Wednesday, April 11, 2007

V – TV (Take Two)

Wha Happened?

In case you were wondering, yesterday’s story regarding North Korea and its nuclear program preempted my scheduled appearance on CNBC, which has been rescheduled to today – same time 11 AM (ish). The focus once again will be on the upcoming earnings season and the market’s likely reaction.

What makes appearing on CNBC and other media channels special is the opportunity to encapsulate a point of view that adds value to the discussion already taking place. This is the challenge for the guests. So, what has already been said re earnings season and what can I add to the conversation?

First let’s begin with what we know.

The earnings data points that will come spewing out these next weeks will help describe the state of the US economy and individual sectors and industry economic performance. This we know. We also know that expectations for the first and second quarter have been ratcheted down to the low single digit levels. Many investment strategists and commentators have come forth to proclaim that the markets have already baked into the stock price these lowered expectations. In other words, it’s old news and any bad news is likely not to have much of an impact. This I cannot argue with mainly due to last week’s market performance.

As noted in Monday’s blog (see below) and report (see link to your left), the market had every reason to decline last week or at least post little to no change. It didn’t. When a market rises more than 1 ½% during a week that included a key economic report that came out on a day when the market would be closed and before an earnings season that could easily surprise to the downside, the message is fairly loud and clear – the markets have once again returned to their sanguine mode.

Investment Strategy Implications

Bad earnings news will likely be greeted with a large yawn. And only really bad earnings news and/or guidance, individually or collectively, will cause stocks to pause or decline. However, given the fact that we have come off a small correction base, that many technical cross currents are active (see tomorrow’s blog for one aspect of this point), and that liquidity and leverage remain high (see Bank of Japan’s rate decision today), I would expect stock selectivity will rise these coming weeks as correlations decline (for the moment). Overall, I would also expect that individual stories and circumstances cumulatively produce a ragged market with an upward bias. This fragmentation should, however, reveal the true strength and sustainability of the current rally off the weak correction base.

This will be my contribution to today’s “Morning Call” segment. Hope you get a chance to catch it.

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