Financial Market UpdateStrategicPoint of View®
January 19, 2010
Welcome to the StrategicPoint of View -- a market and economic overview of what occurred last week, what's up for this week, and our commentary on the economy and current market activity in general for “Making Money” listeners.
LAST WEEK
Banks were isolated for bad behavior last week by the Financial Crisis Inquiry Commission and by the Obama Administration through the Financial Crisis Responsibility Fee. The Federal deficit for December was nearly double the December 2008 figure, while retail sales for December were a stark disappointment.
S&P 500: 1136 (down 0.8% for the week and up 1.9% on the year)
Dow: 10610 (down 0.1% for the week and up 1.75%)
NASDAQ: 2288 (down 1.25% for the week and up 0.8% on the year)
10-year: 3.66% (from 3.84% last week)
Crude Oil (February): $78.00 (from $82.74 last week)
Gold (February): $1,130 (from $1,139 last week)
USD/Euro: $1.4388 (from $1.4407 last week)
THIS WEEK
Two peak weeks are coming up for earnings reports. On the docket are: Citigroup, GE, Goldman Sachs, Morgan Stanley, IBM, AMD and McDonalds. Producer Price Index, Housing Starts and Leading Indicators will round out the news of the week.
COMMENTARY
Markets backpedaled this week, seizing at isolated numbers and extrapolating onto whole sectors. It was the first week of earnings season, but a relatively quiet one. This meant that the companies who did report received exaggerated attention.
Why are earnings so important? The markets have priced 2010 S&P earnings at around $74 -$75 a share. If earnings disappoint, stock prices could be considered overpriced.
The best measurement of success will be top line growth. The number to track is revenue/sales. Company profits are expected to look good, based on cost cutting which has led to increased productivity. Inventory replacement is also expected to boost the bottom line. However, if businesses and consumers don’t start increasing their demand for goods and services, the profits will be temporary and less meaningful over the longer term.
Investors nervousness was evident in terms of how they treated three distinct companies this past week – one each from the basic materials, technology and financial sectors.
The week started with the release of disappointing numbers from Alcoa, the giant aluminum producer, which reported a $277 million loss on lower sales. Analysts - it is important to note - were generally optimistic about Alcoa’s long term outlook based on future growth in commodity prices and global recovery. The markets, however, reacted negatively reflecting investor jitters. After closing out a successful 2009, many investors fear being caught in the wrong place at the wrong time for 2010. They are quick to jump ship.
Intel reported after the bell on Thursday and blew away expectations. One analyst called Intel’s performance “flawless.” (Ten fold increase in profits from 4th quarter 2008, top line revenue growth of 28%, and a 64.7% profit margin). Barron’s added to the positive sentiment with the statement, “..there are good reasons to expect more good times ahead.”
However, investors found reason to boo – expressing concern over prices “peaking.” This was a classic case of buy on the rumor and sell on the news. Intel’s stock had already been bid up in anticipation of the positive earnings report. It couldn’t win.
For the tech sector as a whole, investors and analysts express cautious optimism. However, short term the roller coaster could continue as individual company reports pull the markets in one direction or another.
JP Morgan Chase did not get off so easily. Profits rose sharply in its investment banking department (sale of securities, trading fees and institutional advice), but struggled on the commercial banking side (loans and deposits). Many investors believe that banks will not fully recover until their traditional business of making loans to businesses and consumers improves. JP Morgan Chase CEO Jamie Dimon could not offer reassurances of when this will happen, leaving investors to worry about the banking sector in general.
This week will provide more substance to the quick responses of the past week, as more tech companies and financials report along with consumer staples and the conglomerate GE.
Looking ahead, we see the first part of the year as positive for stocks (albeit choppy), based on excess liquidity, government stimulus, higher profit margins and the need for inventory replacement. We can’t avoid weeks like this last one. The theme for the year is uncertainty, and that can lead to short term swings in valuations.
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*Past performance is not indicative of future results. Indices are unmanaged and you cannot directly invest in them. The Nasdaq Composite Index measures all NASDAQ U.S. and non-U.S. based common stocks listed on the Nasdaq Stock Market. The S&P 500 index is based on the average performance of 500 industrial stocks monitored by Standard and Poor’s. The data referred to above was taken from sources believed to be reliable. StrategicPoint Investment Advisors has not verified such data and no representation or warranty, expressed or implied, is made by StrategicPoint Investment Advisors.
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