This post expands on my thoughts relating to the "unmentionable phrase," namely the prospects for declining corporate profits during the next four quarters.
One of the things that has attracted me to Barron's Financial Weekly over the years are the summaries of the week's business activity. The Trader is always one of my favorites. This is the most recent article from the column:
Norton, Leslie P., 2010. September sang, but october may sink. Barron's, Oct. 2.
It seems that the notion of macroeconomic management never dies. Investors are buzzing about the Fed's efforts to increase the money supply through a second round of quantitative easing, sometimes called QE II. There is so much emphasis on macro policy that I think analysts are taking their eye off of fundamental analysis. Below is a quote from The Trader:
"According to a survey by ISI Group, $1 trillion of quantitative easing could lift the market by four percentage points."
I have absolutely no idea how this type of information relates to the anticipated profits for specific companies. Since profits drive stock prices, it would seem that stocks are going up purely based on the prospect of an expanded money supply. This is an astounding decision-making process for buying stocks that has little probability of success! It represents a heard mentality.
Further from the above article:
"This month, 80% of the companies in the S&P 500 will report third-quarter earnings. Don't be surprised if they guide lower (so they can surprise you on the upside later). Credit Suisse notes that analysts are starting to reduce their earnings forecasts, which 'leads us to expect fewer positive surprises' in the September quarter than in June."
This confirms my earlier post today referring to the potential peaking of corporate profits:
With a letdown after the Nov. election combined with a restrained holiday selling season, I think the end of 2010 could see significant profit taking and a decrease in stock prices.
Some think the weakness will extend into 2011, a distressing thought!
An yet gold continues to rise in price!
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