Tuesday, August 15, 2011
Stocks will likely be unable to sustain the three-day rally of sorts as the reality of economic growth uncertainty comes back to center stage. We have a number of reports out this morning that highlight the lack of economic growth, not just here in the U.S., but also in Europe.
We have known about Europe’s debt problems for a while, but this morning brought in a weaker than expected report about Euro Zone’s GDP growth in the second quarter. German economic growth was barely in the positive column, while France had no growth at all. The sharp slowdown from the first quarter’s growth pace raises questions about the interest rate hikes implemented by the European Central Bank recently.
Lack of growth makes it difficult for European leaders to tackle the common market’s escalating debt problem. The leaders of Germany and France are meeting today to discuss that issue. The idea of issuing Euro bonds, along the lines of U.S. Treasury bonds, has been gaining more traction in recent days as a way to address the problem.
The idea is not on the agenda of today’s meeting and has been dismissed in the past by the leaders of Germany and France. But with the debt crisis steadily moving from the peripheral nations of Greece, Ireland, and Portugal to now Spain, Italy and even France, it’s time may finally have come.
Growth is the best anti-dote to the debt problem that has taken hold in the developed economies of Europe, U.S., and Japan. But it is difficult to grow when all these rich markets are mired in problems at the same time. Had it not been for the robust growth coming out of the emerging markets, the developed world would be in even worst shape.
On the earnings front, Wal-Mart (WMT) came out ahead of EPS and revenue expectations, even as U.S. same-store sales dropped for the 9th quarter in a row. I am not sure if Wal-Mart has lost its way or it’s just the law of large numbers at play here. We have to concede though that when your quarterly revenue exceeds $100 billion, then you need a lot of incremental sales to move the needle.
We also got top- and bottom-line beats and raised guidance from Home Depot (HD). Agilent Technology (A), the maker of scientific instruments, reported better than expected results after the market’s close on Monday, but provided an inline guidance for the current quarter. Dell (DELL) reports after the close today.
As reassuring as these positive earnings reports are, the bigger worry for the market remains the uncertain growth outlook. Some of the more dire fears about recession appear to have eased a bit in the last couple of days. But we are hardly in the clear yet. It will likely be at least another a few weeks before the macro picture clears up a bit. Till then, stocks will likely remain quite volatile.
Sheraz Mian
Director of Research
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