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.
Earnings will be bad. S&P 500 companies are expected to report that earnings are down around 35% from the year-ago quarter. And earnings were already falling then.
But don’t forget, stocks have been rallying because investors are anticipating an economic recovery. Though there have been some subtle signs that the economy is starting to improve, it hasn’t happened yet. In other words, nobody expects Q1 earnings to be good.
This earnings season is going to be all about guidance. What do companies see in the future? Will they be willing to say things look better? And more importantly, will any optimism be reflected in revenues and earnings forecasts?
That’s what investors will be focused on. I’d say it’s an "even money bet" whether stocks are higher or lower when earnings season wraps up a few weeks from
*****We’ll get a pretty good view of what’s going on this week, as key sector bellweathers report. Alcoa and Bed Bath and Beyond (Nasdaq:BBBY), representing the materials and retail sector, report Tuesday. And oil company Chevron (NYSE:CVX) reports Thursday.
Technology and financials don’t start reporting until next week. Some analysts are suggesting that financials are a bit of a non-factor at this point. The logic is that the damage here is done, the majority of write-offs have occurred, and year-over-year comparisons should easier on the companies.
I do think there’s potential for financials to look better than they have for a while. But I also think a lot of money shuffling from bailouts and stimulus efforts may make numbers look better than can be sustained.
If banks have participated in loan modifications, for instance, that will show up as new revenue, even though it’s not additional revenue because it’s an existing loan that’s been miraculously reborn. The same goes for credit card and other consumer debt.
That, of course, sets the stage for future earnings disappointments if modest economic improvements prove unsustainable. This is part of the double-dip in a recession scenario. We’ll be talking more about this in the coming weeks.
*****Big institutional investors, and individual investors as well, are starting to invest with inflationary expectations, rather than deflationary ones. That means a fundamental move away form Treasuries toward inflation hedges like TIPS, the TIP Exchange Traded Fund and stocks.
This is a significant shift in sentiment. Even as recently as the last FOMC meeting, we saw the Fed continue to act with respect toward deflation when it announced it would add over $1 trillion in debt to its balance sheet, in part to keep pressure on interest rates.
Low interest rates and moderate inflation are good for stock prices. And home prices for that matter. This shift in sentiment is part of what is driving the stock market higher lately.
*****If I was Japan, and I was allowed to have an air force, it would have already returned from bombing North Korea’s missile launching site. There is simply no way I would be able to tolerate the provocative act that occurred over the weekend.
It would have been nice if the UN Security Council meeting could have been more like the G-20 summit. The G-20 actually accomplished something. All the Security Council could muster was a statement of "regret" about North Korea’s launch.
And if I were President Obama, I would be in discussion with South Korea and Japan about how North Korea’s facility could be taken out. Not only would he make some serious good will points in the region, he’d also be pre-empting Iran’s nuclear ambitions. It’s reported that Iran might be interested in acquiring long-range missile technology from North Korea. Take out North Korea’s capability and you lessen Iran’s options.
*****Things have been heating up at SmallCapInvestor PRO. Since we launched in late February, we’ve booked gains on two positions: 23% gain on biotech Theravance (Nasdaq:THRX) and 34% on another biotech, Arena Pharmaceuticals (Nasdaq:ARNA).
We’re sitting on a portfolio of seven stocks and only one of them is showing a loss (of about 1%). There are two with gains are between 15% and 16%.
And we released our first Special Opportunity issue last week on small oil companies.
Oil has been moving higher as recovery expectations increase. But even with oil trading for +$50 a barrel, small oil exploration stocks are still trading at 2002 prices. This is a serious price imbalance, and it won’t last long. For more on this potentially profitable situation, please click HERE.
That’s it for today. I’ll talk to you tomorrow.