Earnings Season Is Here

Charts: The S&P 500 closed at 1058, up .27%. The third rally leg of the bull market is still intact according to the charts. In the recent downdraft, the 1018 breakout point was not violated. Today was a choppy session with the index swinging from red to green four times. Earnings season starts today and today’s session reflects investor uncertainty. Analysts forecast a 25% decline in S&P 500 earnings. Beats or misses will determine the course of the rally and charts are not important.

Fundamentals: The Australian central bank raised interest rates yesterday, triggering a bout of euphoria. The market is conditioned to respond positively to the early cycle of central bank tightening after a big recession, a sign that fundies are getting better but rates are not yet so high as to siphon money into bonds or slow growth. By the mid-point of the tightening cycle, the stock market will start to hate interest rate hikes. Is Australia’s tightening the harbinger of a gradual global tightening cycle and really a sign that the global recovery is heating up? Australia is essentially one big mine and its economy is levered to commodity prices. Commodities are at least partially going up because of excess liquidity and asset inflation. This kind of inflation will turn into headline inflation in Australia quicker than anywhere else. So the Aussie rate hike is not that meaningful. On the same day that the Aussie dollar was soaring, the Latvian currency teetered on the brink of collapse.

Geopolitics: On Oct. 3, in Afghanistan, several hundred Taliban fighters attacked a remote US Army base, leaving 8 US soldiers and 2 Afghanis dead. The Pentagon saw the hay being made by the liberal media over this attack and belatedly released a bad guy body count; over 100 bad guys were killed. So it is suicidal for the Taliban to keep attacking US bases, more so going forward as the two huge Army intelligence units come on line as well as CIA drone flights. The Taliban can only sustain these kinds of losses if it translates into a big shift in US public opinion against the war. But public opinion is already low and Obama seems to be saying that Defense Secretary Robert Gates will decide between the Biden Plan, the Gates Plan, and the McChrystal Plan. Gates will not care about public opinion. If one of the plans is called the “Gates Plan” and the guy deciding is named “Gates,” then which plan is likely to be picked?
The Pakistani Air Force is running bombing missions in South Waziristan, killing numerous bad guys. Paki civilian leaders are increasingly talking about and justifying the coming offensive in S. Waziristan. The Taliban is lashing out with showy suicide bombings. President Obama has said no matter what the US is not pulling any troops out of Afghanistan, which means the Paki Army is not alone. A massive US foreign aid package is pouring money into Pakistan. All this adds up to the big offensive being imminent.