Forza Investment Weekly Review - "The Earnings are Coming, The Earnings are Coming!"

Last Friday's stock rally rescued investors from a six-day equity losing skid. Some better than expected news about the China economy where its 2nd quarter GDP "slowed" to 7.6% from 8.1% in Q1 put to rest near-term fears that a hard-landing is coming. This week "the Earnings are coming, the Earnings are coming" as corporate earnings take center stage. The whole market took off on Friday ending six days of selling as the market got a bit oversold and fatigued on negative headlines.  

We also had a few companies report earnings last week, including JP Morgan which announced that its hedging loss was more like $6 billion rather than $2 billion. The huge loss was actually a relief to investors and contributed to the rally. A rumor started early in the week that it could be as large as $9 billion sending the stock lower. (I wonder if Jamie Dimon started that rumor so the $6 billion number would actually look good!). As it turns out, the stock did rally 6% on Friday with the news and the rest of its earnings report. The rest of earnings season really gets in gear starting this week with a number of large companies reporting including IBM, Intel, Microsoft, American Express and GE. I believe that investors are expecting mostly weak numbers, especially for companies doing business in Europe and China. Particular attention should be paid to what is said about the current tone of business and the future outlook for the rest of 2012.   

Looking to the potential for stock gains, if companies can pull a rabbit out of the hat and show even a little upside, that could help keep the market from its typical July doldrums and give us a relief rally. There is a lot of negativity so positive news could have an outsized effect. On the flip side, as it stands now the S&P 500 is about where it was a year ago before it got whacked. Any worse than expected news or just bad news as expected could cause the market to head downward again. If I were to handicap the outcome, I would probably be in the 60% to 40% camp that earnings will be weaker than expected. I hope I am wrong as this market has been remarkably resilient despite the volatility as time and again it keeps coming back from the brink. With rates so low, investors really are almost forced to look to stocks for some return. However, I believe that all the uncertainty (election, fiscal cliff, debt ceiling, China, Europe, blah, blah, blah...) will make it hard for a rally to sustain itself.   

My advice during earnings season is to keep your shopping list handy. There will definitely be some great companies that may miss earnings and will go on sale.  Assuming the problem is a short-term one for that company (or companies) it is often a good time to consider initiating a position. Also, it is a good time to add to strong companies that produce solid earnings and give an upbeat outlook. You can follow who is reporting on www.earnings.com or on Yahoo Finance. 

ECONOMIC UPDATE - A quick review of what was reported last week:

Producer prices rose 0.1% in June, coming in much higher than the consensus expected decline of 0.4%. The increase in the PPI was the first in four months. Energy prices are down at a 23.5% annual rate over the last three months. "Core" prices, which exclude food and energy, and which the Federal Reserve claims are more important than the overall number, were up 0.2% for the fourth straight month in June. Core prices are now up 2.6% from last year, which is much faster than the overall PPI. In the past six months, the core PPI is up at a 2.8% annual rate while overall prices are down at a 1.2% rate. 

New claims for unemployment insurance fell 26,000 last week to 350,000, the lowest since March 2008. Continuing claims fell 14,000 to 3.30 million. This is likely a season adjustment. 

The trade deficit in goods and services came in at $48.7 billion in May, almost exactly as the consensus expected. In the last year, exports are up 4.2% while imports are up 3.8%. Interestingly, increasing energy production in the US is having large effects on trade with other countries. Real (inflation adjusted) oil exports have tripled since 2005, while real oil imports are down about 20%. As a result, the real trade deficit in oil has been cut almost in half in the past several years and is the smallest since at least the early 1990s.  

Bob Centrella, CFA, is President/Managing Partner of Forza Investment Advisory, LLC, a Registered Investment Advisor based in Westfield, NJ. More information on Bob and Forza Investment Advisory can be obtained from www.ForzaInvestment.com. Call us at 908-344-9790 for a free portfolio review. The above blog is a summary of our weekly Monday email. Join our free subscription list to get the full newsletter by going to our website. 

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The material represents the views of Bob Centrella, CFA and the information is believed to come from reliablesources.  Although we have reviewed the material we can’t guarantee the accuracy and completeness of all the information. Do not rely on this information alone to make investment decisions. The information contained in this blog is not intended to constitute financial advice, and is not a recommendation or solicitation to buy, sell or hold any security. This blog is strictly informational and educational and is not to beconstrued as any kind of financial advice, investment advice or legaladvice. We urge you to talk to a financial professional before making investment decisions for a discussion of risks involved. See our website at www.forzainvestment.com or call us at 908-344-9790 for a consult.