The Nvest Market Blog, our current thoughts on the Street

Better Earnings Continue to Fuel US Market - Week Ended 4/23/10

posted 04.26.2010 at 09:28 a.m. by steve

Despite ongoing worries about Greece, which appears to be in an ever more precarious financial situation by the day, US stocks managed to swell higher for the week. The broad S&P 500 gained +2.11%, followed by slightly less sizable gains for the Dow and NASDAQ of +1.69% and +1.97%, respectively. The S&P is now up +4.09% for the month of April; and, 7 of the last 8 weeks have now been positive. Meantime, there has been some noise in the economic data with some reports pointing to continued recovery while others inject doubt. But last week initial unemployment claims fell back to a more preferred level and applications for home purchase surged ahead of the expiration for homebuyer tax credits.

Given the more mixed package of news lately, one might question how the markets manage to continue moving in an upward trajectory. It is worth acknowledging the many headlines that threaten to derail recent gains including Greece debt, China worries, allegation against Goldman Sachs for securities fraud, and on. Additionally, financial regulation reform is gaining momentum moving through Congress.

But, to the surprise of many, company earnings for the just completed 1Q period have largely beaten even the more optimistic projections. In fact, with a fifth of the S&P 500 now having reported results, over 85% of companies have beaten estimates: that is the most in 17 years according to research firm ISI Group. In fact, some companies have been reporting such strength that many of them should start hiring new workers to keep pace with demand, which is up over 20% in just 3 quarters. If the favorable reports can continue, then it is not hard to imagine a positive feedback loop developing whereby more jobs means more spending/demand and continued positive earnings surprises. This week, earnings season continues. Meanwhile it will be worth watching how Europe and the International Monetary Fund (IMF) move to deal with Greece. With the issue 4 months old now, one would think we are nearing a final determination for action. The economic calendar looks to be busier this week, with several key reports including Consumer Confidence, the FOMC Meeting and the first estimate of 1Q GDP growth.

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The Big Bad Banks - Week Ended 4/16/10

posted 04.19.2010 at 09:37 a.m. by steve

What originally looked to be like another week of handsome gains in the midst of strong 1Q earnings was largely erased Friday as investors were reminded of the cause of the financial crisis when investment bank Goldman Sachs was charged with fraud. The SEC charged the firm for its alleged involvement in the creation of collateralized debt obligation (CDS) and failing to disclose that it would benefit if the security fell in value; the actions ultimately cost investors $1 billion in losses. The news immediately sunk broad stock indexes by almost -2% while the banking sector experienced far greater punishment. One cannot help but wonder if the latest charges are part of a bigger political push to help build the case for sweeping and strict financial regulation overhaul (now moving through Congress). Goldman, the subject in question faced the worst decline for the day with its stock falling 13% on the charges. Despite the development on Friday, stock indexes finished the week essentially where they began. The Dow did manage to close the week above 11,000 for the first week since September 2008 when Lehman Brothers failed. The S&P was unable to hold onto its gains for the week and remains shy of 1,200 after having closed above that level for several days earlier in the week.

Despite the negative news centered on Goldman Sachs on Friday, it was generally a very positive week. Investor sentiment improved in recent weeks. The Eurozone sketched out more specific details about plans for aid of Greece and its refinancing of debt obligations. Economic data continued to point to strength in sectors such as manufacturing and the overall economic recovery appears to be gaining momentum. Corporate earnings also commenced with blowout positive reports coming from technology and banking giants Intel and JPMorgan Chase; both reported results that handedly beat even optimistic expectations. In fact, Intel indicated that the recently completed 1Q was the best and busiest 1st quarter in its company history dating over 40 years! Bank of America, the largest US bank by consumer deposits helped to confirm the general recovery being experienced by the financial sector when it too beat earnings and revenue estimates by wide margins and today, Citi also helped to support the story with its earnings release. This week, the focus will be primarily on corporate earnings as the economic calendar is light until Thursday when we receive the weekly round of jobless claims, as well as the producer price index and existing home sales. Meanwhile, the other ongoing debate is whether or not equity indexes can continue to rally and build on the momentum they have had since early February. Many are suggesting that a pause is due while others suggest that momentum is one of the biggest assets of this current rally. Bottom line, it becomes increasingly likely in our minds that the rally and economic recovery continues to surprise the consensus with its ability to climb the wall of worry.

