Market Commentary

Earning season commences this evening
April 12, 2010

Earning season commences this evening as aluminum giant Alcoa announces first quarter profits.  Will results exceed expectations for the fourth straight quarter?  As widely discussed earnings rose in the fourth quarter, breaking a record nine consecutive quarters of declines. 

Analysts expect earnings for S & P 500 Index members to rise by 30% after more than doubling in last year’s final quarter.  This is the first back to back quarterly profit gains since 2007.  All will scrutinize profit statements in an attempt to gauge sustainability.

Will equities sell off as they did following the commencement of fourth quarter earnings under the proverbial guise of “buy on rumor and sell on fact?”  Or will upcoming results be the catalyst for further equity gains?

I reiterate my long held view stocks could undergo a rough period when the Federal Reserve does change its stance on monetary policy, a change last winter I suggested would potentially occur by spring.

Unless one has been living in a cave, the Central Bank has telegraphed its intention to maintain the overnight rate between 0.00%-0.25% for an “extended period time,” which is interpreted as no change until August-September.

I think the averages can enter into a period of quiet volatility as the mindset accepts the ultimate reality that higher rates are indeed inevitable.  As the perceived deadline draws closer volatility may increase sending averages down about 5%-7% from current levels from irrational fears higher interest rates will kill the recovery.

 As written many times, higher rates are a sign of economic recovery and once this reality is accepted I think the averages could stage a 7%-10% gain.

The above scenario occurred during the last two tightening cycles of 1992 and 2004.

Commenting about Friday’s market action, treasuries were almost unchanged as European Union officials stated they are “ready to act” on financial assistance for Greece.  Stocks were moderately higher.

What will happen this week?  As stated above earning season starts tonight.  Moreover the economic calendar is heavy.  Trade and inflation data is released so is retail sales and housing statistics.  Moreover the Beige Book is published, the statistical survey utilized in the upcoming FOMC meeting.  There are several regional manufacturing and sentiment surveys released as is Industrial Production/Capacity Utilization.  All can impact trading and prevailing sentiment.

Last night the foreign markets were quiet.  London was down 0.04%, Paris down 0.01% and Frankfurt down 0.01%.  Japan was up 0.42% and Hang Sang down 0.32%.

The Dow should open quiet as all are waiting for the start of earning season and the host of data released this week.  The 10-year is off 5/32 to yield 3.90%.