By rob curran
Sept. 24 (Business Times) -- THIS week, traders will position themselves for the decisive fourth quarter.
During the third quarter, traders bet on the efficacy of central-bank intervention; fourth-quarter data and corporate outlooks will reveal whether or not those bets were savvy.
As the quarter draws to an end, there will likely be a round of "pre-announcements", as companies warn investors that earnings are tracking far above or - more typically - below the Wall Street target.
If the interventions from the European Central Bank, the Chinese government and the Federal Reserve are going to be effective, signs of economic life in the fourth quarter should already be reaching the corporate antennae.
If the corporate outlooks are downbeat, it may be an indication that the slowdowns in Europe, Chinaand, to a lesser extent, the US, are too pronounced for the stimulus measures to arrest. And there are already hints that this is the case.
Securities trading house Jefferies, whose business is among the most sensitive to changes in the outlook for interest rates and the survival of the euro, posted surprisingly lacklustre earnings growth in its latest quarterly report. Manufacturing reports from China, the eurozone and some of the industrial areas in the USreveal that summer weakness has persisted into September. FedEx has warned of diminished expectations for global economic activity and for its shipping orders going into the pivotal holiday season.
The principal bright spot in the US economy is, surprisingly, housing. As tomorrow's Standard & Poor's Case-Shiller index should confirm, house prices are consistently rising and builders such as KBHome are reporting their best sales since government credits were withdrawn for homebuyers.
This has caused something of a "wealth effect", as higher theoretical net worth boosts consumer confidence. This confidence has not yet translated into consistent consumer spending growth.
The lines around the block in New York for Apple's iPhone 5 last week may reflect the desperation of AT&T and Verizon for new subscribers more than any uptick in consumer spending. After all, everything on the phone is bigger, except the retail price.
Surveys of retailers by Goldman Sachs suggest they are upbeat about growth in the holiday season, but September sales have slowed from August levels.
Ben Bernanke's measures are working: central-bank support of the mortgage market is helping to revive the housing market. But the Fed's end, the whittling away of the unemployment rate, has proved far more elusive.
If Thursday's new weekly claims hold at their recent elevated levels, it is likely another month will have passed with unemployment above 8 per cent.
Thursday will bring another reminder of the global slowdown of production lines. Orders for capital goods in August are likely to have slowed by more than 6 per cent. This drop in demand for finished goods worldwide is taking a particular toll on the Japanese economy, say analysts at Nomura Securities.
Boycotts on Japanese goods in China amid territorial disputes between the two Asian giants are unlikely to help the long-struggling exporter to recapture its old magic. As elections or power shifts approach in Japan, China, and the US, observers say politics, economics and markets will increasingly cross paths.
"Especially in the lead-up to the election, every data point will be used to add to the mosaic for each political party of whether or not Americans are better off than they were when Barack Obama took office," said Quincy Krosby, investment strategist at Prudential Financial.
For now, the market has reconciled itself to a likely Obama victory, but much will depend on the Congressional races. After all, the only way to avoid a "fiscal cliff," or the automatic imposition of a severe budget, is through Congress.
One money manager argued that the central-bank stimulus will improve the economy and the stock market, but only as long as it lasts. "I bet you dollars to doughnuts there will be another 50 per cent correction in the S&P 500," says Oliver Pursche, president of Gary Goldberg Financial Services. "I'll even tell you when: six months after all this stimulus from the Fed and the ECB dries up."
Rather than economically sensitive stocks, Mr Pursche is loading up on precious metals. Gold prices have been among the biggest beneficiaries of the stimulus packages, approaching their record around US$1,900 an ounce.
Central-bank policies may eventually help the unemployed as much as they have the price of gold and securities; if not, the bull market in stocks is unlikely to survive the third quarter.
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