SP 500 Earnings Update: Look beyond the FOMC Meeting This Week – Could the Debt Ceiling Be An Issue Again ?

All eyes are on the Fed this week, but I’ll be more interested in what comes after i.e. could we be looking at another government shutdown thanks to the debt ceiling ?

When Fed Governor Dudley gave a speech at the NY Federal Reserve a few weeks ago, the Q&A was carried live by CNBC, and Bill Dudley noted that with the market volatility at that time (I thought his speech was given the last week of August ’15), the upcoming data, in particular the sentiment and jobs data, would be factored into the September 17th, 2015, FOMC monetary policy meeting.

The sentiment data that Dudley referenced has come in weaker-than-expected, and the August ’15 jobs report was thought to be on the light side, except that with revisions, it was probably closer to in-line or neutral in my opinion.

However the unemployment rate was, as of the September 4th report, 5.1%.

That metric has to have the FOMC’s attention.

This week the financial media will be apoplectic and in a frenzy over the September 16th – 17th meeting, with the monetary policy announcement coming this Thursday afternoon.

Jeff Miller, the quality blogger at A Dash of Insight, who writes the “Weighing the Week Ahead” column every week at his own firm, will no doubt have a quality dissection of this week’s pending announcement on his blog, with the usual new edition coming out Sunday morning. Here is last week’s “Weighing the Week Ahead“. Be sure and read the blog every week. Jeff is econ PhD, and knows the data well.

My own opinion is that with no inflation, the FOMC can continue to wait, but personally I’d love to see 25 bp’s. As one pundit said this week, “it is only 25 basis points (bp’s)”.

At some point (and maybe this is an uninformed opinion), the US Financial System has to be weaned off the financial crack of ZIRP (zero interest rate policy) and must learn to ride on two wheels.

By the numbers:

The “forward 4-quarter” estimate fell this week to $123.39, from last week’s $123.51.

The P.E ratio on the forward estimate as of Friday, 9/11, was 16(x).

The PEG ratio is still negative since the y/y growth of the forward estimate is still -1.82%.

If we looked at “core” earnings growth ex-Energy and Ex-Apple, the SP 500’s PEG is comfortably less than 2(x).

The earnings yield on the SP 500 is 6.29%, down from last week’s 6.43%.

Analysis / conclusion:¬†With almost the entire SP 500 having reported Q2 ’15 earnings (497 of the SP 500 companies), there is little gained from looking at Q2 ’15 data, so we turn our attention to companies that will report their August ’15 quarter end, and this week that means Oracle (ORCL) and Fed-Ex (FDX). Wednesday morning, Fed-Ex will give readers perhaps their first insight into the “real China” economy since Fred Smith and FDX have been focused on that country for years. Oracle’s big issue is transitioning to the Cloud. After this week, Nike and Micron will report the following week, and Nike will also give readers another look into China. (Long for clients ORCL, FDX, NKE).

After the FOMC meeting, what I worry about is the renewed fight over the debt ceiling which has been kicked down the road consistently the last few years.

For me personally, one of the reasons ZIRP and monetary policy has been relatively ineffective in igniting robust US economic growth, is partly due to rancorous fiscal policy, and less financial leverage in the financial system thanks to the post-2008 Mortgage Crisis, part of which is due to increased banking regulation. (Bill Reider of BlackRock has been talking about this for years.)

The fact is the US banking system has been “de-risked” the last 7 years, as large banks have shed trading units, and volatile revenue streams for safer businesses (like asset management), and businesses that aren’t capital intensive from a regulatory standpoint.

Trust me, this matters to the US economy. I’ve always felt that the US banking system was like the human heart: it is the primary vehicle for aggregating and distributing credit (blood) to the US economy (human body).

We have a different banking system today than in the 1980’s and 1990’s, which in some way is a positive and in some ways isn’t.

And this isn’t political commentary, just economic.

The SP 500’s range since the sharp August 24th drop (the 1,000 point, Dow 30 opening decline) has been 1,867 to 1,993.

The SP 500 closed Friday, September 11th, at 1,961.

The resolution of this trading range will tell readers much about the market. A close above 1,993 and it will be the first real technical sign the SP 500 is healing itself.

Very little has changed regarding core SP 500 earnings growth: we could see 4% – 7% growth for years, given that the top 2 sectors, Financials and Technology, went through their bear markets from March, 2000 through March, 2009.

Industrial’s in my opinion offer good longer-term value. The dollar and the non-US markets have conspired to make this sector very cheap for longer-term investors in my opinion.

All eyes are on the FOMC this week, but look beyond that.

This week is both an options expiration week and a FOMC meeting week.

If nothing else, hold on for the ride,

 

 

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