Earnings OK, But Troubles Persist

As traders make their ways through the morass of earnings reports now crowding the markets, the general trend is that companies, for the most part, are beating or equaling estimates, with about 30% failing to make the grade.

With each passing day, more and more companies are releasing earnings, and by Friday, we'll have pretty much reached the midpoint of earnings season.

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There were some prominent companies reporting on Tuesday, with Yahoo (YHOO), Yum Brands (YUM) and Boeing (BA) exceeding estimates, while Ambac (ABK), the monoline insurer of municipal bonds and much of the subprime debt shocked traders with an enormous $5.42 per share loss on $1.7 billion in write-downs, while analysts were seeking a loss of only $1.51 per share.

Shares of the troubled bond insurer traded 42% lower on the news, down 2.57 to 3.46 per share. Ambac had traded as high as 96.10 just last summer but has lost nearly all of its value due to the overwhelming number of defaults and writedowns in mortgage-backed securities and the general overhang from the credit crunch.

With one eye on Ambac and the faltering credit structure and the other on relatively strong reports from mainline stocks, investors were vexed over which direction they should turn, thus, the somewhat uninspired trade on the session.

Dow 12,763.22 +42.99; NASDAQ 2,405.21 +28.27; S&P 500 1,379.93 +3.99; NYSE Composite 9,237.29 +9.32

Declining issues edged out advancers once again, 3499-2765. New lows took the prize from new highs, 264-90.

Trading was led by some big name companies on heavy volume while many smaller stocks - especially on the NASDAQ - were selling off. Since the massive gains this past Friday the markets have been unable to confirm the highs and have since wallowed in a range, seeking direction.

It's difficult to grasp market movements, especially at the height of an earnings season, but this market continues to exhibit signs of weakness rather than strength, but only marginally. Sideways would be the most likely direction for the near term, though a major event or spate of either positive or negative earnings could turn the tide in one direction or the other.

The market's indecision actually may be a boon for traders looking to lock in or get out of positions as we're in a somewhat stable environment for the time being. Of course, that's likely not to last long.

Oil made another new high on the day, gaining 23 cents to $118.30. Gold was slashed $16.20 to $909.00, while silver also lost ground, off 55 cents to $17.28.

There is a good deal of gyration in all markets presently, though the overall movement is a bit like riding around in circles. If anything, the equity and commodity markets are both overbought and a correction to the downside may be in the cards.

NYSE Volume 4,017,958,250
NASDAQ Volume 2,145,000,000

Stocks Give Back On Oil, Outlooks

With a slew of companies reporting earnings on Tuesday, investors took a look at some of the more recognizable names, noted last week's outsize gains as well as another record high for oil and took the cautionary route, selling throughout the session.

The big movers were Texas Instruments, which reported solid earnings gains, but issued guidance that was skeptical about the near term. Airline stocks took another beating as UAL Corp., the operator of United Airlines (UAUA 13.55, -7.88) reported a quarterly loss of $4.45 per share, which was worse than the loss analysts were expecting.

Dow 12,720.23 -104.79; NASDAQ 2,376.94 -31.10; S&P 500 1,375.94 -12.23; NYSE Composite 9,227.97 -84.32

The earnings news was far from all bad. While most companies were in line with expectations or close, Dow components McDonald's (MCD 58.35, -0.32) and DuPont (DD 50.16, -2.09) bested their earnings estimates yet still faced selling pressure.

Internals showed the real story, with declining issues dealing defeat to gainers by a wide margin, 4605-1666. New lows took back the lead from new highs, 269-151.

As noted above, oil made another new top at $119.50, gaining $1.89 on the day. Oil futures are completely out of control and would be subject to a significant fall-off were it not for the inelasticity of the commodity. The inescapable need for oil and gas by business and consumers alike are making conditions for reasonable, sustainable prices impossible.

Likewise, the futures are being led by a devious group of speculators intent on driving prices as far as they can. It should be noted that the speculation in oil fuels rampant profits for the big suppliers who are not buying on spot markets. Their gains will continue to be enormous until some regulation of the futures markets rein in the runaway speculation.

Another part of the equation is the weakening dollar, but it alone cannot account for the spectacular rise in oil prices. As mentioned in yesterday's post (an a good number of posts over the past 12 months), the higher prices of oil and gas are economy killers and they're doing a bang-up job at the present time.

