How Likely Is a Rally in 2012?

10/28/2011 6:30 am EST

Focus: MARKETS

Jim Jubak

Founder and Editor, JubakPicks.com

The big macro events are clouding the picture, says MoneyShow’s Jim Jubak, who delves into earnings reports and companies’ fourth-quarter outlooks and finds them encouraging.

One of the frustrating things about this market is that it’s so driven by macro issues. You know, is Greece going to default? Is the Euro crisis going to be solved? Is China heading for a hard landing or a soft landing?

It’s almost as if with all these big picture things going on that fundamentals don’t count. But think about the fact that at some point, some of these big things will be resolved one way or another and we’ll start to pay attention to fundamentals. [Of course, the Euro crisis did take steps to resolution, arguably, but this was made just before the dramatic headlines last night—Editor.]

So how do fundamentals look like they’re coming out? We’re in the middle of the third-quarter earnings season. We’re starting to get guidance for the fourth quarter of the year and into 2012, what’s the picture look like?

Well, it’s actually not as bad as you might expect, given that the US is supposed to be headed toward a recession.

We’re seeing companies basically say, "Well, we’re seeing some customers get a little sort of antsy about placing new orders, but it’s really not any worse than it’s been." This is coming from somebody like VMWare (VMW), which makes virtualization software for big server farms.

Or we’re getting Intel (INTC) coming out and saying, "Hey, you know, business looks pretty good. We’re seeing PC business at 4% growth if we’re lucky, but we’ve made efforts to move into tablets and other things and those are going pretty well," so Intel beat.

We’ve seen Apple (AAPL) deliver what the market decided was disappointing earnings, basically because people decided they would wait and not buy iPhone 4s in September and wait for the iPhone 4S in October. And so you had a miss in terms of the number of iPhones sold, but they sold in October…

…And then Apple then went out and did something that Apple never does: it raised guidance. Apple is always trying to rein in expectations. This time, they actually said the fourth quarter looks like it’s going to be better than we expected. So if you’re looking at technology, you’re seeing good news.

If you’re looking at banks, on the fundamentals, you’re seeing a couple of problems really crop up. Loan growth is starting to pick up…that’s good. Trading and other banking revenue is down, but that was expected.

The unexpected thing is that we’re starting to see a couple of banks—JPMorgan (JPM) was one of them and Citigroup (C) was another—say that they have to put aside a little more money (or they’re thinking about putting a little more money aside) for delinquencies and defaults, because they’re starting to see those rise again.

In other words, instead of month after month seeing a downward trend in the number of bad mortgages, we’re starting to see a little uptick again. This would not be good news.

Bank earnings have looked really great because companies have taken stuff out and put them into reserves and out of reserves. Now, if they have to reverse that, the sector is going to look stressed.

The industrial sector so far is kind of a mixed bag. Depending on how the company feels about China, and how you feel about how the company feels about China, China is clearly slower than it was in 2010. It looks like it’s headed towards some kind of reasonable growth bottom around 8% in 2012.

Companies that are picking up share are saying "Hey, you know, these are not too terrible times." Companies that are losing share are saying "Well, these are terrible times." But that’s exactly what you expect no matter what the macro picture looked like.

So if you’re trying to think about what’s going to happen in 2012, you can say, in all probability, the China macro issue will go off the radar screen one way or another. The Euro debt situation will probably get kicked down the road into 2013, the US budget hoo-ha would probably get kicked down the road until after the election.

So it looks like 2012 might actually be a year when fundamentals count. And therefore, it’s probably a good idea to pay attention to what companies are telling you about fundamentals right now, during earnings season.

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