Corporate Earnings Season Kicks Off – 1/11/13

We are heading into the heart of earnings season next week. Thus far the few companies that have reported have posted good results. We are interested to hear how the uncertainty over the fiscal cliff impacted sales and spending decisions in the fourth quarter for U.S. businesses. It will also be interesting to hear the CEO comments on how the impending debt ceiling negotiations will impact their hiring and capital investment decisions for 2013. Overall we expect modestly positive news from the earnings reports with comments that business leaders need certainty on tax policy and regulation from Congress in order to become more aggressive in adding jobs and spending some of the estimated $2 Trillion on corporate balance sheets. This is the same message that virtually everyone is sending to Washington. However, getting them to come together and make meaningful change in the trajectory of government spending and the deficit has not really happened even with the passage of the fiscal cliff legislation.

House Speaker John Boehner, R-Ohio, and Senate Minority Leader Mitch McConnell, R-Ky., have said they won’t agree to a debt-limit extension without a deal on spending cuts. Just as adamantly, Obama says the government’s debt ceiling must be raised and he won’t negotiate over it, though he says he would bargain over spending cuts and tax increases to reduce federal deficits. Automatic cuts to defense and domestic programs are due to begin after winning a two-month reprieve in the fiscal cliff deal. In late March, if no deal is reached, money financing federal agencies expires and new legislation will be needed to prevent a government shutdown. Republicans are sure to use these measures to force Obama to accept more spending cuts. The expectations for progress on the debt ceiling are very low which could potentially lead to a positive surprise in our opinion, but the entire process is going to involve a lot of finger pointing and counterproductive campaign style political positioning.

For us, this is a time to remain patient. We believe that there will be opportunities over the next couple of months for patient, tactical investors to jump on potential overreactions by short minded investors that buy into the world is ending routine that we have seen played out many times over the past few years. As we saw during the recent negotiations in Washington, markets are seemingly fixated on every press conference and leaked report. As the debt ceiling fight starts to get more intense in the near future, we believe opportunities will arise to bolster positions on any dips in the market. Looking past the chaos in Washington, we see an improving economy, both here and in emerging markets.

Manufacturing is improving in the U.S., the Fed is ultra-accommodative, housing continues to improve, and recent data out of China is showing increased economic activity.

Please join us in congratulating Mary Horn on her 15 year milestone with Paradigm. Mary is an incredible team member and we appreciate all that she does every day.