The Week Ahead

This week, the Federal Reserve holds a tribal council meeting, and will almost certainly raise interest rates for the 12th straight time. This will bring the Fed funds rate up to 4.0%. They’re still not done. Right now, the futures market is telling us that the Fed has two more rate hikes to go.
We’re now entering the tail-end of earnings season. So far, about 70% of companies have beaten expectations, but this is where things get confusing. You see, you’re expected to beat expectations; 70% is the historical average. However. Companies haven’t beaten expectations by the usual expectation (about 2% instead of 3%). That wasn’t expected. We can now expect expectations to change, perhaps more than expected.
Part of the part of problem is that some of the sucky big-caps have sucked more than usual. General Motors (GM), for example, reminded everyone that they suck, which we knew, but they also took their suckiness to a whole new level. They lost $1.92 a share, blowing past Wall Street’s forecast of an 87 cent a share. The stock is now trading roughly on par with the ebola virus.
Discounting for large-cap stocks like GM and Allstate (ALL), the earnings haven’t been too bad. The problem is that the forecasts for next quarter have been weak. This week, we’ll more earnings reports, including stocks like Valero Energy (VLO), Procter & Gamble (PG), Kellogg (K) and Time Warner (TWX).
Outside our shores, there’s an interesting development in Europe. The Europeans might actually raise interest rates. The eurozone hasn’t raised rates in five years. This is a direct consequence of our economy’s strength. The euro has been slipping against the dollar, and Europe’s Greenspan, Jean-Claude Trichet, has pledged to pounce (or hop) on any sign of inflation.
China recently said that its trade surplus will balloon to $90 billion this year, up from $32 billion last year. Obviously, the U.S. is at the other end of that surplus. Wal-Mart (WMT) is currently China’s eighth-largest trading partner. But for all the talk we hear about China and trade, thanks to oil, Russia and Saudi Arabia have trade deficits that are almost as large. Plus, the Saudis have their currency pegged to the dollar. I think it makes sense for the oil producers to diversify into another currencies. OPEC’s president recently said that oil prices are approaching an “acceptable” level. Earlier today, I filled up my tank for $2.51 a gallon. That’s the lowest I’ve seen in these here parts is a long time.
We’re also seeing the first clear signs of a slowdown in the housing market. (Ever notice how the media loves to call the housing market a “bubble,” but that never applies to oil?) New home sales were sluggish and backlogs seem to be growing. And inventories of unsold homes increased as well. The level of unsold homes is the highest in nine years. Plus, median new home prices dropped 5.7% last month, the fourth drop in the last five months. The homebuilding stocks have been getting creamed lately. This could be just the beginning.

Posted by on October 30th, 2005 at 5:11 pm

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