Wednesday, October 17, 2007
The Follow-up
by David Yu
This has been a very busy week, so I'll keep this short as a follow-up to some of the things I've been writing about.
I'm not buying all the tech earnings hype. The market's always, and I emphasize ALWAYS, forward looking. Earnings are things of the past that have already been factored into the prices by the market. Barring major surprises, past quarter's earnings are of little relevance. Catchy earnings headlines, furnished by the Wall Street cheerleading squad, may also sway the market, but the effect is only temporary. We've all been overwhelmed by great earnings news of a handful of stocks selected and promoted by the Wall Street propaganda machine. Let's take a look at the overall earnings performance of the latest quarter.
As I've mentioned before, I've been compiling earnings data of all the companies listed on the Wall Street Journal's Earnings Digest Table. I've eliminated the ones that don't have comparative data from the same quarter a year ago. As of today, 10/17/2007, I've come up with 294 companies that have already reported their latest quarter's earnings since October 3. The sum of all their latest quarter's earnings per share (EPS) is $84.58, and the sum of the same quarter from last year is $114.59. Based on this summation, the latest quarter's earnings per share is therefore $30.01 or 26.19% lower than the same quarter from a year ago.
In order to avoid statistical skew caused by a few stock's large annual swing of earnings, I've also used both the Median and the Average EPS for my compilation. The Median EPS shows no change from a year ago (see dark gray bars on Chart 1 below). However, the Average EPS (light gray bars) shows a decline of $0.1024 per share, or 26.19% per share, from the same quarter a year ago. Every which way I look at it, the overall earnings thus far have not been impressive. And, by all means, these lackluster earnings reports can not be the driver behind this gravy train. So, nuff of that already.
Chart 1
I also continue to keep an eye on the yen carry trade, which may have a lot more to do with recent stock market resiliency than the past earnings. The yen carry trade provides the world's financial markets with hundreds of billions of liquidity every year. Higher Dollar to Yen exchange rate (USDJPY) means higher profit margin for the yen carry trade speculations. Higher USDJPY means investors are taking on more risks, and therefore more profits, which in turn fuels the market to run higher. Lower USDJPY shows that investors are unwinding their carry trades, which subtracts the liquidity from the market.
The 50% retracement at around 117.85 that's mentioned in my last Sunday's Chartmentary turned out to be as tough a resistance as advertised. And, just as I'd guessed it, after failing to advance from this 50% retracement, the USDJPY had since retreated back to test the 38.2% Fibonacci Retracement at approx. 116.34 (see Chart 2 below). The slumping stock market in Japan played an important role in the USDJPY's retreat (also refer to my last Sunday's Chartmentary for details). The USDJPY did breach the 38.2% support today, which sent the Dow Jones Industrial Average down approx. 200 points. This just shows the importance of the 38.2% retracement support. Fortunately, in the afternoon session, traders felt comfortable enough to start taking on more risks again.
Chart 2
This 5-min intraday USDJPY chart below (Chart 3) shows that traders came back to the market and started buying at around 2:00 pm EDT. That lifted both the USDJPY and the U.S. market in a synchronized and well orchestrated fashion. The intraday market chart and the intraday USDJPY chart looked almost identical.
Chart 3
And finally, here's the Japanese Yen chart update (Chart 4 below). The yen had also bounced back from the 85 support just as I had "guessed" it in my Sunday's The Carry Trade Challenges editorial. The important development to watch is whether it'd rise above the 86 resistance (blue horizontal arrow line). If it proceeded to stay above 86 and turn it into a solid new support, then we could see some selloff in the market, perhaps even markets around the world. Nevertheless, this is usually where the Japanese government steps in to neutralize the momentum.
Chart 4
And, that's all the time I have for now, folks. I'll try to add more should I find some free moments to do so. Otherwise, I'll see ya'll later.
email: dyuguard-2@yahoo.com