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Asia Still the Key this Week
Daily commentary updated December 15, 1997
Risks are high for the stock market this week. Sentiment has held up reasonably well considering the bad earnings news recently. However, the market still has not come to grips with the magnitude of the earnings problem that will result from the Asian economic turmoil.
Asia is Very Real
There has been a lot of rationalizing the past week from those that want to believe that the Asian financial turmoil will not adversely impact U.S. stocks. However, Asia is a big part of the world economy, and represents a large part of final demand. It is not just a place where American companies set up to make products cheaply.
Asia is now experiencing serious credit flow problems and a significant slowdown in economic growth. The world is an interconnected economy. Manufacturing firms that can not get credit to buy parts from other Asian firms create ripples throughout the global economy. When Oracle reported that Asian revenue growth fell to 1% from 30%, there was talk that Oracle's problems were not really due to overall Asian weakness and were company specific. Electronics for Imaging (EFII) and Lattice Semiconductor (LSCC) can testify that there are indeed problems in Asia. Other companies will be reporting problems as well.
In fact, so far the problems have been most evident in the technology sector. But almost every multinational firm will be impacted. The stronger dollar will have a significant negative on earnings for these firms, which will also face a decline in final demand.
Earnings Slowdown of any Magnitude is Significant
Yes, there are some benefits to the economic weakness in Asia, and it won't last forever. But the S&P 500 is trading at 23 times earnings. These lofty valuations require that earnings growth continue strongly. Right now, there is still a level of denial. The Wall Street consensus is for earnings to grow 17% in the first quarter. Estimates have yet to drop at all. That is certain to change in the next couple of weeks of as additional evidence of an earnings slowdown becomes more widespread.
The stock market has lost some of the gains from the November rally, but the Dow is still up from when this all started. The potential down side from further earnings warnings is not yet in the market. The degree of further earnings warnings and how the market deals with that will be the key factor this week. Unfortunately, earnings warning season typically lasts a few more weeks so it will always be hard to say the worst is over.
Asian worries and earnings warning will drive the market this week. Unfortunately, the downside on individual stocks is high compared to the potential upside right now. That doesn't mean that the market will tank or that a bear market is starting, just that risks on the one week outlook are high.
Key Scheduled Events
There is also an FOMC meeting on Tuesday, but no one may notice. Virtually every analyst forecasts no change in Fed policy. The Fed recognizes that the credit disruptions in Asia are cause for caution.
Earnings reports this week include: 3Com (COMS), Adobe (ADBE) and Nike (NKE) on Thursday, Micron (MU) on Monday and Jabil (JBIL) on Tuesday. See Earnings Calendar for more complete listing.
Also of note is CPI on Tuesday. A good PPI on Friday was of no help to the market, and a good CPI might help only if Asian worries have mitigated. Friday is options expiration.
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