What Does Earnings Season Tell Us Thus Far?

Bluntly: Look out below.

But not necessarily right at this instant.

There are firms that are reacting well to earnings.  Intel and IBM to name two.  Then there are those that are doing “not much of anything”, like GE.

Then there’s Google, which is getting pounded today after missing on the top line, along with a few others.

When I look at the tenor of what’s been announced thus far, and the characteristics in general, what I keep feeling like is the early part of 2008.  You know how it was — we had Bear Stearns, there were rumblings of various other problems, but earnings looked mostly ok — not great, but sorta ok.  Some top-line misses were bad, but the catastrophes hadn’t happened yet.

They came though.

We come into and through this earnings season with what should be a cyclical peak in the cycle.  So far the results seem to point this way too, which tends to confirm.  Banks are mixed overall although not disastrous.

The VIX, today, is putting in a pretty solid sell setup.  This doesn’t mean that a big decline is imminent, but it is a cautionary flag.  Assuming it closes where it is now (and it looks like it will) then all we need is a modest sell-off to trigger the signal.  The challenge comes from the potential for that signal to arrive along with the selloff that gives you no entry.

But I don’t think we’ll get that, and am not betting on it.  Instead, I think we’re going to play “muddle muddle” for a bit longer.  Maybe another month, or maybe two.  Maybe — just maybe — right up until next earnings season, when we’ll have a confluence of problems:

  • Greece will have either actually defaulted or be about to.  I don’t think their “deal” will happen.  But even if it does, the better question is does it matter?  There the answer is clearly no, because if you get a deal the precedent is still set — threaten and bludgeon and you can force losses.  Guess who’s next?  Oh, Hungary, Ireland, Portugal, Italy.  Any of these and the apple cart doesn’t tip over, it blows up from inside.
  • 1Q 2012 earnings will be coming and the warnings should be in full force by then.  I expect the confessional will open about end of February and I further expect a line of parish members out the door waiting for the pretty red light to go off and take their turn.
  • The US Debt ceiling — this time without a quick fix available — will be in view.  Yeah, we won’t hit it until the summer sometime if my calculations are correct.  They can play games until the fall.  But note that what Obama was trying to do — desperately so — was prevent this from happening before the election.  He is going to lose that bet.  You heard me say a similar thing about the clock running out in 2008 before the election (remember all those who said there was no way we’d crash before it for the same reason) and those who believed that were proved wrong.  You’re going to be wrong on this one again.

Any of those would be a problem.  All of them — especially if Europe blows up into a hard wall with the US Debt ceiling — is going to be very interesting and not in a good sort of way.

This has been a very nice run from Christmas until now.  I’ve got nothing to complain about with my own performance and I’ve been rather loudly saying that I didn’t think it was going to go to hell just yet — as many have believed and projected.

But if you believe this means the market is safe and we’re going to the moon just remember how well that worked out in 2008.

We’re in far worse shape on a macro level with far fewer policy moves available to the government and Fed now than we were then, and the risk of an “accident” is, in my opinion, rising rapidly toward near-certainty.

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