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Market Drivers: Earnings, Debt Deal, Beige Book

NYSE Euronext : - 17th October 2013

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Washington DC - Capitol Hill: United States Ca...

Washington DC - Capitol Hill: United States Capitol (Photo credit: wallyg)

Debt negotiations in Washington took center stage as this week kicked off, consuming traders attention. Finally, after a 16-day shutdown, the two sides were able to come together for a temporary fix. Still, the solution is not long term. Overshadowed by the "government follies", earnings season began to pick up steam with some household names reporting results. Here are three things that have been driving the market this week:

Earnings Season

Earnings season kicked into full gear this week. So far, results appear to be following the same trends we saw in Q2. With a record number of S&P 500 companies issuing negative EPS guidance for the quarter, 74% of companies are beating on the bottom line, while 55% are doing better on the top line. Here are a few notable results from the week:

  • Tuesday - Citigroup traded lower following an earnings miss on below-consensus revenue. Beverage giant Coca-Cola opened higher after reporting earnings in-line with expectations, but trended lower throughout the session to close on the negative side. Shares of Domino's Pizza slid more than $4 after missing earnings estimates by one cent and beating on revenues.
  • Wednesday - Toymaker Mattel saw shares open sharply higher on an earnings beat and inline revenues. However its shares sold off throughout the afternoon to end lower by 1%. Meanwhile, Johnson & Johnson shares rallied over 1% after a solid beat on both lines.
  • Thursday - Both Goldman Sachs and IBM were sharply lower on bottom-line beats, but significant revenue misses. Shortly after the opening IBM was down by over 11%, while Goldman shares were down more than 4%.

Debt Deal

Taking it right down to the wire, Congress passed a deal late Wednesday night to temporarily raise the debt ceiling and fund the government for a few more months. However, the deal is considered a temporary fix as the plan only funds the government until January 15 and raises the debt ceiling through February 7. If Republicans and Democrats do not agree to a new budget, this effectively means we will be facing the same issues again early next year. In a classic case of "buy the rumor, sell the news", markets rallied on reports that both sides were close to an agreement and sold off once it was finalized.

Beige Book

With the U.S. debt concerns set aside for the moment, markets again set their eyes on the topic of "tapering". Wednesday's Beige Book announcement gives a strong indication that the Fed will again postpone the eventual tapering of the FOMC asset purchase program. The report indicated overall national economic activity expanded at "a modest to moderate pace" over the six weeks encompassing September and early October. However there were a few positive takeaways. Consumer spending, business spending, and payrolls continued to increase in many Districts. According to the survey, the recovery is still making slow progress with the economy effectively stuck in neutral. Prior to the government shutdown, many were placing high odds on a scale back of stimulus programs by year end. In light of the recent data though, this seems much less likely.

Weekly Bonus - Waffle House Indicator

Craig Fugate, the head of the Federal Emergency Management Agency, has created his own informal system of rating disasters in a unique way. He began using the status of the local Waffle House as a measure of the impact of a natural disaster on a region or neighborhood. While it may sound like a far-fetched idea, it is actually catching on. It turns out determining if the 24 restaurant had power, gas, water, etc. was a good proxy for how well the surrounding area fared in a natural disaster. The system is based on three-level color system. Waffle House Index Green means the Waffle House is still operational and serving a full menu. Yellow denotes a Waffle House running at limited capacity, usually on a generator and serving only a partial menu. A closed, badly damaged, or completely destroyed Waffle House draws a red rating. Admittedly it is not a high tech indicator, but the hope is that this service will help FEMA to assess disaster areas better in the future.

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