Market Commentary

Second quarter earnings season commences tonight
July 12, 2010

Second quarter earnings season commences tonight with the release of Alcoa’s results.  As penned many times analysts have been raising forecasts but as evidence by the market slide there is little conviction that either profits will meet expectations or most think earnings are around peak levels. And then there are concerns around forward looking statements. 

Historically companies offer a guarded outlook following any brunt trauma suggesting many firms may make statements similar to second quarter earnings exceeded our expectations but we are guarded about tomorrow.  We are cautiously optimistic but there is a litany of headwinds that we are facing, etc.

Bloomberg is suggesting third quarter profits will rise by 25% versus a 34% expected rate for the just ended period.  Profits rose by 52% during the first quarter.  For calendar 2010 analysts are projecting a 34% rise in earnings.

In my view the market will also be focusing upon top line revenue growth in an attempt to gauge the health of the recovery.  Moreover if revenue does rise more than most expect, earnings would soar because of huge productivity gains.

What will occur this week?  Last Tuesday I wrote the next four days may be relatively quiet given the dearth of data and expected corporate announcements.  Wow!  I was wrong in this observation.  Equities staged their strongest advance in a year based upon several positive third tier statistics.  I did comment however the averages were poised for a large move in either direction suggesting a 75% chance it could be on the upside given the persistent bearishness and massive amount of cash on balance sheets. 

To answer the above question this week can be pivotal to determining the direction of stocks for the remainder of the summer.  If results exceed dumbed down market (not analyst) expectations and if forward looking statements are at least neutral last week’s rally should continue.  Incidentally the latest sentiment surveys as measured by the National Association of Active Investment Managers and the American Association of Individual Investors state the pessimism is at the highest levels since March 2009.  Historically when pessimism is so great, stocks advance.

Will any attention be focused upon a relatively busy economic calendar?  Several confidence and regional manufacturing surveys are released as is the PPI and CPI, retail sales, minutes of the last FOMC meeting as well as Capacity Utilization/Industrial Production.

Last night the foreign markets were quiet. London was up 0.17%, Paris up 0.08% and Frankfurt up 0.18%.  Japan was down 0.39%and Hang Sang up 0.44%.

The Dow should open quiet. The 10-year is up 6/32 to yield 3.03%.