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6 Straight, But Earnings Season Starts Tonight - Week Ended 4/9/10

posted 04.12.2010 at 09:34 a.m. by steve

It was the sixth consecutive week of gains for US indexes, with the S&P advancing +1.38% for the week and the Dow closing just below 11,000, a level not seen for the index since September 26, 2008 (the S&P currently just shy of 1,200). While managing to pull off gains, the week was not without its struggles, as worries of a Greek debt default again became a focus; economic data was generally still favorable, but there were some discouraging releases on the housing and jobs front. Consumer spending appears to be accelerating despite stubbornly high unemployment rates and a significant drop in consumer credit (borrowing). And, upward creeping mortgage rates seem to be negatively impacting the pace of refinancing activity only, not stalling the pace of applications for new home purchase at least for now.

Recent weeks have been relatively light in terms of economic data, giving investors the opportunity to look at news generally given less attention. While some areas of the economy continue to sit at levels of depressed activity (housing), an area of the economy that has shown robust recovery has been the manufacturing sector. Aluminum producer Alcoa kicks off 1Q earnings season today after the market close and it will be important to see if results can confirm the purported strength of the sector. Outside of manufacturing, there are those who believe that Wall Street expectations for earnings are too optimistic following several quarters of positive surprise. On that note, this week could prove volatile for stock indexes if earnings do turn out a bit less exciting than anticipated, especially after the advance experienced in the last 6 weeks. Whether this week can extend the winning streak or takes a breather is probably not that important. Any pullbacks are likely to be relatively short lasting and shallow magnitude. What does seem to be increasingly confirmed is that the economy is experiencing a stronger recovery than most expected, without being so hot as to stoke inflation.

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Roth IRA Conversion: Is It a Worthy Idea For Me?

posted 04.05.2010 at 2:29 p.m. by steve

A big financial planning topic being discussed for 2010 is the conversion of an IRA into a Roth IRA. You may be wondering why all the buzz? In theory, it sounds great: distributions from a Roth IRA are tax free in retirement. But in practice, paying the taxes now may not make sense. This brief paper will answer when and under what conditions does it makes sense to convert an IRA into a Roth IRA. We offer some general thoughts and guidelines, and encourage you to review your situation with tax planners, investment and estate advisors.

Please click here for the full article: Roth IRA Conversion

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Recovery Appears Ever More Sustainable Amid Job Gains - Week Ended 4/2/10

posted 04.05.2010 at 09:34 a.m. by steve

US stocks managed to post gains for a fifth consecutive week and closed out the first quarter of 2010 with solid gains. It was the fourth consecutive quarter of positive performance since the bear market made its low on March 9, 2009. The quarterly gains (S&P +5.6%) were back-loaded, coming entirely from the month of March with the S&P 500 returning +5.9% (including reinvested dividends). March was the best month for stocks since August of last year. But the advance during the quarter did not come without struggle, as a decline of about -10% was experienced for the broad stock indexes between year-end 2009 and February 8. The renewed uptrend has come as economic data has improved and global worries have eased somewhat.

The most recent week was stacked full of employment and consumer related data. Most of those reports met or slightly exceeding expectations. A report on the manufacturing sector showed that activity is about as strong as it can get in any market environment and looks to be one area of the US economy that is experiencing a V-shaped recovery. Employment related data points were consistent with one message: that jobs are slowly returning. The biggest economic data point came on Good Friday with the US markets closed. The US Employment Report showed 162,000 jobs were added during the month of March. The headline number missed expectations, but digging deeper into the report revealed that Census hiring (temporary jobs) was significantly lighter than expected and that private-sector jobs (more sustainable jobs) rose much more than expected. Additionally, the average hourly workweek increased to 34 hours and was at the very high-end of expectations; that suggests that employment gains should continue in the months ahead.

As cliche as the phrase has become, the markets continued to climb a steep wall of worry during the 1Q. And, the most non- consensus call right now is that the markets would continue to drive higher as the majority of retail and institutional investors alike doubt the new bull market. In investing, history has shown time and again that the consensus is usually wrong; we continue to be of the belief that investors focused on the long-term and are unfazed by short-term volatility (emotion driven) will be successful. Further, we hope that the consensus gets positively surprised by being wrong once again. In the meantime, we remain focused on investments with a bias toward quality.

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