Stocks Down, But Earnings Season's Start Today May Change Tone: April 11, 2012

Friday's US nonfarm payrolls figures are weighing on global stocks. The rally in stocks was surely overextended and everyone was just looking for an excuse to drive prices down again. They got it last Friday, when the 120K estimated net change in US nonfarm payrolls was far off estimates of 205K. Global stocks are still selling off.

The number even resurfaced talks about QE3. I think that conversation is premature. Apart from employment, many other US indicators held up well in March, and to be honest, the Fed may be on alert, but their trigger finger is not that itchy. Besides, the US economy has produced net jobs of 3.6 million since the expansion began in March 2009. While it is frustratingly slow, it is still positive.

Other indicators, such as real retail sales and industrial production, are actually expanding around the average expansion pace observed during the economic recessions since 1949 (see chart below). Looking forward, stocks are reasonably priced weighing the upside and downside risks, and as such I believe global stocks are in a consolidation phase, waiting for further data points on the economy.

The short-term catalyst for stocks will definitely be the earnings season, starting today, with Alcoa reporting first quarter earnings after the close. Consensus is looking for minus four cents EPS, down 114 percent from last year. The last two quarters of presumably negative earnings reflect the global slowdown that we already know took place.

The interesting thing to watch with Alcoa is their forward-looking statements and outlook for demand in terms of volume. It is worth noting that the EPS estimates have climbed 19 percent in the last three months and analysts are expecting earnings to normalise in the fourth quarter. We will follow up with a more in-depth focus on the upcoming earnings season tomorrow.

MSCI China Index valuation reaches six years low. Concerns about China are high and these have sent valuation on Chinese stocks (those foreigners can invest in) down to a six year low, with 12 months forward P/E at 9.6. Compare this to MSCI Europe's multiple of 9.4. It makes sense for crisis-hit Europe to trade at these low valuation, but not an economic growth engine such as China.

It could make sense to buy a bite of the future in China at this point. What is the main obstacle? The big question on everyone's mind is whether China will have a soft or hard landing. My view on this is quite clear at this point. China will not have a hard landing. Their latest manufacturing figures and last night's better-than-expected March export figures are evidence that China is weathering the slowdown.

Six-months average export growth YoY is 11.6 percent  (see chart below) and declining, thus confirming the slowdown, but China's economy has been in this territory multiple times before since 1992. A hard landing requires exports to fall by 15-20 percent YoY and we are far from that scenario given the information on hand.