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Two Reasons the Dow’s Rally to 10,000 Will Keep Moving Higher

Stock-Markets / Stocks Bull Market Oct 15, 2009 - 08:27 AM GMT

By: Money_Morning


Best Financial Markets Analysis ArticleJason Simpkins writes: The last time Dow Jones Industrial Average hit the 10,000 mark, it was plummeting from an all-time high of 14,163.53 as shell-shocked investors sought shelter from the worst financial crisis since The Great Depression. But this time around the blue chip index was on the upswing, surging 1.4% yesterday (Wednesday) to a close of 10,015.86.

Of course, it’s not necessarily the number 10,000 that investors should be focused on; it’s how we got there.

“This rally is about much more than a number,” Richard Ross, chief technical strategist at Auerback Grayson, told Forbes. “We have a market and an economy that is in the process of one of the greatest comeback stories ever told. To ascribe any importance to an arbitrary line detracts from the true drivers of the rally.”

And while there have been many drivers of the current really there are two main catalysts for the rise to 10,000:

  • Strong Corporate Earnings
  • The Return of Risk Appetite

Earnings Energizing the Market

Stellar earnings were a major factor in yesterday’s surge to 10,000. A blowout third quarter for JPMorgan Chase & Co. (NYSE: JPM) sent its shares and more than 600 other stocks 52-week highs.

JPMorgan delivered its strongest performance since the financial crisis first took hold two years ago, as the company reported a six-fold increase in third-quarter profit. The bank made $3.6 billion, or 82 cents a share in the three months through September, up from $527 million, or 9 cents a share, a year earlier.

That was far better than Wall Street was anticipating.

Analysts polled by Thomson Reuters Corp. (NYSE: TRI) expected the company to report a profit of $2.03 billion for the quarter, or 52 cents a share, according to CNNMoney.

What’s more is that the rally could be extended today (Thursday) when JPMorgan’s chief rival Goldman Sachs Group Inc. (NYSE: GS) reports its earnings. Goldman reported record earnings in the second quarter, with revenue of $13.8 billion, compared with $9.43 billion in the first quarter and $9.42 billion in the second quarter a year earlier. Net income rose to $3.44 billion, or $4.93 a share.

“We have got JPMorgan [Wednesday], we have got Goldman Sachs [Thursday],” David Morrison, market strategist at GFT Global Markets U.K. Ltd. told Reuters. “There has been a lessening of competition within the investment-banking arena. Activity is basically picking up. There has been expectation that both banks should do very well. Certainly JPMorgan results today have shown that expectation was completely warranted.”

Whereas just a year ago financial firms were swamped toxic securities, many appear to have turned a corner.

“The results are very good for the sector,” said Geoff Wilkinson, head of investment research at the London-based Mint. “It is very hard to sell the market at all if we’re seeing the main U.S. banking indices also very near their highs. It’s an absolutely definitive catalyst for a positive market and has a very positive impact on sentiment. The one point is that if the broad U.S. banking indices are supported by this then everything else will be supported as well.”

JPMorgan stock has rallied nearly 196% since March 9, while Goldman Sachs shares have surged 161%. Meanwhile shares of Bank of America Corp. (NYSE: BAC) and Wells Fargo Corp. (NYSE: WFC) are up 384% and 214% respectively. Shares of Citigroup Inc. (NYSE: C) are up 383%.

In addition to the banking sector, technology businesses have been out in front of the U.S. recovery. The tech-heavy Nasdaq Composite Index is up about 66% from its March lows. Dow component Intel Corp. (Nasdaq: INTC) helped JPMorgan in giving the markets a boost by also topping analysts’ estimates.

Intel reported a 6% decline in third-quarter profit and an 8% drop in revenue – both better than market forecasts. The company has been asserting for months that personal computer sales are rebounding.

The results “underscore that computing is essential to people’s lives, proving the importance of technology innovation in leading an economic recovery,” Intel Chief Executive Officer and President Paul Otellini said.

Otellini predicted in August that PC sales could defy predictions by growing in 2009, and thus avoid the first year-over-year sales decline since 2001. His company’s third-quarter sales jumped 17%, to $9.4 billion, easily surpassing Wall Street expectations, as businesses and consumers around the world took advantage of falling prices to purchase new machines.

He and others have cited aging machines and next week’s introduction of Windows 7 as main catalysts for a resurgance in corporate PC sales.

“We remain encouraged that corporate PC sales will improve and recover some in 2010, potentially a baton handoff to the next growth driver,” FBR Capital Markets Corp. (Nasdaq: FBCM) analyst Craig Berger said in a note.

Risk Appetite Returns

Indeed, many corporations appear to have made the necessary adjustments and are returning to profitability much quicker than anticipated. And as the stock market has stabilized over the past several months, there has been a noticeable increase in risk appetite.

That has been evidenced by the resumption of share offerings after a long hiatus and the acceleration in mergers and acquisition (M&A) activity.

A record $289 billion of stock was sold through initial public offerings (IPOs) in 2007, but that figure was cut by about two-thirds in 2008. In the past few months, however, offerings have come back into fashion with 230 companies going public to raise $32.5 billion in the first nine months of the year.

Seven IPOs flooded the market in the week ended Sept. 25 – the most in one week since 2007. Four more took place the following week, which led into October.

“We’re seeing clients start to get very excited about the IPO market – [in a way] they haven’t been in months or even years,” Brent Siler, a partner at the law firm Cooley Godward Kronish, which helps companies prepare IPO filings told BusinessWeek.

To satisfy investor demand many companies are lining up IPOs as quickly as they can.

The Blackstone Group LP (NYSE: BX), the world’s largest private-equity firm, is planning to list up to eight companies and sell five more to take advantage of rising stock markets and return money to investors, a person familiar with the situation told Bloomberg News.

Hyatt Hotels Corp. and beef and pork processing giant JBS Swift & Co. are also planning IPOs.

Meanwhile, Kraft Foods Inc. (NYSE: KFT) has headlined a resurgence in M&A activity with its $16.7 billion bid for Cadbury PLC (NYSE ADR: CBY). Abbott Laboratories (NYSE: ABT), a smaller rival of drug-industry bellwether Johnson & Johnson (NYSE: JNJ), purchased the pharmaceutical business of Belgium’s Solvay SA (OTC ADR: SVYSY) for as much as $7 billion. And Technology heavyweight Xerox Corp. (NYSE: XRX) added to the frenzy by announcing it would pay $6.4 billion in cash and stock for outsourcing and information-services company Affiliated Computer Services Inc. (NYSE: ACS).

[Clients] seem to be much more interested in thinking about acquisitions and growth plans. They have finished the cost-cutting by and large,” Bill Achtmeyer, the chairman and managing partner of the Parthenon Group, told NPR.

“You have the makings of a recovery,” he added. “I think it will be a gradual uptick, but I think it will be sustained.”

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