Focus: Stocks couldn't rally off of the results at earnings season
>> 2/3 of the 475 companies in the s&p out with results have beaten analysts’ estimates. we want to bring you to the bloomberg terminal to look at a 12-year chart of the actual quarterly earnings for the s&p 500, charted in white, compared to the actual s&p 500 seen in red. you can see the correlation between earnings and stock prices. here you see earnings falling from their previous peak in 2000. this is right here. this is the decline right here. dragging down stocks, the line in red. stronger earnings over the past three years have fueled the s&p. that’s that up trend you see right here. here you go, is the s&p 500. note how it’s basically leveled off. note, too, that earnings have climbed to a peak, that is the white line at the end of the chart. so a question for investors has become, why the s&p 500 has not rallied given the strong first-quarter results. let’s get the perspective right now of lincoln anderson, chief investment officer of l.p.l. financial services, joining us from our boston bureau in lincoln. pleasure to have you on. looking at earnings season, it seemed to confound investors that stocks couldn’t rally off of the results. why was that?
>> i think there is irrational pessimism in equity and credit markets that people are looking away from the fundamentals which is low interest rates and strong earnings through the first quarter.
>> does that mean the rally this week was not a surprise to you?
>> not at all. i was one of the people who’s been scratching their heads wondering why stocks weren’t moving higher following these strong earnings announcements.
>> so, then, why do you think that rally sputtered today?
>> it comes in fits and starts. you know, some bad news comes into the market on a few companies’ earnings disappointments. bear in mind we had about 80% of companies met or exceeded earnings estimates in the first quarter but most people were focused on the 19% that missed.
>> and in terms of that pessimism you talked about that perhaps is overextended, what do you think, then, it would take to erase that pessimism because another factor is oil prices, well off the record highs of april, but also not enough of a catalyst.
>> i think it will take sustained continued progress until people decide that the positive news is a trend and the negative news are little fits and starts that just don’t ever turn into a sustained negative trend. i mean, it’s―we had that soft patch a month ago and then it went away and we returned to strong economic numbers and i think that will translate into a rising earnings estimates for the second quarter and we’ll just go along that way.
>> one thing we heard a lot of talk of this week during the rally was the importance of technology shares, they really need to be there and perhaps leading the rally for the rally to stick. is that how you see it?
>> i think some of the beat-down sectors need to participate here. healthcare already has been and that’s one that was certainly a catalyst, i think, to this advance. and i think technology should follow. we just have to get over the hurdle of lack of pricing power in technology. the spending numbers are there. there has been heavy spending in technology, but there’s still a lot of price competition.
>> the companies in tact where we’ve heard negative news such as i.b.m., is that an anomaly?
>> not an anomaly but that sector is finally getting sorted out so you’ll see winners and losers and misses as you get sorted out and then it will hit on all cylinders and we’ll see more steady upward progress and fewer anomalies.
>> we have listed on the screen a moment ago that you like the industrial stocks. why is that and what specifically?
>> in terms of industrials, what i like about industrials, again, it’s an area that got―had relative underperformance due to people worrying we were in to a cyclical slowdown, the soft patch piece. and also we have such strong capital spending numbers right now that i think we’ll be sustained through the year and can drive that sector higher.
>> any specific stock that highlights this?
>> i’m not a stock analyst.
>> you do like junk bonds. what role do you think they’re playing in a portfolio right now?
>> right now they’re playing a big negative role. the junk bond market is one of those areas where we have a lot of pessimism, as i mentioned. in credit markets , a serious spread widening over the last month or so. at first, initially due to the g.m. problems but it’s kept right on going so at this point i’m liking junk just because we have now moved from spreads being super tight to spreads being wide but, boy, it’s a hard way to get there.
>> overall, what kind of gains are you looking for for the s&p this year?
>> i think earnings will be up over the year about 15% and i don’t see any reason why p.e.’s should go down so the s&p should be up somewhere in the 10% to 15% range to keep the p.e. stable at around 16.
>> lincoln earnings cious -- thanks for joining us.
>> my pleasure.
>> lincoln anderson out of boston from l.p.l. financial services. when we return, microsoft has just 10 days to make major changes. su keenan will join us with those details.
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deborah kostroun is at the big board with more on what held stocks back today.
>> the dow jones industrial average and the s&p 500 might have been lower in friday’s session but they had a really tremendous week. the s&p 500 up 3.1%. the dow up 3.3%. take a look at the gainers in the s&p 500 for the week. we saw the auto industry, it was the best performer throughout the week. retail, second best performer throughout the week and also consumer durables, many of the homebuilders putting in a strong performance. if you look at the auto industry and some of the stocks related to that, visteon, the money-losing auto parts supplier spun off from ford in 2000, they rallied for a second day on friday. the second largest gain in the s&p 500 -- laggards for the week, even though these were laggards, they were still up for the week. all 24 industry groups in the s&p 500 were higher. if you look at energy, crude oil down 3.8% this week. crude oil falling and closing on friday at a three-month low of $46.80 after opec’s president said that the group will keep production levels near their record levels to meet global demand regardless of whether it causes crude prices to decline further. now, in friday’s session, even though retailers, one of the best performers throughout the week, one of the worst performers in friday’s session because gap said sales fell for the first quarter in three years. comparable sore sales―store sales fell in all of the company’s divisions. we also had prudential downgrading federated and abercrombie & fitch so those stocks on the lower side. i’m deborah kostroun at the new york stock exchange.
