October 28, 2011
As I had communicated in prior newsletters, the release of third quarter earnings figures has been largely positive news. We have seen the market rise over the past few weeks in response. As of this morning Bloomberg noted 323 of S&P 500 companies have released their quarterly earnings. They summed up earnings figures with the following “Earnings Surprises” chart:
Q3/11
Positive Surprises: 227/323 = 70.3%
0% Surprises: 32/323 = 9.9%
Negative Surprises: 64/323 = 19.8%
SOURCE: Bloomberg
Current market optimism is predicated not just on unexpectedly positive third quarter figures, but also on the expectation of future growth in earnings. There are a number of areas of the economy one can look to when forecasting the future. One key area is railroad freight volume. Union Pacific, the largest railroad in the U.S., saw third quarter revenue rise by 16% over the previous year, with earnings rising by 19%. Smaller national and regional railroads have also been in the news with increasing freight volume driving increasing earnings for the industry. CSX, Rail America Inc, Norfolk Southern, Kansas City Southern, and CN Rail (Canada’s largest railroad) are just a few examples of railroads making recent news due to increased revenue and earnings. Similar reports have been coming out of trucking companies, with Knight Transportation showing a year-over-year revenue increase of 18.7% for the third quarter.
A great deal of yesterday’s stock market move reflects optimism over the Euro debt plan that Germany has now agreed to. European banks are the largest Greek bond holders and have been resistant to the idea of taking substantial losses on these holdings. This has now changed. Banks holding Greek debt have agreed to take significant write downs on their holdings – likely 50% – in exchange for European governments agreeing to back the banks in each of their countries. The exact details are still being worked out, but the major points of the plan have been accepted by the key players involved. While not a perfect solution, the market is judging this a workable plan that will allow Europeans to take the losses needed from Greek investment and move on.