Sunday, January 13, 2013

Let's get it started

This item is on my New Year's resolutions list: "Create a blog to dig into some of the investment related topics I come across on a daily basis on and off the job". So let's get it started!

About this blog

I am a financial adviser managing portfolios of diversified assets for wealthy people and I spend my days reading about and discussing macroeconomics and financial markets matters. This is more than just a duty, it's also something I like very much. It keeps me connected to the world and the big political, social, technological and cultural trends that make it moving.

Sometimes, however, I feel overwhelmed by the amount of facts, data and stories that we are thrown at every day, hour, minute, second. Things are going so quickly that I often lose track of items I would like to take some time to take a closer look at, analyse and reflect on.

But this year it will be different. I will have a blog. It will be the single place where I will log everything I want to remember, the tiny corner of the web where I will drill down the stories I find noteworthy. And if other people find it interesting, they will even able to read along. 

The fiscal cliff deal: does not solve the long term debt problem in the US

"The deal cuts $737 billion from deficits over the coming decade, primarily through $618 billion of higher taxes on the rich and the resulting interest savings. But that barely dents the $10 trillion in deficits America was on track to accumulate in that time, roughly 5% of GDP on current policies, according to the Congressional Budget Office." The Economist 

We did not begin 2013 by falling of the Fiscal Cliff. That was the consensus, but the news still came as a relief. The picturesque metaphor, used by Fed Chairman Ben Bernanke in a February 2012 speech and overused since then, describes the USD 600bn free-fall in GDP that would have automatically caused a recession in the US on the 1st of January without political intervention. This however does not solve the long term debt problem in the US as the aforementioned Economist story details. Full article here.

Economics 101

"The economy-as-family metaphor is familiar, emotionally intuitive—and incorrect. It’s a fallacy of composition: What’s true for the part is not necessarily true for the whole. While a single family can get its finances back on track by spending less than it earns, it’s impossible for everyone to do that simultaneously. When the plumber skips a haircut, the barber can’t afford to have his drains cleaned."  Bloomberg Businessweek  

Short and simple. Full article here.

Lowered earnings expectation should help

"Q4 Earnings growth forecast at 2.4% only now vs. 9.2% growth forecast at start of quarter; should be ok to beat consensus." Company Research

This is comes from an analyst from within my bank. I receive dozens of such one-liners every day at work. Often, these are linked to extensive reports where one can get a bigger picture on the topic and analyse the data used to come to those striking assessments. This time it was not the case so let's do our homework.

First, the earnings growth we talk about here is the one we get by aggregating the earnings evolution of all companies belonging to the S&P 500, the US stocks market reference. Companies earnings, and the rate at which they grow over time, is one of the factor that influences the most stocks valuation and hence their price. The bigger it is, the more people will be willing to pay to  get a share of those growing revenues through owning stocks.

What is said here is that expectations investors had about Q4 earnings growth at the start of November was around 4x bigger than what they anticipate now. We are in the Q4 earnings release period just right now. Lowered expectations means that people will not fall of their chair if the figure doesn't come in the high single digit area. It is good for markets when investors do not all fall of their chair at the same time.

I have found an article giving more info about this on CNN Money here together with a graph that shows actual past quarters revenue and earnings growth rates and current estimates for Q4. The difference between Q2 2012 earnings and revenue growth figures is striking (to be checked). 

According to CNN, the lowered expectations have much to do with the numerous companies that issued gloomier outlook in their guidance during the quarter, especially in the tech sector.

I am a financial adviser working for a private bank in Belgium. This is my personal weblog. The opinions expressed here represent my own and not those of my employer. 

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