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Good News That May Matter More Than Earnings


M&A, junk-bond buying activity, are good signs for the markets.

There is one thing that is certain regarding the upcoming earnings season -- no one is expecting much. At the start of the year, second-quarter, year-over-year earnings growth was expected to be 10%. Now I've seen estimates ranging from 6% clear down to negative 1%. However you slice it, expectations are rather low.

We love to see this kind of backdrop, as lowered expectations makes it much easier to surprise to the upside.

What has my attention this time around is the credit markets. The credit markets stopped working before the market cracked in late '08 and started firing on all cylinders right as the stock market began to bottom in March '09. Since that time, the credit markets have continued to improve, right along with a higher stock market. I've seen data that says the banks are currently lending as much now as they were before the credit crisis. That's a really good sign that we never hear about. So do earnings matter? Sure. But to me I'd put my money on the credit markets as to where the economy and stocks are headed.

So ... what are they saying now. Well, they are alive and well -- and despite what you hear regarding the overall economy or Europe, they are what truly matter. First off, there were two very significant buyouts announced recently. FX Alliance Inc (FX) was bought by Thomson Reuters (TRI) at a significant 40% premium to the previous trading day's close.

Not to be outdone, there was a huge deal in the healthcare group, as WellPoint, Inc. (WLP) bought Amerigroup Corporation (AGP) for just under a 40% premium. M&A is always very bullish for the overall market, as it shows companies are willing to open their pockets and find values. Also, it is simple economics. If there is less supply and demand stays the same, prices increase.

What really has me encouraged regarding the state of the U.S. economy, though, is the action in the junk bond market (or high yield bond market -- it goes by either). Remember, junk bonds tend to act like stocks, and when investors are comfortable with the economy, they are willing to buy the riskiest of bonds. Why would you buy risky bonds if you think the company paying would just default? With that said, various junk bonds are close to breaking out to their highest levels in a year. Nothing wrong with this picture.

Chart courtesy of

My take is that the recent strong data in housing and continued improvement in the credit markets bodes very well for the economy here. Should earnings come in better than the much-lowered expectations, we could have a major spark needed for a strong second-half rally.

This article by Ryan Detrick was originally published on Schaeffer's Investment Research.

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Twitter: @schaeffers
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