Markets pause for earning season

The small gain the DJIA (Dow Jones Industrial Average)  achieved last week Friday, was given up early this week, following on a lackluster trading in stocks as investors elected to wait on earnings reports to get some vision of the future. Most of the global indexes were flat for the week as investors paused, despite the rather positive and well received comments from Allan Greenspan, the US Federal Reserve Chairman.

In his semi-annual monetary policy report to the US Congress, Allan Greenspan stated that the US economy is poised to accelerate and further mentioned that he expected interest rates to stay low in the near term. The over night rate is currently 1.0%, its lowest rate since 1954. Greenspan even hinted that the US FED still had room to lower rates further if it was required. US treasury yields rose markedly after his speech as a result. It is early in the earning season and it may be prudent to remind ourselves that it is typical for bad news to come out first with good news to follow. At this point, the number of companies reporting disappointing numbers to those meeting or exceeding their targets is running at about 1.7 to 1. To many this may seem to be disappointing or bad but in fact, the number at this point would typically be more like 2.6 negative earnings reports for every positive one reported, hence it is good. Even though the second quarter is typically the weakest quarter, it may well be that we are looking at a very positive earnings season leading to a summer rally. Also typical though would be the sell on news theory so it remains unclear as to how the markets will really move over the short term.

In the United States, IBM announced second quarter earnings rose to 1.7 billion USD from 56 million for the same quarter last year against the background of only a ten percent rise in revenue to USD 21.6 billion. Clearly the mean and lean system is working for IBM. Intel also announced a large growth in earnings, doubling second quarter profits from USD 446 million to 896 million year over year. Another tech reported positive, Microsoft released quarterly net income figures up 26 percent to 1.92 billion USD from 1.53 billion a year earlier and raised its sales forecast for the remainder of the year. Financial stocks also did well with CitiBank, Bank of America, Merrill Lynch and JP Morgan all announcing a rise in earnings. In the UK, stocks were mixed even though jobless claims came in less than expected, keeping the UK with one of the lowest unemployment figures of the major economies. Claims increased by only 1,700 rather than the 9,200 forecast, leaving the employment rate at 3.1 percent for the 17th month in a row. The housing market continued on its strong footing with net lending rising by GBP 5.31 billion in June, up from GBP 4.62 billion in May. UK inflation slowed unexpectedly in June, the RPIX was 2.8 percent as compared to 2.9 percent in May. The result is demonstrated in the UK business executive confidence figure which rose to its highest level in a year to 23, it was only six in March.

On the continent, German investor confidence also rose, reaching an 11 month high as Schroeder’s tax cuts and lower interest rates took hold. Nokia, the worlds largest mobile phone manufacturer, did announce that it expected both handset revenue and network business to fall. The stock fell on the news. In comparison, Ericcson, the largest wireless network supplier saw shares rise on news of its cost cutting measures and announcement that it would not loose as much as forecast. It seems that the German economy is improving but inflation remains too low, and the risk of deflation a concern. In Japan, a report from the Japanese Central Bank made positive statements about the economy based mostly in a recovery of exports, share prices and business spending. In closing, we are reminded that the US equity markets still account for approximately half of the world’s capital market value and will continue to influence the other major market behaviors despite their respective economic situation. We remain positive that the 350 billion USD tax incentive package passed by US Congress in early July (the third largest tax cut in history) coupled with the most aggressive cuts in overnight rates in history by the US FOMC (13 cuts since Jan 2001) have provided the framework for a solid economic recovery.
E-mail : darcy@investments-intl.com