Market Overview

The Most Important Message Investors Need For Earnings Season

The Most Important Message Investors Need For Earnings Season

Oil didn't go down. Bank stocks in Greece didn't crash. The dollar didn't make a new high. And rates didn't put in a new low.

As a result, traders and their computers in the U.S. had the green light to hit the buy button for much of the day on Thursday.

Yep, that's what this choppy, back-and-forth market has come to. If the key drivers are up, stocks move up. And if not, well, the algos chase their tails to the downside until the closing bell rings.

If you are able to trade the stock market on a millisecond basis, as the big banks such as Goldman Sachs Group Inc (NYSE: GS), Morgan Stanley (NYSE: MS), JPMorgan Chase & Co. (NYSE: JPM), etc. and hedge funds such as Citadel do, then this is what the stock market game is all about. However, if your time frame extends beyond lunch, the game is a bit more complicated at the present time.

For investors - you know, the folks that own positions for periods measured in weeks, months or years instead of milliseconds - their view on the stock market's fundamentals tends to play an important role in their decision making. As such, the outlook for the economy, earnings, inflation, and interest rates tends to be the primary focus of this crowd.

Up until December, the outlook for most of the market fundamentals was pretty rosy. The economy was kicking into high gear, earnings were at record highs, inflation was nowhere to be found (which for the majority of my 35 year career has been a good thing), and rates were likely to stay low from an historical perspective. Therefore, the rebound from the September/October pullback pushed the S&P 500 to new all-time highs. And frankly, this made sense.

Muddy Waters

However, since the beginning of December the market's waters have been muddied as the economic data has come in on the punk side more often than not, the oil crash looks like it may be starting to have an impact, and folks in high places are becoming very worried about inflation - err, the lack thereof.

The question at this time is if any of the worries are real. And one of the best ways to confirm or deny such concerns is to listen to the message from companies when they issue their earnings reports.

And, the bottom line is that based on the most recent reports, some pretty big names are starting to fret about the impact from crude's rude move, the dollar's strength, and a slowdown in global growth.

Related Link: Why Tape Action Is Worrisome For Those Attempting To Manage Risk

What Companies Are Saying Now

Let's go to the video tape and see what some of the big industrial names are saying about the issues of oil, the dollar, and global growth...

Caterpillar Inc. (NYSE: CAT) kicked things off by saying in no uncertain terms that there are headwinds from oil, currency exchange, and global growth. Here are some of the comments from management from January 27:

  • "Without a doubt, the impact of substantially lower oil and gas prices is the most significant reason we're expecting lower sales in 2015...With oil this low, we expect substantial reductions in producers' capex and that it will be negative for our sales."
  • "Year-over-year, we expect a stronger dollar to be a sales headwind, commodity prices in mining have also taken another leg down over the past few months."
  • "US [sales] still positive, but probably not quite as positive as we thought before. Almost every place else in the world, to some degree, negative."

General Electric Company (NYSE: GE) said the following on January 23:

  • "In December, we also outlined our expectations for Oil & Gas with a backdrop of oil at $60 to $65 a barrel. Since then, prices have fallen further. When we planned the year, we relied on multiple scenarios including a further fall in oil prices... The [Oil & Gas business] team is reducing employment, executing restructuring and simplification projects to materially reduce their cost structure, all predicated on a tougher scenario."

3M Co (NYSE: MMM) also sounded the alarm about the rising dollar in its January 27 report:

  • "We now estimate FX to reduce sales by 4% to 5% versus previous guidance of minus 2% to minus 3%."

Crane Co. (NYSE: CR) voiced concerns on January 27 about the global macro outlook by saying:

  • "While the long-term outlook remains attractive, we believe that current macro uncertainty from the decline in oil prices, weakness in Europe, currency volatility and geopolitical risks have delayed business investments across our process valve verticals."

Illinois Tool Works Inc. (NYSE: ITW) talked about the dollar's impact of earnings on January 27:

  • "We gave everybody a rough rule of thumb that said a $0.01 change in the euro versus dollar rate equates to $0.01 of EPS on an annualized basis. And obviously, since then, the euro has weakened versus the dollar to the tune of about $0.10 and so that's the $0.25 of headwind that we talked about now versus the $0.15 in December. And obviously, all currencies are moving."

Rockwell Automation (NYSE: ROK) referenced headwinds from oil in its report from January 28...

  • "We're reducing full year sales guidance, primarily to reflect a much more significant headwind from currency...We're dropping the high end of the sales range primarily due to the very significant decline in oil prices, but also because we are continuing to see forecasts for IP and GDP be revised downward in most regions..."

Parker-Hannifin Corporation (NYSE: PH) mentioned issues with currency conversion and China on January 27:

  • "[Reduction in International guidance] is almost – almost all of it is currency. We are seeing some organic weakness in China in the construction business going forward, and that's impacting the numbers a little bit, and also internationally in Oil & Gas."

Dover Corp (NYSE: DOV) was all about oil in its comments from January 27:

  • "...the big change to our forecast is in Energy, where the rapid decline in oil prices is significantly impacting energy CapEx spending and U.S. rig counts."

The Takeaway

So, there you have it. Some of the biggest industrial names are saying that the rise in the dollar, the crash in oil, and the economic slowdown in places like China and Europe are starting to impact their bottom lines - and will likely continue to do so.

Related Link: Is It Time To Worry About Growth In The U.S.?

From a big picture point of view, the key takeaway is that a trend is starting to develop. But, since things don't matter on Wall Street until they do (and then they matter a lot), the question of the day is if this trend will become a focal point and cause traders to enter a "price discovery" (trader-speak for heavy selling) phase in the overall market.

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