Earnings updates, many on the downside, continue to appear as listed companies condition investors on what to expect for the June 30 year or half year financial reporting period.
Some of the updates have been shocking such as Insurance Australia’s big second half loss and write-downs others seem to fit the emerging belief that the economy is not as healthy as it should be.
And yet if there was one message to be taken from yesterday’s May labour force figures (see separate story), It’s that the economy isn’t drifting, but some sectors are.
Since the start of the year the economy has outperformed the market, but in the three months to March, the market clearly beat the economy.
So perhaps we are now seeing a marking time in the market.
Offshore factors, such as Europe, risk fears and China have hurt the market, but overall the economy has continued expanding, but not at the rate expected by some eager investors and analysts.
Jobs growth continues to be very strong, which means more and more consumers will have income (rising at between 2% and 4% a year), they will pay taxes, buy property, cars, groceries and the like, but perhaps not with the same force as we say in 2009 (with the government stimuli) or before the crunch started in mid 2007.
That realisation saw retailing and banking stocks improve yesterday in Australia.
The Reserve Bank’s six rate rises, and the 1% or so on top of those from the banks, have played a major part, so has the ending of the government stimuli.
Now there’s a definite caution abroad among consumers, confidence is down (from extremely high levels); business is less confident, but business conditions are still broadly OK.
On Wednesday, Reserve Bank Governor, Glenn Stevens, explained why; his central comments bear repeating.
"We see at present a certain caution in their (consumers) behaviour: even though unemployment is low, and measures of confidence have been quite high, consumer spending has seen only modest growth.
"This may be partly attributable to the fact that the stimulus measures of late 2008 and early 2009 resulted in a bringing forward of spending on durables into that period from the current period (though purchases of motor vehicles by households – a different kind of durable – have increased strongly over recent months).
"But the long downward trend in the saving rate seems to have turned around and I think we are witnessing, at least just now, more caution in borrowing behaviour.
"Of course this will have been affected by the recent increase in interest rates but the level of rates is not actually high by the standards of the past decade or two. We can’t rule out something more fundamental at work.
"We can’t know whether this apparent change will turn out to be durable. But if it did persist, and if that meant that we avoided a further significant increase in household leverage in this business cycle, it might be no bad thing.
"Moreover if a period of modest growth in consumer spending helped to make room for the build-up in investment activity that seems likely, perhaps that would be no bad thing either.
"These sorts of trends would surely increase the medium-term resilience of household finances and accommodate the resource boom and the rise in other forms of investment with less pressure on labour markets and prices than otherwise."
This week Citibank forecast that earnings per share growth for the ASX 200 would be 11.6% in the year to June, but soaring to 26% in 2010-11.
Deutsche Bank expects 9.9% growth this financial year and 26.4% in the 2011 financial year.
Analysts say we should watch bank and resource stocks for possible earning downgrades in the next month, and later in the year.
Bank lending is getting tougher, especially with home loans falling and credit card and business lending weak.
Banks also face higher funding costs which, at the moment, is the most direct impact on Australian business of the heightened fears about the euro and eurozone banks and their economies.
Resource stocks will be hit by slowing demand, lower prices (but offset by the 10% plus fall in the dollar) and, more importantly, the expected slowing of the rapid growth momentum in the Chinese economy.
For that reason, some analysts say forecasts for 20% EPS growth next year, should be viewed sceptically with a 10% gain pencilled in for now.
So far earnings downgrades, or shocks, have come from Insurance Australia Group, Virgin Blue and Downer EDI, Leighton Holdings, James Hardie, Asciano and several smaller groups such as Hastie and Spotless.
The insurer QBE has been hit on the value of its investments and its income from Europe.
The National Australia Bank also has its UK banks, Lend Lease has a big British construction business, Westfield has its expanding UK mall business (and indifferent US mall performance compared to Australia and New Zealand).
Woolworths, Metcash, Coles, JB Hi-Fi, Noni-B, Harvey Norman and several other retailers have warned that they are seeing a loss of momentum in their sales growth and expect this to continue until later in the year.
David Jones and Myer have echoed those comments and say they will intensify their sales and discounting to keep stock moving (as we have seen with the annual June sales).
Flight Centre is one of the rare solid upgrades, thanks to the high Australian dollar making offshore travel more attractive for more Australians.
But the downgrade from Virgin Blue because of the slump in domes
