Market Strong on Earnings

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Market Strong on Earnings

Another winning week for stocks made it three in a row, lifting the averages to a 6-month high as the Euro zone takes a back seat to mostly strong earnings. For the week, the Dow added 2.4%, the S&P gained 2% while the NASDAQ led with 2.8%.

The market continues to get a boost from what has been a pretty solid start to Q4 earnings season. That started with some good news out of financial services, where both Bank of America (BAC) and Goldman Sachs (GS) beat expectations. The trend continued in technology with Intel (INTC) and IBM (IBM) both delivering solid results. Transports also stood out with a big score for Union Pacific (UNP), beating and raising its full-year guidance.

But there were also a few soft spots. Dow components General Electric (GE) and American Express (AXP) disappointed the Street with under performances. If you take a closer look, both companies are suffering from weakness in the credit markets. GE is still trying to whip GE Capital into shape, and AXP took a hit from writing off more bad debt. It’s a signal that both companies and individuals continue to suffer from a weak credit environment.

The Tone is Upbeat

But overall the tone was mostly up beat on generally positive results and a confident outlook. That has helped to squash a lot of skepticism that the private sector would be showing signs of slowing down as Europe tries to spend less and China contracts.

But as always, those issues will linger. Right now, the market has a nice sugar high because earnings have been good. But the second the market gets a whiff of any material changes or weakness in the Euro zone story, a lot of hot money will be looking to take some profit and scale back. Those are hedge funds that have made some quick gains over the last few weeks in big positions and wouldn’t mind booking a little profit as we move into the back half of the month.

That means expect a little volatility in the short run. Everything is too quiet and complacent right now. We see that showing up in the VIX (volatility index), trading at a 6-month low.

2012 Looking Strong

But the longer term picture is actually looking pretty solid. Stocks are off to a good start in 2012, and the correlations between a strong January and strong year are high.

Looking forward, we’ve got another full deck of earnings on tap for the week.

From technology we hear from Apple, Inc. (AAPL) and Yahoo, Inc. (YHOO). Blue chips McDonalds (MCD), Ford (F) and Boeing (BA) are also stepping up to the plate. These are all big indicator companies too, so good news from the large-cap, multinationals will juice the market.

We’ve also got some key economic data to think about. On Wednesday we hear from the Fed, which is always interesting, but even more so than usual because clearly the market continues to price in more support from the biggest central bank in the world. So no doubt the market will be looking for the Fed to reaffirm its commitment to play nice. And don’t forget it’s an election year, which means the politicians will be pushing to go all in and do everything they can to boost the economy and bids for re election.

Beyond the Fed, we have:

  • Thursday: Initial Jobless Claims, New Home Sales
  • Friday: GDP, Consumer Sentiment

Let’s look for some more good news on the economy and earnings to support the nice up trend.

Updates:

Let’s take a closer look at some headline names that reported this week.

Although tech has generally been strong, Google, Inc. (GOOG) chimed in with a rare miss, disappointing the Street with Q4 earnings that came in short of expectations. The big story behind the miss is that GOOG is incurring more expenses, hiring a few thousand new employees during the quarter that weighed on margins. That’s a common problem that many companies are running into right now. Productivity has been maxed out over the last few years, pushing margins to historical highs.

That means earnings growth has to come from the top line and sales. But to get more sales you usually have to spend, and that is what GOOG is suffering from right now. Longer term, Google is still a solid name and legit player, but it’s another good example of how quickly the private sector in general and technology in specific evolves.

It’s funny how a weak economy can actually increase demand for some companies. One of those is EZCorp, Inc. (EZPW), with the pawn and payday lender reporting anther good quarter as credit-strapped consumers continue to seek specialty sources of finance. Although we didn’t see its share price pop, this was a strong quarter. Revenue was up 14% and earning jumped to 78 cents from 55 last year. The company also raised its full-year guidance. Shares have been a bit flat for the last few months after spiking last summer, which might have something to do with regulatory concerns as the payday and pawning industry remain in the cross hairs of the states and Feds. But with earnings on the upswing and a historically low valuation, EZPW is doing its part to support its investors.

Shifting back into technology, Checkpoint Software (CHKP) also looked strong with earnings up 15% from last year. The publisher of Internet and network security applications said that increased cyber and technology threats continue to drive demand for its products and services. That is a solid long-term trend, and CHKP looks well positioned to capitalize. On the whole, this is a top company in a growth industry with high margins and a killer balance sheet. That gives investors a lot of things to feel good about.

That’s it for this week, but we’ll be back again next week for another update. In the meantime, here is a great article that analyzes the relationship between former Fed leader Allen Greenspan laughing at FOMC meetings and the housing bubble. It’s a great example of how when the market gets too comfortable, something bad is about to happen. Enjoy.

Amazing Chart: Alan Greenspan Laugh an Indicator of Housing Bubble

Your Investment Partner,

Mike

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