Final Verdict on First Quarter Earnings Season

By: William_Patalon_III

With earnings season starting to wind down, investors are not anticipating many new surprises.  Still, a few prominent players are set to report this week led by The Walt Disney Co. ( DIS ) (entertainment), Cisco Systems Inc. ( CSCO ) (tech), and American International Group Inc. ( AIG ) (financial services).

The Microsoft Corp. ( MSFT ) / Yahoo Inc. ( YHOO ) (and occasionally Google Inc. ( GOOG ) ) soap opera will be worth watching - if only to make sure that Microsoft's withdrawal isn't a cover ploy for a hostile run at Yahoo [ For a related news story in this issue of Money Morning that details Microsoft's decision drop its pursuit of Yahoo , please click here ].

A slow schedule on this week's economic calendar will prompt a much greater focus on the dollar as investors speculate on whether the price run-up in commodities - and oil - is at, or near its end. Gold prices will help make that determination [ For a related news analysis of gold prices in this issue of Money Morning , please click here ].

U.S. Federal Reserve Chairman Ben S. Bernanke is scheduled to address the Columbia Business School on mortgage issues, though he'll surely also be asked about central bank policies by a rapt audience whose members will hang on his every word.  [Wasn't he supposed to be on vacation?]

Last week's earnings saw some energy companies that were benefiting from the most recent surge in energy prices. Though Exxon Mobil Corp . ( XOM ) only claimed the second-highest profit ever (it also holds the title for the single best quarter ever), the results nevertheless disappointed Wall Street, which was obviously pulling for a new record.

Likewise, Chevron Corp. ( CVX ) and BP PLC ( BP ) reported favorable periods.  In the wake of the recent initial public offering (IPO) of credit-card processor Visa Inc. ( V ), rival MasterCard Inc. ( MA ) doubled its earnings last quarter as its international business helped overcome domestic weakness.  Consumer-products giant The Procter & Gamble Co. ( PG ) also received good news from overseas with higher sales of consumer goods like diapers (Pampers), razors (Gillette), and shampoo (Head & Shoulders) from certain emerging markets.

Not all was rosy, however, as Sun Microsystems Inc. ( JAVA ) and food giants Kellogg Co. ( K ) and new Warren Buffet favorite Kraft Foods Inc. ( KFT ) each fell prey to the continued economic "challenges" in the U.S. market.

On the transactional front, investor Kirk Kerkorian will boost his stake in Ford Motor Co. ( F ) , in turn a nice boost for the domestic auto industry. Time Warner Inc. ( TWX ) will be spinning off its 84% stake in its cable operation , Time Warner Cable Inc. ( TWC ) .

And privately held M&M's-maker Mars Inc . will buy Wm. Wrigley Jr. Co. ( WWY ) for over $20 billion in cash with financing help from famed sweet-tooth junkie, Warren Buffett .

Market Matters

Recession?  What recession?  For days, weeks, even months now, naysayers had been predicting the emergence of that dreaded "R" word with the release of 1st quarter GDP.  Additionally, they claimed that the labor picture would continue to worsen, gas prices would hit $4 a gallon by summer, the dollar would be worth next to nothing, corporate earnings would signal more "gloom and doom," and high-net-worth investors would be making dramatic allocation shifts from the "risky" equity markets.

Not so fast … the data released last week appeared to portray an economy closer to a rebound - far from the dire business climate the gloom-and-doomers had been predicting. A stronger dollar that may have placed a ceiling on oil (and other commodities) prices, and rich folks seemed to be looking for bargains in stocks.

Do we here at Money Morning buy into that totally bullish scenario?

Not necessarily.

But we do agree that the next few days, weeks, and months are going to get more interesting.

The latest Fidelity Investment's Millionaire Outlook reported (mildly) bullish findings among its surveyed investors who have average investable assets topping $4 million.  Instead of decreasing their equity allocations, 27% of these millionaires plan to add stock positions during the next 12 months. Only 7% expect to sell out of equities, which logically deduces 66% will be staying the course.  Real estate seems to be another "favored" asset class, as 14% of respondents say they will increase exposure to related investments.  That doesn't quite sound like "gloom and doom" at once.

Oil flirted with the $120 a barrel level before sliding on a stronger dollar and news that the Fed may play the "wait and see" game (see below).  Equity investors again took a "things could have been worse" approach and sought out value in the aftermath of last week's economic and earnings reports.  Some analysts believe that a stronger dollar will mean the end to the rally in commodities, and investors (hedge funds) will take some related profits and move back into stocks.

Despite all the recent negativity, the Dow Jones Industrial Average surged more than 500 points in April, and the Standard & Poor's 500 Index and Nasdaq Composite Index both rose about 5% - hardly the recessionary results many had been anticipating.

Economically Speaking

Weekly Economic Calendar

After noting that the " substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time and to mitigate risks to economic activity, " the Fed may now be embarking upon a much-needed summer vacation given that last Wednesday's quarter-point interest-rate cut appears to be its last move for awhile.

After all, Team Bernanke & Co. has lowered the benchmark Federal Funds rate seven times since mid-September; it now stands at 2.0%, the lowest level since late 2004.

Additionally, the Fed had recently engaged in a few other "creative" actions at a time investors were growing quite nervous about the ever-expanding credit crisis.  For now, the central bank seems content to sit back and watch, while the stimuli or "methods to its madness" begin to take effect. 

Though consumer confidence fell to a five-year low in April, analysts may want to revise their recessionary forecasts for another quarter.  With many anticipating negative economic growth in the 1st quarter, gross domestic product GDP rose by 0.6% .

Remember, by true definition, a recession is marked by two consecutive quarterly contractions, so barring a revision in the months ahead, the 2nd quarter now becomes key for the potential emergence of any real downturn.  Suddenly, some "experts" are questioning that likelihood.  While the Labor Department revealed a fourth straight month of job losses in April, the results were not nearly as bad as many had predicted (only 20,000 non-farm jobs were lost, vs. the 70,000 that had been expected). Likewise, the unemployment rate actually fell to 5.0% (from 5.1% in March), another promising sign for workers. 

On the manufacturing front, factory orders rebounded after consecutive monthly declines and climbed by 1.4% in March.  The ISM Index revealed slight sector contraction, though again many economists were expecting a far worse reading.  While a weaker than expected construction spending report depicted that housing is not showing any real signs of rebounding, some analysts believe the Fed has laid the groundwork for recovery. 

News and Related Story Links:

• The Motley Fool : What's Next for Time Warner Cable?
• Money Morning News Analysis : Mars Teams up With Berkshire Hathaway and Warren Buffett in $23 Billion Buyout of Wrigley .
• Money Morning News : GDP Holds Steady at 0.6% in the First Quarter .
• Money Morning News Analysis : With Seven Rate Cuts Since Fall, Could the Fed Be Exporting Stagflation to Europe?
• Fidelity.com : Millionaires Expect Beginning Of Economic Recovery Just A Year Away, According To Fidelity Survey .

By William Patalon III
Executive Editor

Money Morning/The Money Map Report

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