Gold priced higher by $7.60, to $925.20 and silver rose 35 cents to $17.71.

Overall, the markets seem to be distracted daily by the price of oil even in the face of consistently good earnings reports. Unless and until oil finds a top, the markets will find it difficult to post further gains.

NYSE Volume 3,893,264,250
NASDAQ Volume 1,991,252,375

Oil and Gas Killing Economy

Regardless of the causes, the recent spike in the prices of crude oil and gasoline are killing the US and other economies. Middle and lower class consumers are the hardest hit and also the least likely to continue spending on other goods and services, since the cost of transportation has risen more than 35% over the past year and has also caused the price of another basic element of life - food - to skyrocket in the past 3 months.

Higher energy prices overall are great for oil and utility companies, but they come at the expense of curtailed retail spending in nearly all other areas and also contribute to a vicious price spiral since almost all goods are transported. Similarly, most services have energy expenses they cannot absorb, and these are passed along to the consumer in the guide of higher prices.

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The entire world is feeling the pain from the seemingly unending rise in the price of basic fuel, and with gas nationwide at $3.50 per gallon in the US, average people and businesses are having a hard time keeping pace, much less enjoying the fruits of their labors.

Thus far, the stock markets and big business have been able to maintain profitability in the face of spiraling fuel costs, but a significant pullback by consumers will damage (and already have) some segments of the business community. It's difficult to cut back on fuel expenses for most individuals, so in this case, the Exxons and Chevrons of the world win, at the expense of everything else.

Dow 12,825.02 -24.34; NASDAQ 2,408.04 +5.07 (0.21%) S&P 500 1,388.17 -2.16; NYSE Composite 9,312.29 +2.05

The major indices finished mixed, with the Dow and S&P lower, while the NASDAQ and NYSE Composite posted marginal gains. Actually, all of the indices were lower for the better part of the day, but regained much of what they lost thanks to a late-day surge.

After all was said and done, declining issues outpaced advancers, 3521-2749. New highs outdid new lows for the second straight session, though only marginally, 183-177. All indications are that the market is searching for direction in the aftermath of 4-5% gains last week.

Oil closed at a new record of $117.48, up 79 cents on the day. Gold gained $2.40 to $917.60, while silver lost 46 cents to close at $17.36.

Companies reporting earnings were mostly in line with expectations, though Bank of America (BAC) experienced a 77% decline in earnings for the first quarter on a year-over-year basis.

Bank of America's shares dropped 95 cents, to $37.61.

NYSE Volume 3,379,862,250
NASDAQ Volume 1,636,458,250

Resistance Is Futile

...and also nonexistent. With solid corporate earnings in hand, investors broke through the Dow Jones' 12,700-12,750 resistance right at the open, gapping nearly higher than the previous close. Within 5 minutes, the Dow was soaring past 12,800 and into the voided area between, 12,800 and 13,500.

If corporate earnings continue as strong as they've been - and there's no reason to suggest they shouldn't - stocks should continue their march higher. The Dow and other indices have exploded through two separate resistance levels in the past week with no real end in sight.

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Rather than facing the desperation of an extended recession, Wall Street may be right that one of the features of globalization is a real disconnect between corporations and the US economy. While those at the very bottom are struggling to find jobs, pay rising utility, fuel and food costs, corporations have gleefully passed those costs on to the consumer without missing a beat.

While there are a couple of sectors that have been harder hit than the general market - financials, home builders, retailers and some discretionary goods and services (notably alcoholic beverages and gambling) - the rest of the market seems poised to get past this period and move to higher ground.

Dow 12,849.36 +228.87; NASDAQ 2,402.97 +61.14; S&P 500 1,390.33 +24.77; NYSE Composite 9,310.24 Up 136.43

The open questions are whether the US (and to a larger extent, the world) economy can cope with higher prices for just about everything without some substantive changes. Gas at $3.00 - and soon $3.50 - a gallon, food costs spiraling out of control and credit strains have put Americans to the test, but they've neither stopped driving nor eating. Defaults on everything from mortgages to credit cards are dramatically higher, however, so the costs of everyday life cannot be sustained much longer, especially if jobs become scarce, which they haven't, yet.

