This article is a guest contribution by David Andrews, CFA, Director, Investment Management & Research, Richardson GMP Ltd.
The first quarter earnings season got off to an auspicious start with Alcoa disappointing investors with a narrow quarterly loss due to seemingly endless restructuring costs and lower than anticipated revenues. Markets did not have too to dwell on the results as both Intel and JP Morgan earnings set a positive tone early last week. Intel reported better than expected revenues, margins and gave upbeat guidance for 2010 which investors viewed very favourably. In fact, the results were seen as bellwether for the technology sector which is expected to post strong earnings as the economic recovery remains on track. JP Morgan also reported better than expected results with strong gains from investment banking and fewer loan losses sounding a bullish note on the overall state of the U.S. economy.
It remains very early as only 41 of the S&P500 companies have reported with a slew due to report this week. Thus far 78% of these companies had positive earnings surprises beating consensus estimates. Only 4 of the 41 firms have missed their expectations or guidance so the kick off to earnings season has so far been favourable.
This week, earnings season kicks into high gear with major Financials, Technology, and Pharmaceutical stocks reporting. Notable names reporting include Citigroup, Apple, IBM and Eli Lily. With so many of the S&P500 stocks trading at overbought technical levels recently, any negative earnings surprises are likely to be penalized by the market.
In regulatory news, the Securities and Exchange Commission charged Goldman Sachs with a civil fraud suit related to the subprime mortgage market. At question is the firms omission and misstatement of facts related to the construction of securities known as collateralized debt obligations(CDO). It gets a bit sticky in that a hedge fund (Paulson and Co,) and customer of Goldman Sachs not only shorted the CDO, but allegedly the hedge fund was involved in the selection of the collateral used in the CDO security they were shorting. Goldman Sachs stock was down as were other financials on the breaking news but the revelation really reverberated across the entire market place including international stocks, commodities, and currencies. They U.S. dollar and the Japanese Yen spiked higher as investors sought safety once again.
In economic news, most of last week’s data was mixed which, in our opinion, is indicative of how difficult it is for economist to calibrate their forecast of the current economic revival. Certainly this pace of recovery is more tepid than what one would expect or what we have witnessed in recent history. The Federal Reserve’s Beige Book reported last week that there is healthy economic development in most, if not all regions within the country. Another positive was retail sales for March which were much stronger than expected especially with the high rate of unemployment. Manufacturing data was strong as was housing data which showed home builders broke ground on more new projects last month than they had in over a year. Inflation remains a non issue in the U.S. as core CPI data for March indicated. The biggest surprise was the uptick in weekly jobless claims which rose to 484,000 when expectations were only 440,000. This week, we look forward to more inflation data (Producer Price Index) and housing (New Home Sales) for the month of March. Housing market recovery remains a key element of overall consumer confidence and the data will be watched closely. In Canada, all eyes will be on Tuesday’s Bank of Canada interest rate announcement. Whether they move rates higher now or wait until July is what is at stake. A survey shows economists expect short term rates to be from 50 to 100 basis points higher by the end of 2010. On Friday, Canadian CPI and retail sales data for March will give some indication on inflation levels which are of concern to the central bank.
Energy markets were active last week with the big announcement that Sinopec was paying $4.7 billion to Conoco Phillips for a stake in the Syncrude oil sands development. The price was higher than analyst were anticipating and indicates China’s insatiable appetite for securing overseas resource plays. Crude oil finished the week lower as the Goldman Sachs, Greek debt issues, and grounded air traffic weighed on investors. Crude was down 2.7% on Friday and the May crude oil closed at $US82.52. Gold was surprisingly lower by 2% as the market was concerned about new commodity trading rules which could be implemented following the SEC fraud charge announcement.
