Finely balanced US holds key to year's outlook

REPORTING season in North America started this week with "frozen electricity" maker Alcoa turning in a market-beating result that immediately prompted suggestions that it was the start of a bumper year for investors as the US economy recovers.

It is a buoyancy that the local market is likely to surf on because both investors and business leaders draw much of their optimism from how the US performs although reality may bite here once ASX-listed companies begin reporting their results next month.

Even in the US, much of what looks like superlative profit growth is an optical illusion because so many of the profits are being compared against results ravaged by the long financial crisis, from 2008-10 and yes, you have to count part of last year.

Hit from top to bottom by the financial crisis, the US recovery has been slow and shaky. Desperate government and Treasury officials have deliberately slashed the value of the US dollar by printing lots more, and kept interest rates at near zero to make new investment cheaper.

Both the S&P 500 Index and Rupert Murdoch's much narrower Dow Jones index hit two-year highs earlier this week, driven by good economic news out of Europe, but by yesterday had cooled after the US Labour Department revealed the number of people filing for unemployment benefits last week rose upsetting a market that had been expecting a fall.

The depth of the US recession (foreclosures on homes hit an unwanted record of more than 1 million last year) allows us to say something we cannot often claim that the US is at least 18 months, perhaps two years, behind Australia.

A year ago, leading into the December-half reporting season, Australia's retailers were bemoaning the fact that their sales growth would look flat compared with early 2009 figures because they no longer had the impetus of Rudd government stimulus cheques.

As it turned out, not only did retailers last year miss the anti-crisis stimulus, but Australians pulled back on discretionary spending as home loan rates were increased and unclear economic signals from the US and Europe made people wonder about job security.

So concerned are retailers that, having been in the vanguard of sucking in imported goods for sale here, they now want to throw up barriers to protect them from "disloyal" consumers shopping at overseas internet sites.

Their troubles are only just beginning. Shoppers in the US are now using smartphone applications that allow them to go to their local shop, punch in the product number of something they want to buy, and find the best price within seconds.

The one benefit of Australian companies not reporting numbers until February and March is that by then there will be a clearer picture of the impact of damage, and benefit, on the commercial sector from the flood-ravaged states.

Work this week by Deutsche Bank analysts Paul van Meurs and his team tried to put some of the more hysterical economic damage predictions into perspective coming to the conclusion that the impact on listed companies should not be significant if things normalise in weeks rather than months.

Interestingly, the larger effect on retailers is expected to be not so much their closed shops and stock damage (most of which they will be insured against), but the fact that many of the rest of us show empathy for the victims by not spending on ourselves instead, hopefully, donating some of that cash.

Van Meurs thinks that the pull-back in spending will outweigh any lift in sales the stores in Queensland, New South Wales and Victoria will get as those whose homes have been scoured away refill their wardrobes, living rooms, bedrooms and kitchens.

Still, at least US consumers are out shopping, even though their dollar no longer buys as much. Analysis by Thomson Reuters has the "consumer discretionary" sector (retailers) as one of the stronger contributors to expected earnings growth of 32 per cent from companies in the S&P 500 for the final quarter of 2010.

In dollar terms, that means aggregate profits of companies in that index jump from $US156 billion to $US206 billion.

Never mind the width, though, what about the quality? According to Thomson, wash out the financial sector contribution and that profit gain slips back by almost two-thirds to 11 per cent.

Pretty logical when you think about it. The financial sector contains all the banks that made the dud housing loans, the investment banks that parcelled them up and sold the toxic portfolios around the globe, and the insurance companies that underwrote a lot of the business.

Their sectoral growth is expected to be a whopping 1383 per cent, which reflects more how far they sank than how dynamic they are now. The question is whether having recovered to more "normal" levels of profit, those companies can sustain that performance and grow from it.

One measure of increasing confidence is an apparently accelerating amount of takeover activity even though not all of it comes to fruition. That companies can consider major purchases, and get the financial backing for them at an acceptable interest rate, suggests a shift in sentiment and a reappearance of appetite for risk.

By the time this is published, the US's second-largest bank, JPMorgan Chase, will have reported its fourth-quarter results and either confirmed or denied those performance expectations for financial stocks.

More closely watched than the absolute profit numbers, though, will be the size of JPMorgan's dividend to stockholders.

The payout to investors is as much an indicator of management confidence as anything the chief executive might forecast at a results briefing, because if the board is uncertain about the near future, it will want to hoard its cash.

Here, it will be several weeks before the December-half reporting season gets into gear (why Australian companies take so much longer is a mystery), but the finely balanced state of the US will be a major influence on how local companies call the outlook for the remainder of the year and how the market prices their shares as a result.