Submitted by Mark Hanna
Courtesy of MarketMontage. View original post here.
Late yesterday it appeared the Cyprus “rescue” had come to a head, with a far more onerous hand to those depositors with bank accounts >$100K and a much better outcome for those <$100K. Considering much of those larger deposits were of Russian origin, it seems strange that the Russians did not offer their own bailout to Cyprus but I am sure the picture behind the scenes is far more complex than “Putin didn’t want to bailout Russian drug money.” Whatever the case the market has now come to expect all roads lead to bailout and we have it once more, albeit with such a tiny country the Germans balked a little and actually required some skin from the country itself rather than just emptying their pockets with zero strings attached.
For U.S. markets it was a choppy week full of gap ups and downs on headlines, although the size of the daily movements were much less than events seen in 2010, 2011 and even 2012. Safety sectors took the lead again last week which is a negative but we saw the same behavior during the February correction and it did not lead to anything. The upward accelerated trend also was broken for the third time since mid November, but as of this moment it appears that too does not mean anything. In sum, nothing means anything as long as Ben (and Japan) is on your side and funneling money in every direction. That will be true, until it is not but it is the current market religion.
Not the best group to be leading the market…
A week for defensive sectors:
This coming earning season is going to be very interesting because top line growth has become increasingly hard to come by the past few quarters and fewer companies are driving bottom line growth. But just as with 2012 the mantra is “the growth will come in the back end of the year!”. I recall a year ago at this time there were fantasies of 11-15% earnings growth in Q3/Q4 2012. By the time we actually got there it ended up being 1-3% and almost all of that came from a few banks and Apple. This year we have the exact same setup with little to no growth in the current quarter but just you wait until Q3/Q4. Maybe this year they will be correct. But when a market continues to go up in price without support of profits you are counting on multiple expansion. Thus far that’s been good enough but counting on markets to pay a higher price for the same earnings is a far trickier thing than asking markets to count on higher earnings, which was the case in 2009-first half 2012. So market bulls need profits to begin re-accelerating or will need people to pay a higher multiple on the same dollar of profit go forward.
We have a holiday shortened week with durable goods and new home sales dominating the news flow Tuesday and Chicago PMI Thursday. Talk will be of quarter end “mark ups” and such, and with the latest “crisis” now sequestered, expect a return to the low volume Olympics.
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Any securities mentioned on this page are not held by the author in his personal portfolio. Securities mentioned may or may not be held by the author in the mutual fund he manages, the Paladin Long Short Fund (PALFX). For a list of the aforementioned fund’s holdings at the end of the prior quarter, visit the Paladin Funds website at http://www.paladinfunds.com/holdings/blog
