Saturday, August 13, 2005

Earnings revisions - end of bull market?

Our equity strategist has written a piece today, where he talks that if earnings revisions are high for asector/stock, it might be time to become cautious. Makes sense. I guess earnings revision and price momentum are drivers of stock price, but only till these are not in the range of wildly positive or unduly negative. He thinks that the oil sector is now in this dangerous zone of earnings revisions. So is the materials sector. Does materials sector include steel?

Looks like investors are becoming more positive on steel - it is already up 30% since May lows. Mittal Steel reported yesterday and stock was up, similarly Nucor was upgraded at Citigroup the other day. But oil prices continue their steep climb up - how will this impact steel? Meanwhile, interest rates have taken a knocking for 2 consecutive days now - they have fallen from 4.4% to 4.24% today. I guess the bond market is hoping that finally maybe $65 oil would slow the economy down and stop Fed from raising interest rates. But I think Fed would rather cool the housing market than slow down on interest tigheting. There was a report in WSJ which indicates house market might have started cooling already. So that might have also sparked the bond rally in the last two days, the thought being that if it has started cooling, there is no need to increase interest rates further.

One way or other, it looks like the bull market is nearing its end. What would drive the stock prices higher? If coroporate earnings keep growing. Interest rates are rising, housing market is slowing, oil prices are higher. Maybe stock markets worldwide can continue their rise, if increased globalization is working to remove some "ineffeciencies" in the world capitalist system. Inefficiencies show up as higher costs on the income statement of companies.

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