Time to Buy Technology
After last week's strong recovery rally, we will find out soon if the fundamentals will support higher prices. Yes, after I've discussed it for the last three weeks, 2Q earnings season is finally here.
Today, we hear from Alcoa (NYSE:AA), chipmaker Novellus and railroad company CSX (NYSE:CSX). Tomorrow, Intel (Nasdaq:INTC) is up. Thursday brings us Google (Nasdaq:GOOG) and JP Morgan (NYSE:JPM). And then we'll wrap up the week with Citigroup (NYSE:C) and GE (NYSE:GE) on Friday.
We should get a pretty good feel for how earnings will be after this week.
Bank earnings will be particularly interesting. Analysts have lowered earnings estimates significantly. But changes in accounting rules may help banks beat those estimates.
It's called Statement 159, and it allows banks to record a profit when their bonds fall in value, based on the assumption that the banks could buy the bonds back at a lower price and, hence, make money.
Of course, no banks are actually doing this. Despite huge amounts of cash on hand, there is no incentive for banks to actually buy back their debt when they are allowed to book a profit without doing so.
One analyst believes that Bank of America (NYSE:BAC) may gain $1 billion in earning by employing this rule. In all, 20% of banks' pretax earnings may come from Statement 159.
Now, this accounting rule was implemented to help banks fix their balance sheets in the wake of the financial crisis. I guess Geithner and Co. assumed that once the banks got on better footing, lending would resume. But that hasn't happened.
In fact, the number of loans held by banks has shrunk for 6 consecutive quarters. Delinquencies for commercial real estate loans are still on the rise. And credit scores for potential borrowers have also been getting consistently worse.
It's a sticky situation. Loan demand is down, creditworthy borrowers are more scarce, and banks are still saddled with potentially problematic loans.
So as much as accounting rules like Statement 159 seem like complete, um, nonsense, just imagine what the lending environment would look like if banks' hadn't been thrown an accounting bone.
UBS (NYSE:UBS) is reporting that software and computer stocks are at their lowest valuations in 20 years, trading at 15 times trailing earnings. Cash on corporate balance sheets is near record highs, which leads UBS to believe that technology is due for a healthy revenue rebound.
Intel is expected to report its largest jump in net income since 1990. And yet the company trades at 10.4 times forward earnings. IBM (NYSE:IBM), which announced its plans to double earnings per share by 2015, is in the same situation, trading for 10.4 times forward earnings.
This is a good time to buy large cap tech stocks.
Oil prices have dropped back below support/resistance at $76. Gold and copper are down as well. Treasury prices are higher, along with the U.S. dollar.
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