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Macro View

While there is no shortage of issues for this market, ranging from the weak global growth outlook to the sub-par corporate earnings picture, the key concern for the market at present is the looming Fiscal Cliff situation. It is perhaps fair to assume that a full-blown crisis will get averted, but the continued impasse is taking a toll on business confidence as this morning’s Empire State survey shows.

The New York Fed’s manufacturing survey showed that the region’s industry sector contracted again in November. The similar survey from the Philly Fed coming out a little later is expected to show the gauge in positive territory, but drop from the previous month’s level.

In other news this morning, the Euro-zone economy is now formally in a recession after experiencing back-to-back GDP contraction in the third quarter. The economic growth performance in Germany and France, which combined account for about half of the region’s output, was positive in the third quarter.

France is not in that good of shape, and it’s hard to envision that Germany’s export-centric economy can remain immune from the region’s problems for long. The consensus view is that the Euro-zone economy will come out of the slump in the second half of the 2013. But given the enormity of problems facing Spain, Italy and others, it is hard to buy into that sunny view.

On the home front, we got a benign-looking inflation reading this morning from the October CPI report, though the ‘core’ reading (excluding food and energy) came in a bit higher. The weekly initial Jobless Claims data this morning appears to have been distorted by the East Coast storm.

Jobless Claims dropped surged 78K to 439K last week from the previous week’s revised 361K level. The four-week average, which smooths out week-to-week volatility, increased by 11.8K to 383.8K. We will have to wait a few more weeks to get ‘cleaner’ jobless claims data undistorted by the storm as this morning’s numbers don’t reflect true underlying trends.

On the earnings front, the positive earnings beats from Wal-Mart (WMT - Analyst Report) and Target (TGT - Analyst Report) this morning and Cisco (CSCO - Analyst Report) the other day cannot camouflage the overall weak corporate earnings picture. We are at the last leg of the third quarter reporting season at this stage, with results from 466 companies in the S&P 500 or 93.2% of the index’s total membership already known.

Total earnings for these 466 companies are down 3.7% from the same period last year, with 63.1% of the companies beating earnings expectations. The growth rates look even weaker when Finance is excluded from the aggregate numbers. Excluding Finance, total earnings are down 8.6% from the same period last year, respectively.

Importantly, estimates for the fourth quarter have been steadily coming down as companies have guided lower. While there may still be room for downward adjustments, the current fourth quarter earnings growth rate of 3.5% is less than half of the 7%-plus expected just a few weeks back.

A prompt resolution of the Fiscal Cliff issue could undoubtedly serve as a positive catalyst for the market. But while both sides are making conciliatory statements, they still remain poles apart, making a prompt resolution less than likely at this stage. But even when this issue is resolved, the market still has to come to grips with a sub-par corporate earnings picture and a weak global growth backdrop.


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