The Economic Recovery In Full Swing As Earnings Season Kicks Off

The economy continues to show signs of healing reflected most recently in the Leading Economic Indicators coming in at +1.4 the highest reading in ten months, the household job survey showing 260,000 jobs created in the prior month (over 800,000 the previous 3 months) the ISM Manufacturing and Non-Manufacturing Indexes hitting multi year highs and retail sales for March registered a 9% gain. The best showing in more than a decade and the fourth consecutive monthly gain. The argument for a double dip recession is bleeding disciples at critical rates. As stubborn as the bear membership has been, the mounting evidence can overcome the most ardent of camp residents. As the market has continued to grind higher, it has once again put us at yet another potential capitulation point. Either earnings season will provide such a compelling story as to force defensive investors into finally re-engaging the markets or earnings and forecasts will simply meet and disappoint overly optimistic bulls and the much anticipated and forecasted breather will finally materialize in a 5-10% correction. To date, fifty one of the S&P 500 companies have reported and here are the stats:

88% Have reported a beat on earnings per share.
64% Have reported a beat on top line revenues.


The trap investors may fall into is watching the mounting evidence of economic expansionary data and looking past the any number of 200lb gorillas in the room for concern:



1. The European Union and International Monetary Fund has finally dealt with the first of the aforementioned PIGS, with Greece’s ongoing debt refinancing. Or have they? The saga continues, all the while Portugal is getting warmed up to step into the batters box to test the markets appetite for debt refinancing from a country reckless with its spending and unwilling to undertake prudent fiscal measures clearly necessary. I’m talking about Portugal not the US.



2. A potential trade war with China. The saber rattling is ramping up. The time for a more aggressive revaluation of the Yuan is nearing…..or else.



3. Oil currently trading around $85 barrel, while gasoline is hovering just below $3.00 in most markets. Could we experience another super spike? Can our fledgling recovery handle it?



4. Maybe the 400lb gorilla in the room is the end of Quantitative Easing. Without the Federal Reserve supporting the Mortgage Backed Securities markets with the closing out of March, is there sufficient private demand to support mortgage rates of 5%? 5 ½%? 6% or will investors demand higher returns? If so, can the housing market continue its bottoming process if mortgage rates pop to 6%?



5. Will the economic strength prove sustainable? Will this force the Federal Reserves’ hand in a pre-emptive inflationary strike to hike interest rates?



There are many more of these gorillas in the mist, but these seem to be the alpha males most dominant in the pack. For now, the mountainous positive economic data suggests a continued aggressive posturing. We’re cognizant we’ve come such a long way off the March 2009 lows and the market is perhaps currently fairly valued. Keeping things in perspective, we’ve only recently recaptured the high ground lost from the Lehman collapse. Now, earnings season is upon us. As Warren Buffet so eloquently put it, this is a time where when the tide goes out we can all see who’s wearing swim trunks and who isn’t. So, prepare for either seared retinas or pass out the hiking boots, wake up George and Wheezy because we’re moving on up. Personally I’d look for some nice thick socks and forget about any protective eye wear. The pre-announcement period to earnings has come and gone. Typically companies that may have missed on earnings or revenues attempt to telegraph this to institutional investors in the weeks leading up to earnings season kickoff. This season, not a peep. However, as always, I’ll let the market tell me where we’re going. Should we receive a pause signal we’ll be in touch immediately as we’ll look to get a bit defensive and raise our cash position.

Income anyone? Aon Corporation is the largest insurance broker in the world have dethroned Marsh McClennon after the Greenberg-Spitzer clash of the titans or is that the Titanics. Having witnessed the spectacular fall from grace of both it's easily confused. Aon has basically jettisoned the risk taking arm of the company while expanding its core brokerage footprint globally over the last five years. Investors are left with a streamlined company less exposed to the catastrophic nature of the insurance business. Now with insurance premiums stabilizing along with an improving economy and cash flows, investors should be well protected locking in an 8% yield on Structure Products Corts Aon Capital 8.205%-KTN at todays levels.