The economic calendar is moderate. Fed Heads are out in force. More significant is the start of “earnings season.” There is always speculation about earnings, but this time is special. I expect a focus on the question:

Will earnings spark a break in the trading range for stocks?

Prior Theme Recap

In my last WTWA I predicted a focus on the parade of Fed speakers, with special attention to their apparent economic optimism. That was indeed a recurring subject, highlighted by Thursday’s discussion among the current Fed Chair and three predecessors. One of the “Fast Money” participants even used my mixed metaphor (Fed painted itself into a box). Unlike me, he was not smiling when he said it! Doug Short notes that it was the worst week in the last nine, and also that Q1 GDP estimates are now barely positive. See his discussion and context as well as his excellent weekly chart. (With the ever-increasing effects from foreign markets, you should also add Doug’s World Markets Weekend Update to your reading list).

 

Doug’s update also provides multi-year context. See his World Markets Weekend Update for more excellent charts and analysis.

We would all like to know the direction of the market in advance. Good luck with that! Second best is planning what to look for and how to react. That is the purpose of considering possible themes for the week ahead. You can make your own predictions in the comments.

This Week’s Theme

The economic calendar is moderate. Once again, the Fed participants will be out in force. More importantly, earnings reports begin with Alcoa (AA) on Monday and the big banks late in the week. This season might be the most important in recent years. Economic reports reflect only modest growth. The Q1 GDP estimate is plunging.

For equity investors, nothing is more important than earnings and future earnings potential. With stocks in a recent trading range, many wonder whether there is a potential to break out – and in which direction! Options expiration may provide fuel for an explosive move either way. I expect many to be asking:

Can earnings news move stocks out of the trading range?

Background

The earnings story is crucial for stocks. Unlike many who focus on backward or concurrent data, FactSet shows why earnings expectations are important.

 

To these results one must also add the effect of the P/E multiple.

Viewpoints

The basic themes, moving from bearish to bullish, are as follows:

  • The earnings recession is upon us. Expect an over-valued market to crash.
  • Earnings reports are based completely on financial engineering – ignoring “one-time” charges and expenses for employee options.
  • Earnings reports do not reflect organic growth. Stock buy-backs are but one element of deception.
  • Earnings reports will beat “expectations” but only because these have been maneuvered lower. A lower multiple might be in store.
  • Earnings are a poor indicator. Look instead to revenue, where few companies are doing better.
  • Look carefully for excuses and a weak outlook in the conference calls.
  • Some of the earnings negatives, especially a strong dollar, are less relevant. This will help international companies.

    • These viewpoints have all been vigorously expressed in recent days, but my sense is that short-term traders are mostly negative on earnings.

    As always, I have my own opinion in the conclusion. But first, let us do our regular update of the last week’s news and data. Readers, especially those new to this series, will benefit from reading the background information.

    Last Week’s Data

    Each week I break down events into good and bad. Often there is an “ugly” and on rare occasion something really good. My working definition of “good” has two components:

  • The news is market-friendly. Our personal policy preferences are not relevant for this test. And especially – no politics.
  • It is better than expectations.

    • The Good

    There was a little good news in a light week for data.

  • Chair Yellen maintained the dovish tone, but still expressed confidence in the economy. This is consistent with the Fed minutes. Our go-to expert, Tim Duy, agrees.
  • ISM non-manufacturing remained positive and also beat expectations.
  • Jobless claims down ticked to 267K, continuing a string of strong results. (Calculated Risk)

    •  

    The Bad

    Some of the news was negative.

  • Factory orders fell 1.7%, lower than the prior month, but in line with forecasts.
  • The JOLTs report was viewed negatively by many since job openings were slightly lower. I am more interested in the quit rate, which shows job conditions by measuring voluntary departures. Here is the balanced analysis from New Deal Democrat. Also check out this chart:

    •  

     

    The Ugly

    The Panama Papers. The news of how the rich and powerful escape taxation has many dimensions. Expect it to remain in the news. Here are a few current themes:

    The most popular tax havens, from Felix Richter via GEI:

     

    Banks have a “tail risk” because prosecutors may pounce. (ValueWalk)

    This is a big story in the U.S. (Value Walk)

    And dismiss the conspiracy theory about the Russians being responsible. (Brookings)

    I am leaving out the effects on Presidential politics. More to come, but generally not good.

    An Ugly Update

    In January I cited the Flint water problem as evidence of infrastructure neglect, suggesting that it was something to monitor. This week we have an update from VOX. I cannot do justice to the interactive chart in my static format. Please check it out to see the threat in your own community. I was surprised at the variation even with small geographical changes. Here is the basic map:

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