Monday, April 21, 2008

Could Present Surge in Stocks Signal a Rebound Ahead

It’s earnings season again. But with an odd twist.

You see, most investors realized that earnings season would be dismal; so when the results came in (pretty much) as expected, many investors seemed to find that the news (especially among financials) was not worse and went on a buying spree.

By watching the trading "tape," you almost could "hear" what investors were thinking:

  • JPMorgan Chase & Co. (JPM) announces a 50% decline in first-quarter profits, and says markets will remain weak through the rest of this year and perhaps into next: No problem. As bad as the results were, they were actually better than Wall Street expected.
  • Citigroup Inc. (C) says it lost $5.1 billion on a 48% decline in revenue and will slash 9,000 jobs - that’s great!
  • Merrill Lynch & Co. Inc. (MER) posts its third straight quarterly loss, and says it is going to have to slash 3,000 jobs. Again, the investors seemed to be saying: No sweat.

And those were just the financials. Intel Corp. (INTC) posted lower quarterly earnings, even after issuing a warning a few weeks earlier. Even so, the results were better than anticipated. The Coca Cola Co. (KO) experienced lackluster domestic results.

On their face, these earnings just didn’t look so hot overall.

So how did the U.S. stock markets respond: With great strength.

In fact, U.S. stocks reached their highest levels in nearly three months - and energy stocks in the Standard & Poor’s 500 Index had their biggest gains this decade - on a mix of better-than-expected earnings, soaring oil prices and new record highs in key commodities.

The Dow Jones Industrial Average soared 4.25% for the week. The Standard & Poor’s 500 Index jumped 4.31%. And the Nasdaq Composite Index rocketed a stunning 4.96% for the week.

The Russell 2000 Index of small-cap stocks increased 4.8%.

Energy stocks in the Standard & Poor’s 500 Index had the biggest gain this decade after crude oil surpassed $116 a barrel in New York. The profit report for Google Inc. (GOOG) sent shares of the Internet search-engine giant up 20% Friday, its biggest single-day climb since it went public in 2004. Intel’s report pushed tech stocks to their largest single-week gain since August 2006.

Profit exceeded analysts’ estimates at 58 of 101 companies in the S&P 500 that have released first-quarter results so far, even as earnings fell an average 37% from a year earlier, according to Bloomberg data. Overall, earnings are forecast to decline 13.7% in the first quarter, marking the third straight decrease.

JPMorgan Chief Executive Officer Jamie Dimon said the credit crisis is nearing an end.

"It’s been quite an exciting market," John Carey, who helps oversee $13 billion at Pioneer Investment Management USA Inc., in Boston, told Bloomberg News. "Earnings are the big story, and you have some companies surprising and being rewarded in the market."

Stocks tend to be a leading market indicator, in effect, anticipating future events.

As part of that, markets tend to rally during the depths of a recession, anticipating an economic recovery even at a time when the outlook still seems to be as dire as can be.

The question to ask right now is this: Is last week’s rally - coming amid a bevy of disappointing earnings or outright corporate losses - merely an aberration, as in a pent-up burst of buying that’s following after weeks of bearish selling?

Or was last week’s rally a signal - perhaps telling investors that the recession many experts believe the U.S. economy is already well into is on its way out?

Only time will tell.

Market Matters

It was another tough week for the airlines: Given that, it’s clear the $17 billion Delta Air Lines (DAL)/Northwest Airlines Corp. (NWA) merger deal may have been the first of many similar transactions that will change the landscape of an industry struggling through the twin challenges of mountainous fuel costs and a weak economy. With oil surging past the $116 a barrel level and gasoline moving ever closer to the $4 a gallon level on supply concerns, Republican presidential hopeful John McCain proposed a "gas-tax holiday" that would suspend the federal gas tax of 18-plus cents a gallon for the summer-driving months.

Did anyone even notice?

Meanwhile, Blockbuster Inc. (BBI) expressed confidence that consumers ultimately will move out of their doldrums and back to the malls as the company proceeded with its potential $1.35 billion bid for ailing consumer-electronics retailer Circuit City Stores Inc. (CC).

Equity investors digested the earnings data, disregarded the surging energy prices, put away their tax records for another year, and went bargain hunting for undervalued stocks. When the dust had settled, each of the major indices climbed more than 1.75% on Friday alone, rose over 4% for the week, and hit levels not seen in two months.

Even so, the Dow is down 3.13% year to date. The S&P has skidded 5.31%. And the Nasdaq is down 9.4%.

Of course, fixed income felt the brunt of the shift in asset allocation as the yield on the 10-year Treasury bond climbed to around 3.75%.

With positive stock-price momentum, the potential for a new round of corporate deal making that could further stoke bullish sentiment, tax refunds on the way for some, and gas-price relief in time for the all-important summer driving season, there seems to be a lot to be optimistic about as the arm weather months return to us here on the East Coast.


Previous Week

Current Week

YTD Change

Dow Jones Industrial








S&P 500




Russell 2000




Fed Funds



-200 bps

10 yr Treasury (Yield)



-30 bps

Economically Speaking

While investors clearly had their hands as they read through, analyzed and prioritized the flood of earnings releases last week, at least the results seemed to be generally upbeat. Economists, however, had to deal with an array of "not-so-rosy" reports last week. While stock prices hint at a potential economic rebound, economic reports hint at an inflationary resurgence that could derail any rebound.

Retail sales rebounded from a decline in February and surged 0.2% in March. Then again, rising gas prices accounted for most of the gains, as sales at service stations climbed by 1.1%. Core inflation - which excludes volatile food-and-energy prices - rose by 0.2% within both the wholesale (Producer Price Index, or PPI) and retail (Consumer Price Index, or CPI) readings. Then again, the volatile food-and-energy components (which now includes airline tickets) continue to skyrocket and cannot be overlooked. While most "experts" anticipated a decline, industrial production actually climbed by a whopping 0.3% in March on greater output from utilities. But manufacturing production struggled on a weak auto sector.

Housing moved a step closer to rebounding. Then again, home foreclosures have now increased by 57% from last year’s levels and housing starts reflected the lowest pace of construction in 17 years. The U.S. Federal Reserve’s Beige Book noted a "deteriorating" economy, as manufacturers and other businesses struggled with skyrocketing energy and materials costs, and as consumer continue to sit on their wallets, fearing they may become victim of the next round of layoffs.

We’re still waiting to see what kind of positive spin the central bank can put on that troubling Beige Book report.

Weekly Economic Calendar




April 14

Retail Sales (03/08)

Slight gain primarily reflects higher gas prices

April 15

PPI (03/08)

Surge in oil prices downplayed by mild core release

April 16

CPI (03/08)

Energy increases offset by decline in clothing prices

Housing Starts (03/08)

Lowest level of construction in 17 years

Industrial Production (03/08)

Better then expected increase in output

Fed’s Beige Book

Deteriorating economic health

April 17

Initial Jobless Claims (04/12/08)

Higher weekly benefit claims

Leading Eco Indicators (03/08)

Slight increase after poor showing in February

The Week Ahead

April 23

Existing Home Sales (03/08)

April 24

Durable Goods Orders (03/08)

Initial Jobless Claims (04/19/08)

New Home Sales (03/08)

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