07/28/10   Halfway Through Earnings Season

Editor’s Corner

Investor Heat Map 7/28/10

Halfway Through Earnings Season

Ron Rowland

Earnings season continues apace and it’s time for a halftime report. As of July 28, 245 of the companies in the S&P 500 had reported their quarterly results. Of those, 196 had higher earnings than the same period last year. This would seem to be good news, and in many cases it is. Industry groups with particularly strong profit growth included semiconductors, banks, diversified financials, and consumer durables. Telecom services and food retailers were the main losers. While earnings data is subject to some manipulation, these results are consistent with other impressions of the economy. The growing industries are those that can increase revenue while keeping costs under control, especially personnel costs. Profits are down in sectors that sell commodity-like goods and services with high fixed costs.

Wall Street’s finest analysts, as usual, managed to severely underestimate the strength of corporate earnings. Almost 77% of the companies reporting so far managed to beat the consensus estimates while another 15% were negative surprises. In other words, the consensus estimates were wrong more than 90% of the time. Yet for some reason people continue to pay attention to these analysts – and their highly-profitable employers continue to pay them very well. Obviously analysts are expected to do more than just post on-the-money profit forecasts, but the record for accuracy is still stunningly bad. Our only guess is that they know people rarely complain about pleasant surprises.

Earnings or not, a strong July rally has pushed the major stock indexes back up near their June peaks. We’ve mentioned the 200-day moving average as a barometer in the past, but this year it seems to be providing neither support nor resistance. Anyone trying to use it as a timing signal has been whipsawed several times. Stocks pulled back a bit today, suggesting the short-term bullishness may be tapering off. The latest economic news, durable goods orders, continued the theme of weak recovery. This tempered the earnings enthusiasm.

Bond yields climbed back up a bit, with the ten-year Treasury now back above the 3% level. Interest rate trends are still pointed down. Gold has been moving inversely to stocks, meaning it is down this month, but both gold and gold stocks seem to have found some support the last two days. The U.S. Dollar is still trending down which is generally bullish for gold. The dog days of summer are now upon us, however, so it may be a few more weeks before we see any more dramatic changes in the financial markets.

Sectors

Strong gains in the last five days flipped most of our sector categories from bearish red to bullish green, but many are still on the threshold and could easily slip back into negative territory. Utilities were strong and held their grip on the top of the rankings. The Consumer Staples sector was relatively weak, relinquishing its #2 spot to Telecom and sliding all the way to #5. Following Telecom in a climb up the rankings were Materials and Industrials, the latter based primarily on strength in the Transports group. Health Care lost ground as insurance company reports showed a significant drop in medical spending.

Styles

Small Cap Growth made a tremendous leap from #8 last week to first place today. Small cap stocks are doing well but the strength seems concentrated in the growth names. Small Cap Blend only moved up to #5 on the list and Small Cap Value is still down in eighth place. With little dispersion between the top and bottom of the list, however, it would probably be a mistake to put too much emphasis on relative rankings at this time.

International

The top global markets are mostly the same as they were last week: Emerging Markets, the U.K., and the E.U. are still in first, second, and fourth places, respectively. The World Equity benchmark fell lower based on relative weakness in three of the largest components: Japan, the U.S., and Canada. The U.S. flipped barely positive while Canada and Japan are still trending down.

Note:

The charts above depict both the relative strength and absolute strength of various market sectors, styles, and geographic locations on an intermediate-term basis. Each grouping is sorted (top to bottom) by relative strength. The magnitude of the displayed RSM value is a measure of absolute strength, which is our proprietary method of measuring and reporting the intermediate-term strength as an annualized value.


“The sluggish economy and high unemployment has affected the consumer’s ability to visit the doctor.”

John Ryan, CEO of Caremark CVS (CVS), 7/28/10


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