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All Eyes on Fed MoneyNews
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Entering its fourth year, the bull market is showing signs of aging, says The Wall Street Journal. The Journal reports that Wall Street analysts are cutting their profit expectations this year. "At the start of January," reports the Journal, "analysts, on average, predicted first-quarter profits would grow 12.6% at companies in the Standard & Poor's 500-stock index. By Friday, that forecast had been cut to 11%." While 11% profit growth is nothing to sneeze at, the telling sign is that analysts are cutting their forecasts heading into reporting season. In the early part of the bull market, beginning in 2003, analysts regularly raised guidance, and companies still beat their expectations.
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Now, as the bull market matures, the analysts drop forecasts and companies usually meet or beat those forecasts by just a few percentage points - generally barely meeting the original forecasts. This still sends stocks higher, but not by much. And if analysts were to maintain their original guidance, there's no telling if stocks would head higher. Thomson Financial research analyst David Dropsey comments to the Journal, "We have definitely seen a dramatic pull-down. It seems like every quarter it gets a little more back to normal." Dropsey's "normal" refers to when analysts are generally just a little bit below expectations. This keeps the stock market trending higher at a slow, steady pace -- not rocketing higher as it did in 2003 - 2004, but still reaching new highs such as it did last week. Posits the Journal, "Normal isn't necessarily great. Bull markets usually are strongest when they are young, right after a bear market. Investor expectations are low then, and surpassing them is easier. The bull market tends to end, or at least pause, when expectations get well ahead of companies' ability to deliver." So, perhaps the bull isn't yet ready to be put out to pasture, but it is inching closer to the gate. Editor's Note:
2. All Eyes on Fed All eyes are on the Federal Reserve and its new chief, Ben Bernanke, this week as the stock market revels in one of the best weeks Wall Street has seen so far this year. Traders will keep a sharp eye on Bernanke's speech to the Economic Club of New York on Monday evening heading into the Fed's Open Markets Committee meeting next week. "Wall Street does get its own version of March madness, and it involves the new Fed chief," says CNNMoney.com on Sunday night. While nobody expects Bernanke to reveal his hand on Monday, he could provide investors some guidance on the yield curve and on monetary policy. Then later this week, Wall Street will redirect its focus on economic data in the form of producer prices, jobless claims, home sales, and durable goods data. Of particular interest to investors will be February home sales, both new and existing, and durable goods orders. Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. tells CNN "With durable goods orders, you should get a bounce back after January's weak number, but it's important to look beyond the headline number to the details in the report."
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3. Hints Coming From Outside of Fed on Rates While Bernanke may not reveal any clues on the Fed's intent when it meets on March 27, there is no shortage of economists who say that the Fed, satisfied that inflation is at bay, may raise rates two more times and then move to the sidelines, as MoneyNews suggested last week. "Fed funds futures show traders polled by CNNMoney.com expect the central bank to vote to lift rates by another quarter-percentage point to 4.75 percent at the conclusion of the March 28-29 meeting," says CNNMoney. "The futures also show traders think the Fed will probably lift rates again, by another quarter-percentage point, at the May 10 meeting." A separate poll by CBS Marketwatch concurs, saying that the Fed Funds rate should top out at 5% in May, rather than the 5.25% that many economic observers had predicted. If the market thinks the Fed may stop its increase cycle at 5%, that would be a catalyst that would allow the major indexes to push ahead to extend their almost five-year highs, Benjamin Pace, chief investment officer at Deutsche Bank private wealth management, told CBS Marketwatch. But, if signs of inflation rear their ugly head, we may see the Fed tighten its monetary policy even more in the coming months. Right now, the indicators that the Fed uses don't point to higher inflation. Time will tell if the Fed's indicators are accurate.
4. Ford: Late to the Show More top manufacturers are building a bigger presence in mainland China these days. This week, Ford Motor Co.'s Volvo Car Corp. announced that it would begin manufacturing its S40 Sedan models in the southwestern Chinese city of Chongging. Company officials admit they are late to the third-largest car market in the world, but think they can achieve profitability within one year.
"Volvo said it could reach its Chinese manufacturing target of 10,000 cars a year in 2007, and was working with a number of Changan Ford's local suppliers to meet the government's local content requirements and the company's quality standards," says Reuters in a report on Monday. "At 10,000 units we will be making money," Alexander Klose, the head of Asia Pacific for Volvo told Reuters. As Reuters notes, rivals like Volkswagen A.G.' and Audi A.G. have been building high-end cars for years in China. In related news, Wal-Mart announced that it plans to expand its business in China over the next five years. Wal-Mart is looking to hire 150,000 additional employees by 2010 - five times the number it currently employs there - and open 20 more stores this year, reports Reuters. Wal-Mart has not been as successful in China as analysts had hoped. Its 56 stores generate a lot of foot traffic - an estimated 1.2 million visitors per month, but the U.S. still accounts for 80% of Wal-Mart's sales. However, China relaxed foreign rules against foreign retailers in 2004, says Reuters, giving Wal-Mart a chance to grow. Editor's Note:
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