And these are only the economic indicators - beware of the earnings

Monday, April 18, 2005

After Wall Street fell out of the bed last week (as foretold), first an easy forecast: Asian and European stock markets have no reason not to follow the decline of the sickly mother of all bourses, given the weak economies in the Euro area. Germany and France are most likely to be the leaders on the downside since their unemployment figures of 12 and 10 percent respectively don't bode well for an upturn in consumer spending anywhere soon.
A look at the economic calendar for the coming week and the associated expectations that all indicators will point to a worsening of the economic picture do not raise much hopes for a significant slowdown of the demise of Wall Street.
Alas, since forecasts on the general economic indicators all point to a negative trend, they might not wreak as much havoc as last Fridays NY Empire State index did, when it came in way below estimates. Economists now should have shifted to much more cautious forecasts, thereby even undershooting the actual outcome, except for producer and consumer prices, due on Tuesday and Wednesday.
I am not swaying away from my opinion that official consumer prices still understate real inflation significantly because of factors explained in this post. The same applies to producer prices, as oil is more than just the energy needed to produce things and to transport them, but it actually is the product itself in most cases. Just look at the mouse under your palm and the veneer of the desk your arm is resting on and you will understand what I mean. And don't let yourself fool from CPI "ex food & energy", when exactly these two "ex"-items are the ones on which we spend a considerable part of our income and which are the most inelastic items in our spending patterns. The US is most likely to become a net importer of food this year so there are further increases to be expected in the future.
So far, so bad about the general economy. Now lets turn to the earnings numbers to be released this week. Sticking to the Dow components only, EPS estimates for 3M are seen up to 1,01 $ from 90 cents on Monday. On Tuesday, Coke (the beverage company) should report EPS of 43 cents, GM is seen at minus 1.49 (plus 2.25) $ a share - when will it file for chapter 11 ? -, Intel at 31 (26) cents, Johnson & Johnson should have made 92 (83) cents and Pfizer is seen at 53 (52) cents, all according to data from Pfizer could be the bad surprise, given the problems the company is looking at a wide range of problems (Bextra, lots of marketing, declining research spending). After Citigroup's good numbers, Merrill Lynch could come in higher than the estimate of 1.22 $ too. But that's no reason for a rally altogether.
On Wednesday nicotine provider Altria's EPS are seen in a range from 1.19 to 1.26 $. Caterpillar is seen stronger with 1.34 (1.16) $ EPS for the last quarter. That's not in line with recent soft durable goods orders. Honeywell, estimated at 40 (34) cents could fare the same fate as IBM last week. JP Morgan Chase's estimates of 69 cents lie well below the comparison period, when it managed to make 92 cents a share. SBC Comunications is associated with a drop to 33 (37 ) cents and estimates of 1.25 (1.14) $ a share for United Technologies seem to be out of touch with the dire realities in the technology sector.
50 year old McDonalds might meet the estimate target of 43 (40) cents on Thursday, assuming that the need to save by eating cheaper worldwide because of stagnant wages drives people from healthy food back to "supersize me's". The estimates for Merck, at 58 (73) cents seem to have discounted already some of the problems of the drugmaker, who had to pull its painkiller Vioxx off the shelf.
My bets lie with a further decline of the Dow, given the cloudy outlook. While there are few possibilities for a surprise to the upside, don't forget that oil prices could reverse their recent fall as they depend not only on US consumption of the black gold. The far east might take advantage of the current 50 $ range and fill up its stock, thereby driving prices up again. OPEC has not taken back its forecast of 60 to 80 $ dollar oil in the next 20 months.


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