Earnings Season Again, Watch the Multinationals for Stock Market Trend

By: William_Patalon_III

Can it be earnings season already?

It sure is, but don't expect too much. With its report tomorrow (Tuesday), Alcoa Inc. ( AA ) leads off what is expected to be a pretty dismal series of profit reports. Thomson Reuters now estimates that second-quarter earnings declined by 11.1%, which is significantly worse than the projected 2% decline that was made back in April.

Of course, financials will lead the charge in terms of these dire expectations, followed closely behind by consumer discretionary (which reflects the lagging confidence measures).  Technology is also expected to struggle; these days management must think long and hard about investing in any major systems upgrades.

But the real key to the stock market's future may well lay with major multinationals. In recent quarters, many multinational companies - we often refer to them as "Global Titans" - have weathered the domestic storm. The reason: They've been able to generate substantial revenue and profits from continued growth in emerging markets and from the weak dollar (which increases demand for the "cheaper" U.S. goods). Unfortunately, this trend may be coming to an end as global inflation heats up and slower international growth means that multinationals may be losing their safety net.

Investors get a bit of a reprieve (and time to recover from second-quarter hangovers) as few economic releases of substance are on the calendar for the week ahead.

Market Matters

Good-bye and good riddance.  That general sentiment was shared by investors and traders alike, as the second-quarter came to a close (and none too quickly).  Many folks expected the market negativity to shift after a poor first quarter, since the U.S. Federal Reserve jumped in with both feet and attempted to end the credit crisis. Unfortunately, the past three months brought more of the same and the outlook for the remainder of the year does not look much stronger.

The Dow Jones Industrial Average suffered its worst 1st half of the year since 1970, while the bleak performances of the Standard & Poor's 500 Index and the Nasdaq Composite Index brought back memories of the dot-com bubble collapse of 2001 and 2002.

Likewise, certain emerging markets (Shanghai and India) plunged in value, leaving equity investors few attractive options in the global marketplace. 

Thus far, the new quarter brings a continuation of those same "tired" themes: Financials and energy.  Lehman Brothers Holdings Inc. ( LEH ) actually moved to the backburner as investors focused on European competitor UBS AG (ADR: UBS ) and a Justice Department investigation into the potential tax fraud of several key clients .  To date, the Swiss banking giant has reported more than $35 billion in asset write-downs, while reshuffling its board and revising certain governance policies to appease disgruntled shareholders.  Meanwhile, Standard & Poor's downgraded much of the banking-and-financial services sectors, as losses become the norm and many firms search for significant capital infusions.

Bank of America Corp. ( BAC ) enhanced its leadership position in the mortgage origination and servicing markets (but is that really a good idea these days?), as it completed its acquisition of Countrywide Financial Corp. ( CFC ) .  At closing, the transaction was estimated at $2.5 billion, down significantly from the initial $4 billion proposal due to BofA's plunging stock price.

In non-financial-sector news, Starbucks Corp. ( SBUX ) is feeling the pain of a sluggish economy, given its customers' inability to pay $5 for a "Cup of Joe," as the company announced the closing of 600 stores during the next year.  The General Motors Corp. ( GM ) liquidity struggles continued, as a key analyst even threw out the term "bankruptcy" in a recent report.  Microsoft Corp. ( MSFT ) still has interest in Yahoo! Inc. ( YHOO ) and opened discussions with News Corp. ( NWS ) and Time Warner Inc. ( TWX ) about potential partnerships in such a deal. 

The markets took their clues from surging crude oil prices yet again as supply concerns and tensions between Iran and Israel helped push prices to a new record near $146 per barrel.  Since the beginning if the year, oil has jumped by more than 50% and gas prices have followed, causing many Americans to alter their July 4 plans and stick closer to home because of record ($4.098) gasoline prices.

The Dow and Nasdaq have both tumbled into "bear" territory as the indexes have fallen in excess of 20% since the highs set last year.  On the international front, the markets have struggled in Britain, Germany, and Paris (among others), as escalating inflationary fears in Europe prompted a European Central Bank interest-rate increase (much to the chagrin of the Fed) [For a related story on the ECB rate increase in today's issue of Money Morning , please click here .]

Economically Speaking

While Fed Chief Ben S. Bernanke and friends fret over their " Mission: Impossible " task of guiding a struggling economy through a period of inflation, the European Central Bank increased its short rate by a quarter percentage point to counter its own price concerns.  That move just made Bernanke's job even harder as the higher rate abroad puts new pressures on the dollar - and, subsequently, on the entire U.S. domestic economy.

On the economic front, all eyes and ears were on the Thursday morning release of unemployment and non-farm payroll additions as investors got a quick glance at the labor picture before heading out for the long weekend.  As expected, the jobless rate held steady at 5.5% and the economy lost more jobs for the sixth-consecutive month.  Clearly, all businesses and not just financial firms remain nervous about the immediate future. Many have issued pink slips or offered early retirement buyouts in an attempt to lower their expenses. Construction, manufacturing, and retail were among the sectors that reported payroll contraction in June. [For a related story on the job numbers in today's issue of Money Morning , please click here .]

The manufacturing sector got some good news in the form of a higher ISM survey release, though the euphoria was short-lived as a closer look inside the numbers revealed that higher prices contributed more to the increase than rising demand for U.S.-made products.

Likewise factory orders gained less than expected, another bad reflection on the state of manufacturing.  As has become the norm during the housing slowdown, construction activity declined again in May, the fifth time that's happened in six months.

Additionally, the ISM Services (non-manufacturing) index revealed sector contraction in June, surprising analysts who were calling for a third straight month of growth. 

The week ahead doesn't hold any big economic releases, giving investors a welcome break after last week's disappointing round of reports.

Weekly Economic Calendar

News and Related Story Links:

• Money Morning News Analysis: Surging Demand, Weak Supply, and Dwindling Inventories, Drive Oil to Another Record High .
• Money Morning Analysis: A Bearish Dow Has its Worst June Since the Great Depression .

By William Patalon III
Executive Editor

Money Morning/The Money Map Report

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