Expect Stormy Q3 Corporate Earnings Season as Washington’s Maelstrom Proceeds
Companies / Corporate Earnings Oct 08, 2013 - 10:36 AM GMTBy: PhilStockWorld
“I am always doing that which I can not do, in order that I may learn how to do it.” -- Pablo Picasso
So now the fun really begins.
That is, if you consider fun the sort of thing that happens when Wall Street has way too much information to process in a very short period of time.
Regardless, a bunch of information is precisely what investors will get this upcoming week, as the new earnings season is about to be unfurled.
In addition, another round of “government shutdown noise,” replete with the requisite alarming budgetary projections will no doubt be on full display in the nation’s capital.
The thing is, should an early, negative trend in earnings emerge, the impact on Wall Street could be amplified, as investor concerns regarding the economy will once again be seen through the prism of a Congress that seems intent on drumming up angst among its constituents, no matter the cost or collateral damage.
Though the Q3 earnings season really doesn’t get into full swing until next week, when a slew of S&P 500 companies are scheduled to report, too many missed earnings this week might be enough to provide investors with a reason to pull back from equities, particularly if the shutdown continues.
In fact, the downtrend may already be primed, as both the Dow Jones Industrial Average (DJIA) and the S&P 500 Index (SPX) lost ground for the second straight week, with the Dow shedding 1.2% and the SPX falling 0.1% over the course of last week.
Meanwhile, the Nasdaq Composite (COMP) was up 1.8% during that same period. It was the fifth week in a row that it ended in the black, and is now entering into the rarified atmosphere of the dot-com bubble days.
So what can investors look forward to? Well, a key date to keep in mind is October 17. That is the debt ceiling deadline, which, for those who are trying to keep score, is considered significantly more important than the current shutdown debacle.
Why?
If the $16.7 trillion borrowing cap isn’t raised, the government will go into default.
Sadly, default, with its accompanying lowered credit rating and subsequent higher interest rates for the government, seems to be the only thing that really nabs the attention of Congress. It is that date, therefore, that is generally considered to be the absolute line in the sand.
If a deal doesn’t get made to raise the debt ceiling by then, whoever is shorting the market at that point will be the only ones who are cheering. In the meantime, it is certainly possible, based on previous shutdown history that the current shutdown lasts right up until that October 17th deadline.
What the Periscope Sees
So what’s an investor to do?
Well, staying the course is always an option, and one can only hope that the looming deadline will cause Congress to actually raise the darn debt ceiling. Obviously, it would be the prudent and intelligent thing to do, considering the consequences of failing to do so.
Naturally, being the current version of Congress, the words prudent and intelligent are often omitted in conversations referencing those elected officials presently residing in the House and Senate.
Still, one can only hope that common sense prevails, and investors certainly would be happy to see grown-ups take charge up on the Hill, if indeed enough of them can be found.
However, for those investors who may have attained a certain level of understandable cynicism, a little extra portfolio hedging would not be uncalled for.
The act of injecting the asset class of volatility into one’s portfolio in these volatile times is rising in popularity, as evidenced by the growth of VIX-based derivatives such as VXX (S&P 500 VIX Short-Term Futures ETN), which tracks the S&P 500 VIX Short-Term Futures Index Total Return.
So, if you lack confidence in the legislative outcome, or how it might act in tandem with the new earnings season, by all means, add some volatility insurance.
On the other hand, if you feel as if you have seen this movie before, the one where the protagonists and antagonists huff and puff at each other until the encroaching deadline, you might want to position yourself with an ETF that would benefit from a “buy the dip” moment.
One ETF that certainly has proven robust so far this year is FDN (First Trust Dow Jones Internet Index Fund), up 39.62% year-to-date as of the first week of October.
FDN has tended to prove a good equity to buy when the market has corrected, and has substantially outperformed the key indices this year.
Also, though the Nasdaq is close to pre-bubble highs, the constituents of FDN exhibit more solid fundamentals than many of the high fliers circa 2000.
Here is a list of FDN’s top ten holdings by percent which, taken together, represent slightly more than 50% of FDN’s total holdings as of the first week of July 2013:
1-Google (GOOG): 9.94%
2-Amazon (AMZN): 7.09%
3-eBay (EBAY): 6.15%
4-Priceline (PCLN): 5.72%
5-Yahoo (YHOO): 4.69%
6-Salesforce (CRM): 3.91%
7-Netflix (NFLX): 3.69%
8-Akami (AKAM): 3.09%
9-Linkedin (LNKD): 3.04%
10-Facebook (FB): 3.01%
ETF Periscope
Full disclosure: The author does not personally hold any of the ETFs mentioned in this week’s “What the Periscope Sees.”
Disclaimer: This newsletter is published solely for informational purposes and is not to be construed as advice or a recommendation to specific individuals. Individuals should take into account their personal financial circumstances in acting on any rankings or stock selections provided by Sabrient. Sabrient makes no representations that the techniques used in its rankings or selections will result in or guarantee profits in trading. Trading involves risk, including possible los
- Phil
Philip R. Davis is a founder of Phil's Stock World (www.philstockworld.com), a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders. Mr. Davis is a serial entrepreneur, having founded software company Accu-Title, a real estate title insurance software solution, and is also the President of the Delphi Consulting Corp., an M&A consulting firm that helps large and small companies obtain funding and close deals. He was also the founder of Accu-Search, a property data corporation that was sold to DataTrace in 2004 and Personality Plus, a precursor to eHarmony.com. Phil was a former editor of a UMass/Amherst humor magazine and it shows in his writing -- which is filled with colorful commentary along with very specific ideas on stock option purchases (Phil rarely holds actual stocks). Visit: Phil's Stock World (www.philstockworld.com)
© 2013 Copyright PhilStockWorld - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.
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