October 03, 2011
The challenge of October begins with the week ahead which is the beginning of the fourth quarter begins, historically the best of a year -- if October cooperates.
The challenge of October will be dominated by three themes:
• Worry about Greece and Europe.
• Worry about China.
• Worry about the domestic economy.
Its markets are closed for the week. But the price of ”copper”, which is an important economic indicator, tumbled badly this past week because of worrisome economic signals. So the challenge of October, surrounding China, starts with talks about property markets starting to stumble in some markets. Also, manufacturing has declined for three straight months.
• The European worry will be more focused.
Europe provides many challenges for October, beginning with the 17-nation eurozone, slowly approving an aid package for Greece that will keep the country functioning for a little while. There is a widespread belief that Greece will default on its debt. The question is whether the default is expected and markets can cope. Or if it occurs over a weekend, will the markets panic on the Monday?
At the same time, European economies are struggling. Germany has seen little growth, and the European Central Bank's governing board meets Thursday to decide whether to cut interest rates. The markets have been betting on a rate cut.
It will be a crucial time for Greece, which must show it has taken measures to qualify for the next tranche of IMF and EU funding by mid-month.
Another challenge of October is seen where markets are looking to European leaders to show commitment to some bigger plan to stop the crisis from spreading to other countries and deeper into the banking sector.
• The domestic economy faces questions every day.
But this challenge of October may surprise investors in the fact that the domestic economy may be a bit more robust than many believe!
The September jobs report is the big item to watch for with U.S. data in the coming week, but there is also testimony from Fed Chairman Ben Bernanke, who appears before the Congressional Joint Economic Committee to discuss the economy and recent monetary policy at 10 a.m. Tuesday. "If we get weak U.S. employment numbers, that will just remind people how weak and bleak the outlook is for the major economies," said Brian Dolan of Forex.com.
The consensus is for 50,000 jobs in September, after August's jobs report showed zero new jobs and an unemployment rate of 9.1 percent.
"That's the standout. The rest of the economic data stream has been largely ignored," said Art Hogan of Lazard Capital Partners. "The big question everyone wants to know is what the guidance looks like for 2012. Are your estimates too exuberant? They've got to be coming down a bit, if in fact, the economy is slowing."
Earnings Growth - the Challenge of October
Another challenge of October is the fourth quarter company earnings reports. Investors are worried U.S. earnings growth may finally fall back to earth as turmoil in Europe and signs of a less robust Chinese economy hurt foreign support.
The euro zone's debt crisis and weakness in China have fueled investor concern that the global economy could tip back into recession, possibly dampening U.S. earnings growth at a time when the U.S. economy is still struggling to gain ground.
Overseas sales have helped U.S. companies beat earnings expectations in the last couple of years, with foreign sales totaling 30 percent on average for Standard & Poor's 500 companies.
"If the euro region is crumbling, that's going to have a tremendous negative impact" on companies like McDonald's (MCD.N), said Todd Schoenberger, managing director at LandColt Trading in Wilmington, Delaware.
"I'm not expecting a big earnings quarter," he said. "We've been getting the clues already."
The most recent company to trouble investors about the earnings outlook is Ingersoll Rand Plc ( IR.N), whose shares tumbled 12.1 percent to $28.09 on Friday after the industrial conglomerate cut its third-quarter and full-year earnings forecast to below market estimates.
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