Earnings and Economics

The week began with strong upward movement in stocks as various companies reported not only strong earnings growth but the expectation that things will continue to improve. 

Alcoa began the week having a positive quarter versus a loss for the same quarter last year.  Clearly Alcoa’s aggressive cost cutting initiatives had helped.  Alcoa reported that demand was returning and this helped the outlook for economic recovery.  CSX also had a strong positive growth versus a year ago, and management noted that demand total tonnage shipped was rising.  Many view the increase in the shipment of goods to be a strong indicator of economic health.  Intel also had a good earnings report as they saw demand for their product increase.  As the week progressed companies began to miss expectations and stocks began to tumble with the S&P 500 declining 1.2% for the week.  General Electric saw earnings increase 16%, but revenue fell 4.3% and that missed expectations as some of the industrial segments and GE Capital continued to show weakness.  Technology giant Google reported slowing growth in its search engine business and investors responded negatively to the news.  Bank of America had a decline in earnings that was better than expected, but investors focused on the declines in all business segments and stock sold off. Citigroup saw earnings decline 37%, which was better than expected; however, revenues declined 33% from year ago levels.  Also, on Friday the 2,300 page financial reform billed passed in Congress, and by some estimates the financial industry will be subject to 300-500 new regulations in the upcoming two years.  As we are able to dissect the bill, we will report our views.  However, next week expect us to continue our reporting on earnings.  

The Producer Price Index and Consumer Price Index numbers topped the economic headlines this week, sparking some fears of deflation.  Both the PPI and CPI declined in June and the CPI recorded its third straight month of decline.  However, all of the declines have been in either food or energy and the “core” PPI and CPI continue to steady increases.  While we do not begrudge anyone experiencing lower prices for food or energy, we remind our readers to note that food and energy prices are very volatile and with the Eastern part of the US experience record heat in July, both food and energy prices may see higher than expected increases.  

This week also began our quarterly conference calls with those money managers that partner with us as we serve our clients.  We have these calls to ensure that our partners are following their stated strategies to assess how those strategies fared in the quarter.  One of those managers noted that while economic news may be pessimistic, in his meetings with company management, he is anecdotally seeing an increase in optimism and business expansion.

Weekly Market Commentary is written by the MSF Investment Committee
*Information for this commentary was obtained from sources believed to be reliable. MarketSpace makes no assurance or guarantee regarding the information provided from outside sources.