Earnings Surprises to Favor Bulls

George Brooks |

Earnings Surprises to Favor BullsInvestor’s first read   - Brooksie’s edge before the open

Tuesday, July 10, 2012        9:18 a.m. ET

DJIA:  12,736.29

S&P 500:  1352.46

Nasdaq  Comp.: 2931.77

Russell 2000: 804.80

Alcoa (AA) kicked off the Q2 earnings report period with  a profit of $0.06 a share  vs. $0.32 a year ago. Revenues dropped 10% to $5.96 billion. Analysts had been projecting a gain of $0.05 a share, which they had been ratcheting down in recent weeks.

The Street is expecting overall Q2 earnings to be flat-to-down perhaps as much as 1.8% for the S&P 500 companies. For the year, analysts still see an increase in excess of 7%.

Driven by the biggest increase in credit card debt in 5 years, Consumer Credit soared to $17.1 billion in May well beyond expectations. Does this indicate consumers are tapping their credit cards to make ends meet or are they spending ?

Revolving credit, which includes credit cards accounted for $8 billion, non-revolving credit  which includes auto loans and student loans rose by $9.1 billion, the latter  powered  by students front-running a possible increase in interest rates on the loans.

CONCLUSION:

Stabilization in Europe’s precarious financial situation stands to lift consumer and business optimism, so Q4 and 2013 may start to look attractive.

Perhaps this explains why stock prices remain firm.

If Europe was the only negative, the market would be more than firm.

Investors will still have to deal with the uncertainties of the November elections, economic reports, and confusion and  politicking as the nation nears the edge of the fiscal cliff – spending cuts and taxes (more or less).

TODAY:  Yesterday, I wrote odds favor  a drop of the  DJIA  to 12,620 (S&P 500: 1330) by Wednesday.  That’s still possible, though there was just enough “bounce” in the market yesterday to trim my conviction a smidge.

With expectations for earnings so low, the element of surprise is in favor of the bulls, especially with the oppressive overhang of Europe’s woes lifted (for now).

I still see a choppy and slightly down market for  two to three months – volatile.

Facebook (FB) – has had some buyers. I can’t tell if its short covering or a long-term oriented fund(s)  carefully taking a position, trying hard not to alert others that is what they are doing. Possibly the buyer(s) didn’t want to show ownership of FB on the Q2 report due to the bad press. As a result, support is now $31.30. The stock punched up through my resistance level of $31.85 to close at $32.17 after reaching a high for the day of $32.88.. I still think it needs to work off the prospective sellers in the low-to-mid 30s, investors who  got bagged by the IPO or who bought on a slight pullback from the offering ($38).

ECONOMIC REPORTS: A light week for economic reports.

MONDAY:

Consumer Credit (3:00p.m.) – Surged $17.1 billion in May,  more than forecast, driven by the biggest jump in credit card debt in 5 years.  Estimates ranged from $4 billion to $15.6 billion with the median forecast by 32 economists surveyed by Bloomberg News.

TUESDAY:

NFIB Small Business Optimism Index (7:30a.m.) - Edged 0.1% lower in May to 94.4.  While indications are mixed, it would be a surprise if this index lifts until fall.

WEDNESDAY:

Wholesale Trade (10:00a.m.) - Slight improvement in the trade gap in April due to a drop in imports as trade gap declined to %50.1 billion from $52.6 billion in March. The gap has been narrowing since early 2010.

FOMC Minutes (2:00p.m.) - The Street will study the minutes for a clue to future Fed policy, especially for the possibility of further economic stimulus.
THURSDAY:

Jobless Claims (8:30) – Fell 14,000  foe June 30 week to 374,000. The 4-week average  stands at 385,750.

Treasury Budget (2:00p.m.) – The Treasury deficit is down 8.9%  eight months into government FY vs. a year ago. Receipts are up 5.4%, outlays off a smidge.

FRIDAY:

Producer Price Index (8:30a.m.) - Dropped 1.0% in May  after a drop of  0,2% in April.  PPI has beenin a slide since August 2011.

Consumer Sentiment (9:55a.m.) – Index dropped to 72 in final two weeks of June.  Now down  from a 2011 year-end of 75.

George  Brooks

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The writer of  Investor’s first read, George Brooks,  is not registered as an investment advisor.  Ideas expressed herein are the opinions of the writer, are for informational purposes, and are not to serve as the sole basis for any investment decision. Readers are expected to assume full responsibility for conducting their own research pursuant to investment decisions in keeping with their tolerance for risk.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
FB Facebook Inc. 117.48 2.08 1.80 18,646,458
AA Alcoa Inc. 31.20 2.16 7.44 6,607,783
HTS.P.A Hatteras Financial Corp Cum Redeemable Pfd Ser A n/a n/a n/a 0

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