Signs to look for in Q1 Earnings- End Demand and Currency Effects

Hoy Grimm

Earnings expectations for the first three months of 2015 have plummeted. Since January analysts reduced their estimates for company profits so much that earning will be considered on target even if they are 4% less than last year. Stock market bulls who are comfortable buying the market at current levels believe that the second half of 2015 will see an acceleration of activity which will more than justify expensive PE ratios. The Fed was forced to rethink the timing of interest rate increases because of a series of poor economic data point.

For our part, we are positioned with a healthy cash cushion because we are suspicious about where this excess demand will materialize from. China growth is very weak, Japan is no better and other than Germany, Europe is resorting to artificial stimulus through the ECB to stave off a recession. Despite this overwhelming body of evidence, the S&P 500 is still trading at 17 times forward earnings - a valuation that is normally reserved for periods of steady, predictable earnings growth. The stakes for US stock investors couldn't be higher than right now.

Alcoa kicked off earning season last week with earnings per share that was 2 cents better than the reduced guidance but revenue that was less than expected. On the day the stock dropped 3% and is down more than 10% this year.

As more companies announce their financial results here are two key factors that investors should be paying attention to:

 

Demand

Over a three month quarter most competent CFOs can manufacture a decent report or at least offer a plausible excuse (weather, the dollar) for any shortcomings. Dig into their business to discern any change in demand trends. This is most readily measured through top line revenue and through inventory. If demand is strong, revenue will be up and they will be turning their inventory over faster.

 

Is the strong dollar helping or hurting business

Companies that have little international sales exposure should realize economic benefits from the strong dollar. They produce in dollars and sell in dollars. Domestic businesses are more focused on controlling manufacturing costs and inventory than their exposure to the strong dollar. The dollar rally was a primary driver in the decline of energy prices over the last 6 months and that should provide a cost savings to domestic producers.

US companies with a global footprint are still dealing with the effects of the strong dollar. The dollar rally has persisted long enough that these companies have had enough time to hedge some of the currency risk away. If they use the strong dollar as an excuse for missed expectations it likely means they aren't managing their business well and will subject their shareholders to more earnings uncertainty.

 

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We’re Halfway There

kevin-painterWhile perusing through social media last week, I saw a post that caused me to stop and really think. Today we are as close to 1990 as we are to 2040. Ouch! That hit me like a ton of bricks. It's impossible that 1990 was 25 years ago. I was a freshman in high school. I had grown 7 inches in 6 months and had a mouthful of braces. I was wearing Tommy Hilfiger shirts and rolling my jeans.

The words to a famous Bon Jovi song then came to my head, "Whoa, we're halfway there. Whoa, Livin on a Prayer." For a child of the 80s, this was our anthem. But, oh wait, I just turned 40. What's even more troubling to me is that I'll be 65 in 2040. Our kids will be out of college, our mortgage will be paid off, and I better be ready to retire.

Life is constantly in motion. Good things happen to us like graduations, marriages and births while sad and difficult experiences such as job loss, illness and death of a loved one also plague us during our journey. We can't predict what will happen tomorrow, but we can prepare for it.

Planning for the future isn't easy. It takes discipline, commitment, time and perseverance. Those are all behaviors that need to be rewarded or modified. If you had to pick one, what has kept you from reaching your financial goals? We often talk about birthday risk with our clients. We can't control where interest rates or stock prices will be when we turn 65. You can control how much you save, spend and what you risk you take on your nest egg.

When you're 15 you want to be 18, when you're 18 you want to be 21, when you're 21 you want to be 25, and when you're 25 you want to stay 25. Unfortunately, it doesn't work that way. Time doesn't wait for us. We are all a quarter century older than we were in 1990 and we're 25 years closer to retirement. If you haven't planned for the future, what are you waiting for?

 

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The Market’s Response to The Fed was Golden

Hoy GrimmInvestors that were battered and bruised by the euro-dollar currency war landed some heavy counter punches after the Fed meeting ended on Wednesday.

 

Janet Yellen faced reports after wrapping up the two-day March Federal Reserve Open Market Committee meeting. As was widely expected, The Fed eliminated the phrase “patient” from their descriptive language on when they will start raising US interest rates.

