strength of the SOX.
Robert Walberg, Briefing.com>> |
