Many Investors Seem To Think the Worst Is Over

by: Grace Cheng

This week the markets ended on a positive note after generally positive earnings data from major companies like Intel (NASDAQ:INTC), JP Morgan (NYSE:JPM), Caterpillar (NYSE:CAT), Google (NASDAQ:GOOG) and Coca Cola (NYSE:KO). The Dow rose 4.3% for the week and is down around 3.1% for the year; the S&P 500 is up 4.3% for the week and down around 5.3% for the year, and the Nasdaq is up 4.9% for the week but still off 9.4% for the year.

Surprisingly, financials outperformed the overall market for the week. Citigroup (NYSE:C), AIG (NYSE:AIG) and JP Morgan (JPM) were up around 10% this week. Even more surprisingly, this was due in large part to those terrible numbers from Citi which announced $16 billion in writedowns, $5.1 billion in losses and around 9,000 job cuts. With such huge writedowns and the bank trying to “come clean” on its losses, investors hope that the worst may soon be over. On Thursday, after Merrill Lynch (MER) announced $6.5 billion in writedowns and that it would axe around 3,000 employees, investors showed the same optimism and the stock rose an astonishing 7%.

All of this despite a worsening outlook with Citi expecting a 20% drop in home prices, of which 9% has already occurred, and Citi’s CFO Mr. Crittenden saying that “if historical trends were to repeat, there is a potential for higher loss in our cards portfolio into 2009.” What these results show is that investors want transparency, but are these banks transparent enough among themselves that CEOs have a clear picture of where all the assets lie and what writedowns might be forthcoming?

Apart from financials, tech stocks also got a boost from Google’s strong earnings, which grew 30% to $1.31 billion or $4.84 a share. This was far more than the $4.52 that analysts expected. The stock shot above $500 for the first time in over a month but is still far below its high above $740 in November last year. Price targets now are far more modest than the $900 that was predicted back then, although analysts are already giving targets in the mid $600s.

On a sidenote, these improved earnings from Google may give Yahoo (YHOO) more leverage when negotiating with Microsoft (NASDAQ:MSFT) or other suitors of a proposed takeover as it shows that internet advertising is still healthy and growing strong. Of course the real clincher will be when Yahoo reports earnings this coming Tuesday.