With all the distortions caused by the subprime mortgage implosion and the related global credit crunch, it's difficult to predict direction over the long term, but for the past month, that direction has largely been straight up. There doesn't seem to be much more ground to gain before the markets become severely overbought and correct themselves through profit-taking.

Having the profit on trades in mind (and noting that today was an options expiration day) a cooling off period could come shortly, though we've just barely touched down into earnings season.

Of companies reporting better-than-expected first quarter results, Google (GOOG), Honeywell (HON) and Caterpillar (CAT) and Schlumberger (SLB) were notable standouts. Citigroup (C) posted a 1.02 per share loss and wrote down another $12 billion in bad loans, but was boosted by investors with a 4.5% gain. Other banks and financial services were also ridden higher. They really do take care of their own.

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For the week, the major indices posted their best gains of they year, up anywhere from 4 to 5%. On the day, advancers outnumbered decliners, 4764-1552, and new highs finally supplanted new lows, 216-152.

Of course, the oil barons couldn't resist the euphoria and closed at another all-time high of $117.00, up $1.83. The metals, however, were decimated, with gold down $27.70 to $915.20 and silver off 49 cents to $17.82.

Earnings will be a huge factor to next week's trading, and if the companies reporting come through with reports as robust as this week's early batch, the rally could be monumental. Shorts and puts players should keep abreast of developments and especially note how their individual positions compare to the general market.

I'm still not convinced that the economy won't eventually drag stocks down, but the corporate results appear to have overcome the worst-case scenarios.

NYSE Volume 4,193,403,000
NASDAQ Volume 2,221,355,750

No Follow-Through on Rally

Chartists will understand that most of the trade after 2:30 (the last 100 points on the Dow) on Wednesday was options-related and short covering, thus, follow-through needed some form of impetus. After the close on Wednesday, IBM released first quarter earnings data ahead of expectations, which looked as though it could be that fuel for a second leg of the massive Wednesday rally.

By Thursday morning, IBMs results were already old news.

Prior to the markets' opening, investors digested two bits of news. Initial claims for unemployment insurance shot up to 372,000. Merrill Lynch (MER) lost money for the third consecutive quarter, losing $2.14 billion, or $2.19 per share in the first quarter of 2008.

Rally over.

By the end of the day, stocks ended mixed, but mostly down.

Dow 12,620.49 +1.22; NASDAQ 2,341.83 -8.28; S&P 500 1,365.56 +0.85; NYSE Composite 9,173.81 -29.95

Declining issues took back the initiative from gainers, though by a slim margin, 3453-2782. New highs once more approached, but did not surpass, new lows. There were 189 new lows to 174 new highs.

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After gyrating around the flat-line all day, stocks spent most of the day going nowhere, though after-hours, Google announced higher 1st quarter earnings, providing a possible boost for techs on Friday.

Another major setback was Pfizer (PFE) posting earnings for the quarter of 0.61 cents, five cents below analyst estimates. Overall, earnings are coming in mostly mixed, though hardly terrible. Most of the damage seems to be in financials, retailers and companies with a dominant US-only presence. More globally-based operations are posting better earnings than expected, or are in-line with expectations.

On the commodities front, where everything from corn to used tires seems to be going up in price, the majors took a little bit off the top. Oil was off 7 cents, closing at $114.86, a number that is sending shock waves throughout the world economic community and forcing prices for automotive fuel (gas, diesel), home heating oil and any oil-related products higher.

Gold lost $5.40 to $942.90, while silver fell two cents to $18.31.

Volume was muted, as has been the case for most of the past 45 days. The possible explanations are that investors are sitting back, awaiting more data, though more likely is that hedge funds have been shut down or have substantially slowed the velocity of trade.

The latter explanation is preferable, if only to stem some of the volatility that was evident from last August through this January. Overall, markets seemed to have settled down somewhat, with the mortgage morass under some kind of management - though likely insufficient - and consumers dealing with higher food and fuel prices in whatever ways they can.

What's troubling is how this scenario eventually ends. Prospects of eventually surpassing the all-time highs from 2007 are dim, though the major indices are still only 8-12% off their highs. With the residential housing market still falling and credit markets still close to seizure status, from where is future investment to come?

NYSE Volume 3,682,688,500
NASDAQ Volume 1,838,124,125