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Monday, July 7, 2008

Just What The Doctor Ordered, Earnings Season; Is The Doctor A Quack?

 
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Monday, July 7, 2008
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Are You Scared Yet? You Should Be, Earnings Season Starts This Week

By Rick Pendergraft

Believe it or not, earnings season is upon us again.  Alcoa (AA) will get things started tomorrow and General Electric (GE) will announce on Friday.  Next week is when things really get going with eight of the Dow 30 reporting along with Internet giants Google and EBay. 

So what should we expect this earnings season?  I wouldn’t get my hopes up for earnings saving the market.  Earnings for the S&P 500 as a whole have declined for three straight quarters for the first time since 2001. 

The first quarter results were marred by very poor earnings from the financial sector, but with financials being such a large portion of the index these days, it resulted in the overall being down.  In fact, the overall earnings for the first quarter were down 25.9 percent from the first quarter of 2007.  If you exclude the financials, earnings were up 8.66 percent in Q1.

Looking at the second quarter, the bar is fairly high since Q2 2007 was the peak performing quarter before the credit meltdown started last summer.  So you can expect companies to struggle to get over this hurdle, given the recent sluggishness in the economy.

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Despite the sluggishness, non-financial components are expected to show earnings growth of 10.8 percent.  The financial components are expected to show devastating declines yet again, with analysts predicting a decline of 47.7 percent from the sector.  Overall, this would lead to an overall earnings decline for the fourth straight quarter.

Here is how I see things playing out over the next six weeks or so.  Due to the extreme number of stocks that are oversold right now, I can see the indexes rallying this week and perhaps even early next week.  This would be enough to get most of the stocks out of oversold territory.

The problem is the long-term trend is still to the downside.  The bearish crossover of the 10-month and 20-month moving averages on the S&P that I pointed out in last week’s article is just getting started.

I look for a mild rally over the next week or so, and then when the earnings start rolling and falling short of expectations, the selling will resume.  Not all companies will get hit, as some will beat expectations and some will rally because the expectations are so low that they can’t help but go up.  Overall, I look for earnings to disappoint as a whole and the low from March on the S&P will be taken out over the summer.

Historically, over 60 percent of companies beat their earnings expectations.  In Q1, only 48 percent beat expectations.  I would expect more of the same this quarter.

As we all know, earnings season is all about expectations, and right now, it seems that the expectations are for the financials to do poorly, but all other sectors will grow at a double-digit pace.  I just can’t see that happening with the employment picture looking like it does and the housing market being the worst that it has been in 25 or 30 years.  Add to that the abysmal consumer confidence numbers, and I just don’t see companies growing their earnings by ten percent or more.

Good luck and good trading,

Rick

P.S.  To let me know what you thought of today's article, send an e-mail to: feedback@investorsdailyedge.com.

[Ed. Note: Subscribers to Rick’s KISS Investing service recently closed out gains of approximately 150% on Continental Airlines and 175% on the Diamonds Trust. Click here to learn more about KISS Investing]

Market Watch

Light Economic Calendar,
But Earnings Season Kicks Off

By Christian Hill

Wall Street is easing back into things after the holiday weekend with a rather light calendar this week.  The reports start on Tuesday, with Pending Home Sales for May released at 10:00 am. Expectations are for a decline of three percent, a sharp decline from April, which showed a gain of over six percent. I would be very surprised to see this sharp of a decline. In the last month, many housing reports have beaten estimates. Those that didn’t only posted slight declines. I would expect this report to follow suit.

On Friday the Trade Balance report for May is released, and is expected to show a further decline. In April, we were at a collective $60.9B deficit, and that number is expected to have grown to $62.1B in May. This report is difficult to predict. On one hand, we are a nation of importers, on the other hand importing is becoming more and more expensive due to rising costs, and this is shifting demand to domestic products. The final figures on this report will likely show an increase, but I would expect at a slower rate.

Friday also brings us the preliminary Michigan Sentiment survey for July, and in what should come as no surprise, it looks like it will continue to decline. With everything going on in the economy, it could be quite a while before this report starts showing any optimism.

This week also marks the return of earnings season, and as usual, Alcoa leads the group. In addition to Alcoa reporting on Tuesday, GE reports on Friday. Earnings season really gets going next week, and I will provide you with a list of companies to watch every week.

Date

Time (ET)

Statistic

For

Market Expects

Prior

8-Jul

10:00 AM

Pending Home Sales

May

-3.00%

6.30%

8-Jul

10:00 AM

Wholesale Inventories

May

0.70%

1.30%

8-Jul

3:00 PM

Consumer Credit

May

$7.0B

$8.9B

11-Jul

8:30 AM

Export Prices ex-ag.

Jun

NA

0.40%

11-Jul

8:30 AM

Import Prices ex-oil

Jun

NA

0.50%

11-Jul

8:30 AM

Trade Balance

May

-$62.1B

-$60.9B

11-Jul

10:00 AM

Mich Sentiment-Prel.

Jul

56

56.4

11-Jul

2:00 PM

Treasury Budget

Jun

$36.5B

$27.5B


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The Market Minute

How oversold are we… the 10-month slow stochastics on the S&P 500 have entered oversold territory.  The percentK portion dropped below the 20-level for only the fifth time since 1988.  This oscillator hit this level in March 2003, twice in 2001, and in October 1990.  Of the four previous times this occurred, twice the S&P enjoyed a two-month bounce before resuming the downtrend.  The other two times started prolonged bull markets.

 
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Newsworthy

The European Central Bank raised its benchmark interest rate Thursday by a quarter percentage point to 4.25 percent in an effort to rein in escalating inflation in the 15-nation euro zone.

The move comes despite worries in some quarters that it could dampen growth, but ECB President Jean-Claude Trichet said at a news conference that the fundamentals of Europe's economy "are sound" and focused on inflation, which he said could remain high "for a more protracted period than previously thought."

He did not clearly indicate more rate increases were coming, as he did at last month's meeting.

"The monetary policy stance after today's decision will contribute to achieving our objective of price stability," he said. "I have no bias and we are never precommitted...and we do what is necessary to deliver price stability in the medium term."

 

-- AP

 
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