Afternoon Review

U.S. stocks spend most of the day in negative territory before climbing in the final hours of trading. Energy producers gained after oil jumped above $77 a barrel, the highest price in a year, while Citigroup and Goldman Sachs Group led banks lower on earnings that disappointed some investors.

The rally continues to be one of sentiment rather than one based on fundamentals, which means it will take a big disappointment to hold stocks back for now. Investors seem increasingly willing to view results through rose-colored glasses. It would be nice to see more companies beat revenue expectations. Cheering companies for beating estimates via cost cutting will only make firms more reluctant to reinvest profits to growth their business.

Gluskin-Sheff's David Rosenberg notes this trend and explains that: “This strategy is being deployed by so many firms that it is having a broad-based dampening effect on private aggregate demand and hence corporate revenues – enticing firms to take even more costs out of the system.”

Before the market re-opens tomorrow, we will have earnings results from several technology firms including IBM, Google, and Advanced Micro Devices. These companies should give us further color following Intel’s results on Tuesday. Intel results showed PC demand may be returning to pre-crisis levels. While Intel seems fairly priced, the market may be underestimating the strength of the corporate PC replacement cycle in 2010 and the resulting benefits for PC makers such as Hewlett-Packard and Dell.

Other companies that will surely catch morning headlines are General Electric and Bank of America. GE lowered guidance last quarter, so a significant miss would result in big downside. As for Bank of America, expectations were lowered today after traders realized that today J.P. Morgan’s monster results won’t necessarily trend across all banks.


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Peter J. Lazaroff, Investment Analyst