 

As she fielded questions, the big reaction was aroused by the Fed’s acknowledgement of a string of weak economic data (that some forecasters blamed on winter storms) that is tempering her rush to raise rates. Yellen pointed to the strong dollar as the culprit and explained that just because the Fed removed patient from their stance doesn’t mean they will be impatient.

 

 

The collapse in the dollar was immediate and dramatic:

 

usd-eur 3-18-15 post Fed

 

 

And had a knock on effect on commodities was equally intense (XOP, S&P Oil & Gas Expl & Production ETF):

 

xop 3-18-2015 post fed

 

And gold, (GDXJ, Market Vectors Jr Gold Miners ETF):

 

gld 3-18-2015 post fed

 

Why the huge reaction? The markets interpretation of Yellen’s economic warning is that QE did not make the US economy immune from the weakness sweeping across the rest of the globe. The speculation-driven dollar rally that heated up last August was based on the premise that our economy had enough velocity to pull ahead even if the rest of the world was going in reverse. It is becoming apparent that our economy can’t withstand a global slowdown after all.

In regards to the question about how far the dollar rally will last, we probably have our answer. The question that will be answered in the coming weeks is how fast speculators unwind the short euro/long dollar trade that is getting squeezed hard today.

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Blount Partnership VIP Program Enhances Key Business Connections – and Community Friendships

kevin-painterThere’s nothing quite like being part of a local, close-knit business community. (http://www.blountpartnership.com)

Hoy, our team and I were all reminded of this fact recently at the Blount Partnership’s 95th Anniversary Celebration gala – which brought together members and friends of the Blount County Chamber of Commerce, Economic Development Board and Smoky Mountain Tourism Development Authority to enjoy the fellowship of our collective work that makes Blount County strong.

As last year’s chair of the Blount Partnership’s VIP Program (Volunteers in Progress), I’ve been a firm believer in this “Power Chamber” cadre within the Partnership who help in a concerted way to make amazing things happen economically for our community. The VIP Program (http://www.blountindustry.com/community/our-partners/vip/) serves as a gathering place for businesses that make the extra investment to support our Economic Development Board – which focuses on attracting solid jobs and quality-of-life economic growth to this area.

We enjoy being part of this group for many reasons. There’s great satisfaction in the work that’s undertaken, powered in large part by VIPs. But truthfully, many of these ladies and gentlemen are some of my closest friends . . . not just in business but in life – and that’s what makes it a pleasure to show up!

You can find out more about the Blount Partnership and the VIP Program by calling Tammi Ford, (865) 983-2241 or e-mail: This email address is being protected from spambots. You need JavaScript enabled to view it.. I would love to have the chance to welcome you personally and introduce you around to this group, so drop me a line as well if you plan on attending a future event (This email address is being protected from spambots. You need JavaScript enabled to view it.).

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The Color of Money: Use a Little Spring-Season Inspiration to Keep Your Financial Focus Blooming

kevin-painterThere’s nothing like getting out of the winter doldrums to infuse some extra energy in your step and breathe new life into your outlook for the year.

And of course, there’s no overlooking the symbolic coincidence that the primary hue of the season – from St. Patrick’s Day, the budding vistas emerging across East Tennessee, and even the less inspirational aspect of these months (Tax Day arrives April 15) – is the color of money.

So how are your financial plans and asset management strategies progressing for 2015?  Are your New Year’s financial resolutions holding firm?

If you’re going it alone on these areas, it’s painfully easy to let good intentions remain just that, without definitive action to transition them into results.

We urge our clients to use interactive tools not only to get their plans committed to “paper” but also to remain actively engaged with how their plan is executed day-to-day.

Along the way, it’s important to keep trusted counsel and expertise close at hand – professionals you know well, who have a clear basis for understanding who you are and where you want to go financially to help keep your plan and the process guiding it in a smart direction.

So breathe deeply – and get that spring air energizing a renewed lease on your financial life, with the right tools and people in place to help you make it happen.

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Manufacturing orders are still punk

Hoy GrimmBloomberg  headlines the decline of manufacturing last month. Halfway into the piece we get the meat of the story. The slowdown reduced manufacturing jobs by 5% from January:

The ISM’s U.S. factory employment index declined to 51.4, the lowest since June 2013, from 54.1 the prior month.

You have to go back to last July to record a positive increase in factory orders. In the past 15 years if new orders dropped this much, the economy was in recession:

 

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