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When You Hear Hoof Beats…

It sure was nice to see stocks make a nice move higher yesterday. Especially after I came out yesterday and said Dow 10,000 and S&P 500 1,071 were support points.

It’s also interesting that this advance came on the first day of February. Recall that the positive GDP surprise came on Friday, the last trading day of January. Investors were not interested in buying stocks in January. But now that it’s February, the buyers are back.

It might seem strange, but mutual funds and other institutional investors don’t base their buy and sell decisions solely on making money. They have to play the percentages. And that sometimes means taking profits when the economic data supports better earnings and higher stock prices.

Is that what took stocks lower in January? Maybe, although it’s a little too soon to say the upside trend has been re-established. But sometimes, when you hear hoof-beats, it’s best to think horses not zebras.

The financial media has a tendency to think zebras. The writers always want to find the reason behind the selling. It’s China, maybe it is earnings, or is it economic data? The list goes on. Of course, I’m not saying that these items aren’t factors. But at the end of the day, it is institutional investors that drive market direction. And like I said, they will take profits sometimes, just because they can.

Low Rates to Continue

I managed to catch part of Treasury Secretary Geithner's testimony yesterday. I actually thought he represented himself pretty well. I can appreciate his stance that AIG really was to big to fail. But that notion that the New York Fed had to make sure all of AIG's credit default swaps were paid still doesn't make sense.

Geithner's explanation was that if AIG did pay off debts like the $25 billion that went to Goldman, AIG would get downgraded and it would become more expensive to unwind the company. Maybe I'm wrong, and I haven't checked to be sure, but I'm pretty sure AIG's debt was downgraded. And do you even need a rating for a company that's 80% owned by the government?

Bottom line: I still think former Treasury Secretary Paulson made sure Goldman Sachs got paid and it really stinks that tax payers get taken advantage of like that. Unfortunately, it's unlikely anything will come of it.

*****The Fed reiterated its pledge to keep interest rates low for an extended period. No surprise there, but investors liked the news. Stocks finished the day with a nice rally.

Still, it's not like the Fed is keeping the liquidity spigots wide open. The Fed plans to end its mortgage-backed securities purchases. With so many stimulative monetary policies in place, low interest rates will probably be the last thing to get changed.

*****China is also d oing its part to soothe investors. According to Bloomberg, China's banking regulator has told lenders to "....step up scrutiny of property loans while pledging to satisfy "reasonable" financing needs..."

Watch ‘Em Squirm

I plan to be unavailable for a few hours, starting around 10 a.m. this morning. I want to hear the members of the New York Fed try and defend their actions regarding the AIG (NYSE: AIG) bailouts in front of Congress.

The New York Tines published some of the prepared testimony of the principal players. I try to keep a level head, but I'm reaching for my pitchfork and torch right now.

*****Recall that the New York Fed orchestrated what ultimately became an $85 billion bailout. A good portion of that cash was paid directly to other companies with which AIG had entered into the now famous credit default swaps. These were essentially insurance contracts on mortgage backed securities held by banks and underwritten by AIG.

A full $25 billion in AIG bailout money went to pay off Goldman Sachs (NYSE: GS). Here's a section from the New York Times (Mr. Baxter s the general counsel for the NY Fed):  

Mr. Baxter explained that the New York Fed felt compelled to pay out A.I.G.'s counterparties in full to unwind tens of billions of dollars in derivative contracts because "there was little time, and substantial execution risk and attendant harm of not getting the deal done by the deadline of Nov. 10." That was the date when A.I.G. was scheduled to report its earnings and could face downgrades from credit ratings agencies. A downgrade would have led to more collateral calls and even greater liquidity problems for A.I.G., Mr. Baxter said.

Today is the Day

On the surface, earnings from IBM (NYSE: IBM) appeared excellent. The technology bellweather posted $3.59 a share in 4th Quarter earnings. That beat analysts' expectations of $3.47 a share. IBM also beat slightly on revenues.
IBM also said 1st quarter revenues would be higher and even went so far as to raise earnings estimates for all of 2010. So why is the stock down?
Because IBM's business services division, which includes consulting, reported a 2.8% drop in revenues. Obviously, strength in other divisions more than made up for it. But investors seem fixated on the negative.
Yes, the drumbeat of the skeptics rolls on...

Earnings Season

I heard there's a new slogan making the rounds in corporate accounting departments. "Flat is the new up." I have to admit, that got a chuckle out of me. But it's true, flat really is the new up when it comes to sales volume, revenues, and even earnings to an extent.
And that maxim will be put to the test next week as we head into earnings season for the Fourth Quarter of 2009.
It's the weirdest thing, but I'm always a little surprised by Q4 earnings. It just seems to sneak up as I'm easing back into full work mode right after the holiday season. I don't think I'm alone here either, because I haven't seen any mention of Q4 earnings in the media.
OK, that's not exactly true. Meredith Whitney did offer up an earnings estimate cut for Goldman Sachs (NYSE:GS) earlier in the week. Ever since Whitney started her own firm, she's seemed a bit more eager to make a splash in the headlines. I imagine her as a task master in her office: punctual, driven, strict, and humorless. Kind of like Dwight from The Office (yes, I catch that show on occasion).
*****Still, Whitney's is the first recognition that earnings season starts with Alcoa (NYSE:AA) on Monday. It should also be noted that the market ignored Whitney's Goldman earnings cut (the parallels with Dwight continue). Truly, flat is the new up.
Of course, investors will be looking for earnings growth. But I suspect if revenues come in flat and companies can give a somewhat encouraging outlook for 2010, stocks will hold current valuation, and may even move higher...
 

Goldman Blows Out Earnings: Numbers vs. Actions

"Given the challenging fundamental backdrop in the global economy, we continue to be cautious about the near-term outlook for our businesses …" 
That's what Goldman Sachs CFO had to say after it posted pretty good earnings numbers on Monday. Of course, no one in the banking sector in his or her right mind is going to say things are great. But numbers are one thing, actions are another.

Earning Season Starts with AA, BBBY, and CVX

Time flies. Seems like earnings season just ended and yet here we are again. But first-quarter earnings kick off tomorrow with Alcoa (NYSE:AA). 
Given how far the stock market has come over the last three weeks, you might think stock prices are set up for a fall as the reality of earnings dashes the enthusiasm that economic recovery is at hand.

HOV and GHM still in the green

Unemployment numbers continue to rise, but investors are more focused on the hope that the economy has bottomed and may be positioning for recovery. At least for now. 
Please note that I said "positioning for recovery." Mortgage rates are down and that seems to be helping the housing market a little. Credit afforded by the Treasury aimed at removing toxic assets from banks is resulting in higher valuations for those banks. 

GM’s Wagoner Gone and Oil Below $50: Time to Buy?

I didn't know former General Motors CEO Rick Wagoner was so popular. The morning headlines in the financial press make it sound as though stocks are selling off because Wagoner and other auto industry executives failed to put forth strong enough turnaround plans to guarantee more government loans.  
Never mind that the S&P 500 rallied 167 points, or 25%, over the last two weeks. Ignore the possibility that one of the sharpest rallies in stock market history might have some investors taking profits. 

Retail Sales Up, Income Down: buy KB and HOV?

I'm fond of saying "never underestimate the American consumer." Retail sales for February came in with a 0.2% rise, even though income fell 0.2%. Stocks look ready to sell off, but it's not a response to retail sales. The indices have come a long way over the past two weeks, and it's time for a little profit-taking.  
I still believe that "buy the dips" is the appropriate strategy for the current rally. Of course, I'm talking about taking short- to medium-term positions. For the long-term investor, I suspect that you will get better entry points in the future.

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