>> over at the nasdaq, the nasdaq had its biggest weekly gain since august. robert gray has details.
>> the nasdaq composite finishing higher on friday, the only of the three major averages to do so, finishing higher for the sixth straight day, the longest streak since november and best weekly gain on the nasdaq composite index since last august. the nasdaq has rallied more than 7% in the past three weeks since closing at its 2005 lows on april 28. head of trading at p.n.c. capital markets telling me that given the action in the last week, people didn’t want to go into the weekend short. the shorts are at risk, he says, the tone changing more bullish this week. he says as far as next week’s trading goes, the fed minutes will move the market , and he’s most focused on the consumer sentiment reading from the university of michigan due out next friday and there’s a strong possibility of a summer rally and the consumer sentiment index an important gauge of that for him. the rally over the past week, transports leading the gains as crude oil falling to a three-month low on the nymex. 6.5%-plus gains for the transports. also financials and computer-related shares gaining, as well. the semiconductors, one of the best performing groups over the past week continuing their gains that they’ve had basically over the past month. the s.o.x. rising for an eighth straight day. intel shares rising for an an eighth straight day on friday. google rising to a record as they lost a customized home page. there was weakness in retail. looking at sharper image, j.p. morgan cutting it to underweight from neutral as they forecast a wider loss than the average estimate.% also, weakness in teen retailers, prudential downgrading the group from underweight to neutral. american eagle outfitters and pacific sunwear falling in friday’s session. at the nasdaq, i’m robert gray. a new york state grand jury investigating possible criminal conduct at the insurance giant a.i.g., according to people familiar with the situation. allan dodds frank joins us with details.
>> the grand jury is taking testimony from insurance industry witnesses as they listen to―as they are questioned by prosecutors from the new york attorney general eliot spitzer’s office about possible misconduct at a.i.g. the attorney general declined to comment on the grand jury, which, by law, is conducted in secret. spitzer has said his investigation is focused on offshore reinsurance transactions that a.i.g. executives may have used to boost the company’s net worth. people familiar with the investigation say a.i.g. senior vice president testified in exchange for immunit from possible criminal charges that could arise from the grand jury. former prosecutor john moskow says he has no information from inside the a.i.g. grand jury although he says, if it is sitting, its existence is significant.
>> part of an investigation. then you are seeking to obtain an indictment. or checking to see whether you should obtain an indictment but in any event, the question is, should you bring criminal charges? if not, should you bring civil charges or should you bring criminal charges. that’s what you learn in a grand jury investigation.%
>> on may 1, a.i.g. said some reinsurance deals may have to be reclassified as loans and could cause the company to restate earnings by $2.7 billion over the last five years. so far, former a.i.g. chairman and c.e.o. maurice hank greenberg has been forced out of the company and three other top executives have been fired for refusing to cooperate with investigators. the new york attorney general does not expect to prosecute the company which is cooperating with investigators from his office and the u.s. securities and exchange commission. spitzer also said he could pursue possible criminal charges against individuals from a.i.g. and other insurance companies caught up in the investigation. a.i.g. disclosed on valentine’s day it received subpoenas from spitzer and the a.i.g., since then the stock has declined more than 25%. a.i.g. may file its delayed annual report for last year by the end of the month.
>> thanks so much. turning our attention right now to the currency market . the dollar traded higher today, sending it to a seven-month high against the euro. the gains came on concerns that economic growth in europe, also on speculation the three-year bear market for the dollar may be over. as for treasuries, prices were little changed today. the yield on the 10-year at $4.12%. for the five-year, that yield at 3.87% and two-year, note that it recorded its fourth weekly price decline in the past five weeks coming on speculation the federal reserve will continue to raise interest rates. and speaking of the fed, fed chairman alan greenspan said some regions of the u.s. housing market are showing signs of unsustainable speculation and trough based on fast turnover of existing homes.
>> the big price surge will soon simmer down and because of the heterogeneity of the market and inability to get a major reduction in price in this country, we don’t perceive it as a serious macro economic issue.
>> greenspan also offered a warning that energy choices americans make will have a major effect on the economy. he was speaking to the new york economic club today. he said energy prices should fall some, noting the rise in oil as well as gas inventories. long-term, however, the choices the u.s. makes now, he says, will affect the economy for a language time to come.
>> of critical importance will be the extent of the light vehicles on u.s. highways which consume 11% of total world production become more fuel efficient as vehicle buyers choose the lower fuel costs of lighter or hybrid vehicles.
>> one problem the chairman anticipates is that much of the untapped oil and gas in the world is in countries hostile to the u.s. or that prohibit foreign investment. >> unless those policies and political institutions and attitudes change, a greater proportion of the cash flow of producing countries will be needed for oil reinvestment to ensure that capacity keeps up with projected world demand.
>> he says fear that won’t happen is a major reason oil future prices are so high today. taking a break, then stocks failed to get a lift from first-quarter earnings results. will that affect investors in coming weeks? keep it here.
