Davis's Monday Outlook

by: Philip Davis

It’s certainly a manic Monday in New York as we celebrate our first Superbowl victory of the 21st century and that should put traders on Wall Street in a good mood Monday morning (albeit a little hung over).

Asia had plenty to celebrate last night with a 908-point gain in the Hang Seng and a 362-point move in the Nikkei but it was Shanghai who really scored a touchdown with an 8.1% gain, reversing all the losses that have piled up since 1/22. China’s state-run newspapers carried front-page statements by top economic officials downplaying the likely impact of the winter storms, despite widespread power outages and snarled road and rail traffic in some regions. News that credit policies may be eased and two new stock funds have been approved also lifted Chinese shares. "There’s no need to worry. The losses will be recovered and investors should not worry," the China News Service quoted Li Rongrong, chairman of the agency in charge of big state corporations, as saying. I’ll throw a yellow flag on that play though as I trust the Chinese government only slightly more than I trust our own and a bit less so when they find it necessary to say "no need to worry" twice in the same sentence!

Over in Europe, Germany is up a point and England and France are trading flat ahead of our flat-looking open. RYAAY had flat earnings and a poor outlook and this great airline is getting killed pre-market but auto makers are moving well as are miners on (as usual) RIO takeover news. I will like Ryanair as they bottom out here as their outlook is pessimistic about fuel costs.

At home Google is, as predicted desperate to stop the MSFT/YHOO deal and they are putting everything from financial assistance to a merger on the table (and how is that less monopolistic than Microsoft (NASDAQ:MSFT) taking over I’m not sure) but, interestingly, what they are NOT doing is making a better buyout offer. Does Google (NASDAQ:GOOG) think Yahoo (NASDAQ:YHOO) isn’t worth it? Does that then mean that Google isn’t worth it or does that mean that Google can’t justify paying up for a competitor they’ve already destroyed???

As to the broader markets, with over half the S&P 500 weighing in with earnings it may surprise you to know that earnings (outside of the financial sector) are UP 11% for the quarter. That is about double expectations and not at all recessionary sounding. "It’s very striking — nonfinancial earnings are still quite healthy," said Thomas Doerflinger, executive director for U.S. equity strategy at UBS. That strength, he added, "has been fairly broad based." Earnings at technology companies are up 26%, energy earnings up are up 19% and health-care companies are up 18%, he said.

Analysts (not exactly known for their ability to analyze anything) have been predicting Q1 proftis to be up just 2.6% and Q2 is projected at 3.5%, that would be quite a fall from 11%, especially if the doom and gloom write-downs already taken by the financials don’t match the 18.5% decline we’re seeing in Q4 reports so far. I will point out that 18.5% is itself, far less than the 21% drop in the (NYSEARCA:XLF) since the summer. Of course these projections also assume that consumer discretionary earnings will also rise an anemic 1.2%. On the whole, these ultra-low expectations are certainly setting us up for a major second-half rally as it will be very hard for the financial sector to blow comps to these Q4 earnings (or lack thereof).

Tom Brown has an excellent overview of how NOT big a deal all this hulabaloo over the bond insurers really is a load of nonsense and MBIA made a presentation over the weekend with many, many charts, one of which shows their ENTIRE actual exposure to bonds that they have NOT reinsured is UNDER $1Bn and another chart that shows that the amount of subprime classified as an asset to MBIA is JUST 0.2% of their investment portfolio - these hyenas may really be barking up the wrong tree on this one!

Perception is everything though and we can expect to see continued weakness in the financial sector until this mess is cleared up but I’m getting very bullish on tech and we will continue bargain hunting as we look for the SOX to lead us up and out of this slump.