Will Stability Lead to A Rally?
Stability is returning to an uncertain market. Japan's benchmark index, the Nikkei, has rallied out of last week's depths as news that the impending nuclear crisis is being alleviated. I guess we can say that not having a nuclear meltdown is bullish.
Other relatively bullish events like yesterday's huge acquisition by AT&T (NYSE:T), the resumption of dividend payments from some banks, and the recent strong economic data are helping to refocus attention on the economy and stock market valuations.
The current P/E for the S&P 500, according to the Wall Street Journal, is 17 and the forward number, based on earnings estimates, is 13. That's not ridiculously expensive, but it's not exactly cheap either. Any impairment to earnings due to higher material or energy costs, or lower consumer spending, would have important implications for stock valuations.
Case in point: cruise ship operator Carnival (NYSE:CCL) just reported lower than expected 1Q profits due to higher fuel costs. At the same time, revenues were up as people spent more money on board the ships.
*****We should be watching the banks closely. Despite the resumption of some dividend payments, the banks didn't trade well yesterday. JP Morgan (NYSE:JPM) and Wells Fargo (NYSE:WFC) traded higher, but failed to approach recent highs. Bank of America (NYSE:BAC) and Citi (NYSE:C) both looked weak.
We can say that the dividend news was priced into these stocks, and that there wasn't enough new information to push them higher. And the news of a reverse split for Citi doesn't really site well with me.
Stock splits are always just a numbers game. But in Citi's case, it appears like a blatant attempt to gloss over the effects of stock dilution. Now, Citi, and other banks, sold a lot of stock to pay back TARP loans. I'd prefer to see Citi show some earnings momentum before trying to inflate its stock price with a reverse split.
Quite frankly, this whole bank dividend thing stinks. Lending is already a drag, and setting aside earnings to pay dividends will not help improve the lending environment.
*****It may seem logical to assume that a return to stability means that stock prices should rally. But right now, it's probably better to assume that stability simply means that the market is no longer facing extreme panic selling in reaction to macro events, like Japan and the Middle East.
We will probably have to wait for earnings to begin before there's any catalyst capable of pushing stocks higher. Fortunately, earnings are not too far off. Alcoa (NYSE:AA) reports on April 11.
