First Quarter Earnings Will Make or Break Market Rally

By William Patalon III
Executive Editor
Money Morning/The Money Map Report

A rally in the U.S. stock market has gained traction over the past month, but holding onto its recent gains could prove difficult this week as investors catch a glimpse of the first batch of first-quarter earnings reports.

The Dow Jones Industrial Average wrapped up its best four-week run since 1933 last week after the economy showed signs of improvement and world leaders at the Group 20 meeting in London pledged more than $1 trillion to ending the first global recession since World War II.

However, the key to sustaining the rally will be this week’s quarterly earnings reports. Tuesday officially kicks off the first quarter earnings season, and aluminum producer Alcoa Inc (AA) will be the first Dow Jones industrial to report.  While many analysts expect the overall earnings results to be weak again, many are hopeful that the past three months represented an ever-so-slight rebound from the 4th quarter.  (And, any rebound would be deemed positive these days.)  After all, companies had been engaged in all kind of cost-cutting measures from layoffs to plant closings to dividend reductions to (forced) bonus restrictions. 

Investors are eager to see some sector specific results as well.  Have banks indeed rebounded as executives from Citigroup Inc (C) and Bank of America Corp. (BAC) indicated a few weeks ago?  Is retail showing signs of life after a dismal holiday season?  How are energy companies weathering the volatility from oil and gas prices? Will we see more record profits for ExxonMobil Corp. (XOM)? 

In reality, the “relative” comparisons may start to look even better over the next few quarters.  A slow week on the economic calendar should give analysts more time to focus on the corporate reports and also to debate the merits of the new FASB mark-to-markets rules.  While the news was initially extremely well-received, some feel that it contradicts the U.S. Treasury’s plan to buy toxic assets from banks (private investors will not want to overpay) and ultimately could backfire. 

Market Matters         

Full-fledged bull market or temporary bear market rally?  For the 4th consecutive week, investors dissected the daily news, economic data, and statements from the powers-that-be (fed, politicos, corporate titans, etc.) and apparently liked what they heard.  Though the labor picture continued to weaken  and the domestic auto sector remained in disarray (Fiat SpA (OTC ADR: FIATY) to the rescue?), investors saw enough positive developments from the G-20 meeting and the new mark-to-market guidelines to push equities to levels not seen in months.  Bear in mind, sentiment can change on a dime as the markets continue to experience more volatility than they have at any time in recent memory.  But, for now, optimism (or, at least, cautious optimism) has become the theme du jour. 

The week started with some harsh rhetoric out of DC, and ultimately General Motors Corp.’s (GM) chief, Rick Wagoner, was given his walking papers.  When the auto task force did not see enough viable measures in the restructuring plans of GM and Chrysler LLC, the administration made its case that bankruptcy may be the best option.  Both essentially have been put on life-support and will be required to obtain some serious concessions (from bondholders, retirees, unions) in order to be eligible for additional government funds (bailouts). 

A Chrysler/Fiat merger emerged as one promising option, while GM’s new CEO seemed more amenable to the bankruptcy possibilities.  The administration was not done with its less-than-cheery assessments as early in the week, Treasury Secretary Geithner took his message to the Sunday morning talk show circuit and announced that the credit crisis continues and ailing banks may be turning to the government for more handouts (hopefully, not for retention bonuses this time…what’s that, Freddie Mac (FRE) and Fannie Mae (FNM?). 

While investors did not take too kindly to the early week developments, a bunch of accountants came to the rescue.  The Financial Accounting Standards Board loosened the rules impacting mark-to-market; effective in the second quarter, banks will no longer be forced to write down assets to levels reflecting distressed conditions.  While the news was well-received by investors, critics bemoaned the move and claimed the independent board gave in to political pressures.  Others wondered aloud how the valuation change would impact the treasury’s (public/private) plan to buy such toxic assets, now that many could be priced at higher levels.  (Always a few naysayers in the crowd.) 

 Across the pond, U.S. President Barack Obama and his “disgruntled” G-20 counterparts discussed ways to save world and decided to boost the lending powers of the IMF and tighten regulations on hedge funds.  Again, investors reacted favorably to the news (perhaps, happy that no foreign leaders were injured amid the potentially antagonistic discussions or the protests outside).

