A Week in the Rearview – week ending 7/17/09
In the headlines
A look at some of the market movers over the past week:
- Lender CIT Group found itself close to bankruptcy after the government refused to bail out the company
- Microsoft fired back in the escalating battle between it and Google
- Bank of America and the U.S. government clashed over fees for government asset guarantees
- Bullish commentary on Goldman from Meredith Whitney lifted banks early in the week
- Goldman Sachs posted earnings that easily soared past expectations, and JPMorgan followed with a similar performance
- Bank of America and Citigroup both reported profits driven principally by one-time gains from asset sales
- California’s CalPERS filed a lawsuit against the major credit rating agencies
- Intel posted encouraging earnings, but Google’s slowing sales overshadowed its earnings
- The consumer price index rose more than expected, primarily due to higher gasoline prices
- In minutes from the Federal Reserve’s Open Market Committee meeting in June, most Fed officials judged the economy as still weak
- GE’s earnings disappointed investors
- Nouriel Roubini reiterated his view that the recession will be over by year end
- Four banks were closed Friday, bringing the year’s tally to 57
Commentary
After four straight losing weeks, the market sprung back to life this past week. The S&P 500 index climbed 7% on the week, thanks in large part to big gains on Monday and Wednesday. The heady week brought the S&P’s year-to-date performance back into the black to the tune of 4.1%, and the index is also up 39% from the low in March.
The financial industry was in the driver’s seat for most of the week as some of the biggest names in banking reported earnings. Before the first of the major earnings announcements even hit the wires though, bank analyst Meredith Whitney helped start the week on a positive tone.
Whitney made a name for herself by turning bearish on the largest banks before the worst of the losses had set in. She had stayed consistently bearish on the industry until Monday when she issued a “buy” rating on Goldman Sachs ahead of the firm’s earnings. The call was primarily motivated by the expectation that Goldman would benefit from the wave of debt issuances and the elimination of some of its chief competitors, including Lehman Brothers and Bear Stearns. Nonetheless, the market took it as a generally bullish signal on the financial industry.
The financial institutions themselves then stepped in to help keep the rally going. Goldman Sachs reported a positive earnings surprise in the early part of the week, while Bank of America, JPMorgan, and Citigroup all revealed profitable quarters at the end of the week. Many contended, however, that the earnings from B of A and Citi belied the yet-tenuous positions of both banks, as both benefitted from hefty asset sales during the quarter.
Outside of the financial sector, upside surprises from Intel and Johnson & Johnson helped spark the 3% rally on the S&P on Wednesday. Intel in particular encouraged investors as technology is often seen as a sector that leads the rest of the economy. Later in the week, investors found reason to be disappointed with the recent performance of Google, but more positive commentary out of IBM helped balance that out.
Also notable during the week were the comments from economist Nouriel Roubini. Roubini is an NYU economics professor well known for his bearish outlook on the U.S. economy, and as such is known as “Dr. Doom.”
In comments during an investor conference in Chile, Roubini noted that the U.S. economy is no longer in “free fall” and that the recession should wrap up by year end. Originally, the comments were taken as an improvement over his previous commentary, though they actually mirrored what he has said in the past. Upgrade or not, this was a good reminder to investors that as terrible as this recession has felt, an end is in sight.
Looking ahead
Earnings will be the big story next week. To continue or even keep the big gains from last week, the upcoming earnings announcements will have to prove that the relatively rosy picture we got this past week wasn’t simply a mirage.
On Monday, earnings reports will include Boston Scientific, Eaton, Halliburton, Hasbro, Legg Mason, and Texas Instruments. A heavy schedule on Tuesday will bring Apple, BlackRock, Caterpillar, Continental Airlines, Lockheed Martin, Merck, Schering-Plough, Southwest Airlines, Starbucks, Stryker, Coca-Cola, UAL Corp, United Technologies, Unitedhealth Group, Western Union, and Yahoo. Wednesday will follow with Chipotle, Delta Airlines, E*Trade, eBay, GlaxoSmithKline, Illinois Tool Works, Morgan Stanley, PepsiCo, Pfizer, QUALCOMM, SunTrust, Boeing, Mosaic, U.S. Bancorp, VMWare, and Wells Fargo.
On Thursday we’ll see earnings from 3M, Amazon.com, American Express, AT&T, Bristol-Myers Squibb, CA, Capital One, CIT Group, Credit Suisse, EMC, FLIR Systems, Ford, JetBlue, Kimberly-Clark, Laboratory Corp of America, McDonald’s, Microsoft, Netflix, Northrop Grumman, PNC Financial, Potash Corp, Raytheon, UPS, US Airways, Wyeth, and Xerox. Finally the earnings calendar for the week will wrap up on Friday with Black & Decker, Fortune Brands, Ingersoll-Rand, Schlumberger, and T. Rowe Price.
As I pointed before the start of earnings season, in many cases the actual second quarter earnings numbers may not be the most important part of many of the earnings releases. Most investors have already digested the idea that the second quarter took place in a very difficult operating environment, so instead they are looking instead towards company commentary about the outlook for the rest of the year. That said, as we saw this past week, earning surprises can still help drive market gains.
The economic calendar will be very light next week and is likely to get little attention due to the overwhelming number of important earnings reports.
