Seeing The Market's Glass as Half Full

by: Andrew Corn

There are a few things we can be certain about in the markets: They never go straight in any one direction, we will experience both good and bad markets in each decade, and we don't know how high or low the markets will fluctuate.

According to the press, the subprime lending market is in shambles. And, they are asking lots of questions. Some of these include whether this will destroy the banking industry or just the mortgage industry, or whether the hedge funds will ride in and save the industry while pocketing all of the winnings for themselves. The answer is that any of these scenarios could probably take place at one time or another since its influence on the overall equity market to date has been minimal.

Two of the common predictions made earlier this year in the press were that 2007 would be the year that large cap stocks will dominate market gains, and that corporate earnings increases were only going to be two to three percent. Despite the surge in the Dow, mid cap stocks have strongly outperformed large caps. Part of the issue of this common misconception is the way the in which the Dow is calculated. I covered this last week in a posting in my blog.

The second myth that is not holding true is that corporate earnings are in the lower single digits. True, they are not growing at the record pace set last year, but they are very far from disappointing, especially after the much lower expectations that Wall Street analysts set up for us. In retrospect, it seems that a surprise to the upside was almost inevitable.

Companies in the S&P 500 Index (NYSEARCA:SPY) through May 11 reported an average earnings gain of 13% in this quarter, according to data compiled by Bloomberg thereby making, the period ending March 31, the 19th straight quarter with double digit gains. The last time growth was less than 10% was the second quarter of 2002.

Last week, Jeff Sommer published a piece in the NY Times with some other great statistics:

The numbers tell the story. By the end of this week the vast majority of the companies in the S&P 500 Index will have reported their earnings. And so far, overall results have been terrific - especially when compared with the consensus expectations on Wall Street.

With 89 percent of the S.& P. 500 reports in hand, Thomson Financial calculated that earnings in the first quarter were running 10 percent higher than in the same period a year earlier - a number in line with the kind of double-digit increases investors have taken as their birthright during this long bull market.

What’s more, about two-thirds of companies have treated investors to positive earnings surprises for the first quarter.

For now the prospects of companies in U.S. markets continues to look good. Last week China opened it doors on the outbound lane allowing investments by banks overseas and on Sunday, the Chinese government announced a $3 billion investment in The Blackstone Group (NYSE:BX). This is its first investment from the massive war cheat of foreign exchange reserves into a company, and it is willing to make this huge investment with no voting rights.

This investment is right smack in the heart of the U.S. investment world. We look at this as a vote of confidence and stability in the United States. Despite the lack of confidence in the current administration, our continued occupation of Iraq, rising energy prices, trade imbalance and the falling dollar, the Chinese government is making its first, and very significant, investment here.

There are always many reasons to see the glass half empty. It is good to see some real verified numbers here and investment coming from abroad. Taken together, they demonstrate that the glass just may be half full.