Q2 earnings have been great, at least relative to massively revised down estimates. But the market's reaction has been a resounding "ho-hum".
Now that it's coming to a close, attention will focus even more on the macroeconomic side of things. And there's no possibility of upside surprises in this area except for artificial insemination by cenbanks. On the other hand, there is plenty of possibility for downside surprises, or at least expected downside pressure.
1. Housing, unemployment: same old same old, except it'll likely keep getting worse and worse.
2. Currency moves must have hurt Japanese and German exports over the past few months, while demand remains subdued everywhere.
3. Strange things are happening in Euroland, e.g., PIIGS sov CDS premium are shooting up again, Euribor is becoming obsolete and being replaced by collateralized lending (meaning rising distrust among banks). Same old same old, which is surprising in a way -- how many times can you kill the same beast? Of course, as many had said all along, the Euro problem has never been solved, only delayed.
4. Strange things are happening in the US, mostly related to various kinds of bonds or other fixed income markets, e.g., corporates have lower yield than treasuries, swap rates lower than treasuries, treasuries curve got all twisted and kinky as Fed sticks it in here and there, bond buyers begging big corporations to sell them the some bonds. These are all caused, directly or indirectly, by the Fed's artificial insemination. I don't know what all this weirdness will amount to in the end. But they're worrying to say the least.
5. Despite various streams of government free money, TBTFs are getting squeezed on many fronts, slowly but surely. Trading, M&A, private equity -- everything is slowly slowing down. Regulatory reform is slowly ramping up as implementation proceeds, even if at a glacial pace and in very watered-down forms. It's just not the same-old, same-old again for TBTFs. At some point it'll snap, somewhere.
6. The pink elephants of Fannie (FNMA.OB) and Freddie (FMCC.OB) are dragged to the spotlight. There is no pleasant solution except ignoring it, which is getting harder and harder to do. This is perhaps the biggest source for potential surprises in the near term, and I have tremendous difficulty imagining good surprises here.
I'm not calling for imminent correction as I did in early May, because I don't see specific trigger events yet, only potential ones. But the risk is heavily biased toward the downside. If you insist on long equities, at least be paranoid about it.
Disclosure: Long puts on SPY