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Irwin Kellner
July 27, 2010, 12:01 a.m. EDT · Recommend (8) · Post:
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Plastic surgery and the double-dip
First Take "º
Possible Dow Theory buy signal at Monday's close
By Irwin Kellner, MarketWatch
PORT WASHINGTON, N.Y. (MarketWatch) -- If you want to know where the stock market is headed this year, you need to look through the front window, not the rear.
What you will see out of the rear window is corporate profits. They were pretty good in the second quarter of this year, but this offers little guidance for the balance of 2010.
So far, about one-third of the companies that make up the S&P 500 index /quotes/comstock/21z!i1:in\x (SPX 1,112, -2.88, -0.26%) have reported earnings that were better than expected. They have exceeded expectations by more than 10%.
However, this information is already four months old. It reflects decisions and trends that are even older.
On the flip side, the expectation that taxes will be raised next year might well have induced some firms to pull some of next year's income into this year. While this puts lots of cash into corporate coffers, it will be at the expense of next year's earnings, which will hurt stocks, once investors react to it.
It will also do nothing for companies' willingness to put workers on their payrolls, which is the big problem today.
Understand that profits are not a leading indicator of future economic activity. If anything, they tend to lag behind.
Market trends can change suddenly and unexpectedly. Most business people don't have much of a handle on the economic outlook beyond their own industry -- if they have even that much.
A better statistic to watch is retail sales.
First of all, they make up one-third of the economy. This alone makes them very important. For many firms, retail sales represent where the rubber meets the road.
Retail sales are not a leading indicator, but they do tell you what's happening now and thus what trends will affect corporate results in the future.
What has been happening to retail sales, you might ask? They fell in May and June, seasonally adjusted, after seven month-on-month increases.
This, no doubt, has left many wholesalers and manufacturers with an unanticipated pile-up of unsold goods. As you might imagine, this development will affect business decisions and profits during the current quarter, as well as further out.
Investors are aware that consumers are not opening their wallets. That is why stock prices have not changed much, on balance, since the middle of June, when Wall Street first began focusing in on the second quarter's results.
Indeed, according to one survey, investors are downright bearish on the market -- more bearish than they have been since 1987. And you remember what happened in that year.
It is not too difficult to understand such bearishness. For one thing, there has been lots of talk lately about the economy falling into a double-dip recession. (See my last three columns.) Unemployment remains high, and consumer moods are dour.
For another thing, the advent of August means that we are only a month away from the two toughest months of the year for stocks -- September and October. This is making investors nervous as well.
With this much bearishness trolling the Street of Dreams, if you think investors are going to wait until September to pull the plug -- think again.
Irwin Kellner is MarketWatch's chief economist.
Irwin Kellner, MarketWatch's chief economist since 1998, writes a weekly column on the economy and the financial markets. He has been a leading economist for more than 40 years and previously served as chief economist for North Fork Bank, Chase, Chemical and Manufacturers Hanover. Widely quoted by the media in the U.S. and abroad, Kellner regularly addresses groups of business people and community leaders and appears regularly on Cablevision's News 12 Long Island.
That tantalizing possibility comes on the interpretation of none other than Richard Russell, editor of Dow Theory Letters.
4:52 p.m. July 26, 2010 | Comments: 51
- DRC | 11:09 p.m. July 26, 2010
"Irwin Kellner: Earnings offer little clue to the future http://bit.ly/bQM8QD" 11:37 p.m. EDT, July 26, 2010 from MktwKellner
"Irwin Kellner: Plastic surgery and the double-dip http://bit.ly/duZQ5o" 11:42 p.m. EDT, July 19, 2010 from MktwKellner
"Irwin Kellner: Good reasons to extend jobless benefits http://bit.ly/da4X2b" 11:50 p.m. EDT, July 12, 2010 from MktwKellner
"Irwin Kellner: Perched between growth and recession http://bit.ly/9Ox2hE" 11:56 p.m. EDT, July 5, 2010 from MktwKellner
"Irwin Kellner: Some people never learn, including G-20 http://bit.ly/9dBq0A" 11:54 p.m. EDT, June 28, 2010 from MktwKellner
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