Once the auto revelations became old news, the bullish sentiment returned to the marketplace.  Research in Motion Ltd (RIMM) (Blackberry) announced strong earnings, Microsoft Corp. (MSFT) was upgraded, and Intel Corp. (INTC) released its “latest and greatest” high-powered chip.  (Not a bad week for techs.)  The Dow shot passed 8,000 for the first time since Feb. 9 and the Nasdaq closed in positive territory for the year.  Even a poor jobs report could not restrain the newfound euphoria and few investors seemed concerned about the actual distinction between bull market vs. bear market rally. 

Market/ Index	Year Close (2008)	Qtr Close (03/31/09)	Previous Week (03/27/09)	Current Week (04/03/09)	YTD Change
Dow Jones Industrial	8,776.39	7,608.92	7,776.18	8,017.59	-8.65%
NASDAQ	1,577.03	1,528.59	1,545.20	1,621.87	+2.84%
S&P 500	903.25	797.87	815.94	842.50	-6.73%
Russell 2000	499.45	422.75	429.00	456.13	-8.67%
Fed Funds	0.25%	0.25%	0.25%	0.25%	0 bps
10 yr Treasury (Yield)	2.24%	2.68%	2.76%	2.91%	+67 bps

 

 

 

 

 

 

 

 

 

Economically Speaking

Needless to say, more than a few political advisors were nervous about Obama’s initial trek to the world stage for the G-20 meeting.  After all, foreign leaders made no bones about who they blamed for the global financial crisis (USA, USA, USA) and Obama had ruffled a few features by implying his counterparts were not doing enough to help.  Apparently, the Prez was pleased with his performance.  The agreements mark a “turning point in our pursuit of global economic recovery.”  (Perhaps next trip, he should warn his wife that the Queen prefers not to be touched.)  

During the week, the European Central Bank even dropped its key lending rate to 1.25%, a historic low, but less than the expected cut (and perhaps a slight jab at Obama and the United States). 

Labor statistics highlighted a hectic week on the economic calendar and the results were not pretty.  (Perhaps, investors were not paying attention.)  The March unemployment rate soared to 8.5%, its highest level since November 1983.  Meanwhile, another 663,000 jobs disappeared from the economy, bringing the grand total to 5.1 million since the recession began in December 2007.  (How does it feel to make that list, ex-GM CEO Wagoner?)   

While labor clearly continued to struggle, economists searched for silver linings elsewhere in the week’s data.  Consumer confidence climbed a tad in March, though still remained at near historic low levels.  The ISM index reported that manufacturing remains in contraction mode, though the weakness was not as sharp as many had expected.  Further, factory orders jumped for the first time in seven months, a sign of renewed activity in the sector.  Construction spending declined for the fifth consecutive month in February, though housing activity was not quite as depressed as many had anticipated.  Any silver linings or simply more of the same? 

Weekly Economic Calendar

Date	Release	Comments
March 31	Consumer Confidence (03/09)	Slight increase though remains near record lows
April 1	Construction Spending (02/09)	5th straight monthly decline, but better than expected
	ISM – Manu (03/09)	Continued sector contraction, but at a slower pace
April 2	Initial Jobless Claims (03/28/09)	Climbed to 26-year high
	Factory Orders (02/09)	Surprising increase after 6 consecutive declines
April 3	Unemployment Rate (03/09)	Highest level since November 1982
	Nonfarm Payroll (03/09)	2 million jobs lost in past 3 months
	ISM – Services (03/09)	6th consecutive month of sector contraction
The Week Ahead
April 7	Consumer Credit (02/09)
April 9	Initial Jobless Claims (04/06/09)
	Balance of Trade (02/09)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

News and Related Links:

• Money Morning:Not Just a Price Floor, Treasury Programs May be a Stable Foundation for Economic Recovery

• Money Morning:G20 Summit Leaders Pledge $1 Trillion to Spur Global Recovery

• Money Morning:Record U.S. Job Losses in March, Unemployment Highs In Europe

• Money Morning:
  Obama Rejects Automakers’ Reorganization Plans; Elevates Potential for Bankruptcy

Tags: William Patalon III