Earnings Outlook

While the market is in the middle of a tug of war between the bears and the bulls, earnings reported from Alcoa, GE, and Wachovia Bank have set the tone for this quarterly earnings reports. With the bulk of the companies reporting earnings starting tomorrow, here’s a possible preview of what to expect…

Financial Earnings – Most financial banks will report a decrease in net income or a loss as was the case with WB. It’s no surprise that banks currently have no means of generating income and it’s prudent for them to clean out their balance sheets. I expect the write downs to be finalized during this quarterly reports and efforts to increase liquid capital through stock sales, sovereign funds & dividend cuts will be made. While downside risk certainly remain for financial stocks going forward, this quarterly report period should be the final period to cause downward surprises.

Technology Earnings – While most technology companies reported good revenue numbers but got punished for bearish guidance in previous quarterly reports, this time around they’ll have to deal with a decline in revenue AND slowing growth in providing guidance. The economic slowdown would seem to deal the biggest blow to technology companies and I expect a massive amount of beatings to come for these stocks. Only bright spot would be for companies that have heavy international exposure as they can benefit from the weakness in dollar. However, going forward, with dollar nearing a bottom and domestic economy falling into a recession, I can’t paint a bright picture for the technology sector.

With financial crisis, rising inflation, decreasing consumer consumption, and overall slowing economy, it’s no surprise to see that the bears are up 3-0 so far after three earnings reports from companies mentioned above. By the end of earnings period, I expect the bears to come out victorious in a lopsided fashion. (Buying puts ahead of these earnings would be a play worth noting.) As for the general outlook for the market, with our recent failed attempt at registering a higher high than January highs, and negative earnings outlook, I’d favor a break of the previous lows and a fall down to 1150-1200 instead of a break of 1400 in S&P500. An increase in volatility will likely persist to the end of April at which time, the Fed will have a meeting to announce what could possibly be the final interest rate cut.

Rino Choi
Titans of Wallstreet
Market Columnist