A Week in the Rearview – week ending 4/17/09
In the headlines
A look at some of the market movers over the past week:
- General Motors bankruptcy discussions continued
- eBay announced the acquisition of Korean competitor Gmarket for $1.2 billion and its intention to publicly offer shares of its subsidiary Skype
- Express Scripts announced the acquisition of WellPoint’s in-house pharmacy benefit management business
- Goldman Sachs announced first quarter profit that topped analysts estimates and revealed plans to raise $5 billion to pay back the US government
- India’s Satyam announced Tech Mahindra as the highest bidder for the troubled services business
- The Obama administration decided to reveal some details of the banking stress tests sooner than originally planned
- Mall operator General Growth Properties filed for bankruptcy
- The Fed’s beige book highlighted the slowing speed of economic decline
- Hewlett-Packard took the top US computer sales spot from rival Dell
- China reported its slowest quarterly growth in 20 years
- Carl Icahn and Oaktree Capital Management have started pushing for casino operator MGM to seek bankruptcy protection
- Google reported better than expected profit
- Citigroup joined a host of finance companies to report better than expected earnings
- GE’s finance unit helped drag down its year-over-year performance
Commentary
As expected, the past week was all about earnings. However, what may have surprised some investors was the tenor of the reports.
But first, let’s take a look at the performance for the week. After a 2% drop on Tuesday, the market straightened back up and delivered up days through the rest of the week to finish 1.5% in the black. The continuation of the market’s winning streak cut the year-to-date loss for the S&P 500 index to 3.7%.
Banking earnings across the board — including Goldman Sachs, JPMorgan, Citigroup, and BB&T — were positive. The diversified financial companies had success in the quarter trading, particularly in the fixed income divisions. At the same time, low borrowing costs and demand for mortgage refinancings helped to boost the core banking business at both the diversified financials and the traditional banks.
However, loss provisions are continuing to mount. The financial world continues to suffer from growing provisions for bad loans, but the earnings reports appear to have given investors some comfort that earnings can help offset these provisions.
Outside of the banking world it was more of a mixed bag. Tech earnings from giants like Intel and Google came in ahead of expectations, but projections failed to interest investors. General Electric earnings meanwhile, showed some positive notes, but the struggles from the company’s capital division continue to plague the bottom line. Meanwhile, economic reports gave some signals of slowing decline, while also suggesting that we’re not out of the woods quite yet.
Notably, the pace of the stock market’s bounce slowed toward the end of the week despite the relatively positive reports from important companies like JPMorgan, Citigroup, and GE.
Looking ahead
The economic calendar for next week is notably light. In the current quest to find signs of a slowing of the economic deterioration, the report on leading indicators, initial unemployment claims, and durable goods orders may get some attention. New and existing home sales for March may also get some eyeballs because of the housing market’s importance in the current downturn.
However, for the most part, economic releases will be overshadowed by: earnings, earnings, and more earnings. That’s right, the earnings rush continues in a big way next week and those reports will play a major role in how the market moves.
After the reports from Goldman Sachs, JPMorgan, Citigroup and others last week, the market seems to be a little more comfortable on the near term outlook for the financial sector. A little more comfortable, though, doesn’t mean positive, and so the continued reports from that industry will be closely watched next week. On Monday, Bank of America reports, which will perhaps be the major financial report of the week. It won’t be alone though, as we’ll also be hearing from Capital One Financial, US Bancorp, Morgan Stanley, SLM Corp, T Rowe Price, and PNC Financial — among many others.
Now what’s interesting is that if this past week was any indicator of investor sentiment, we’re not likely to see a major reaction next week unless financial earnings come in much worse than what we’ve already seen. While this is certainly possible, it seems somewhat unlikely, so surprisingly enough, banks may not be at the center of the action next week.
Looking beyond the financial industry, we’ve got a stack of earnings coming from a host of other industries. There are too many major companies to name them all, but we’re talking about companies like Delta Airlines, Lockheed Martin, Coca-Cola, and AT&T. Though the recession may have started with the financial sector, it’s spread to the whole economy, and so investors are going to be looking for signs of recovery outside the financial sector as much as they have been within the financial sector.
Because there has been somewhat less pessimism heaped on non-financial companies to date, there will be a higher bar for the companies reporting next week to impress investors. For this reason, we could end up with a market that’s a bit more sobered next week than it has been over the past month.
