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Market Holds Its Breath Ahead of Earnings

Cindy Perman
Monday, 7 Apr 2008 | 4:03 PM ET

Stocks finished flat Monday as traders opted to pull over and let some of the earnings traffic pass before deciding what to do next.

Earlier, stocks had gotten a boost from news that Washington Mutual will likely be getting a cash infusion and from energy stocks after crude oil settled just below $109 a barrel.

But an afternoon warning from Arch Coal offered a stark reminder: Earnings season starts today and it's not going to be pretty. Arch said its quarterly earnings would be between $2 and $2.50 a share, a lower range than analysts had expected. The prognosis for steel prices and steel earningsis actually quite good but the market took the lowered outlook as a reminder that more earnings heartache is on the way.

Analysts at Reuters Estimates again lowered their projection for S&P 500 earnings. The revised forecast, announced early Monday, calls for a collective decline of 11.8 percent for the first quarter, down from the expectation of an 8.1-percent drop issued last week and the forecast for 4.7-percent growth issued on Jan. 1.

The decline in financial earnings is pegged at 61 percent. The energy and technology sectors are expected to post the best gains, up 33 percent and 10 percent, respectively.

Alcoa, the biggest decliner on the Dow today, shed 4 percent ahead of the aluminum maker's earnings report. Alcoa's report is seen as the official start to earnings season as it's the first Dow component to report.

After the closing bell, Alcoa reported its earnings were cut in half and missed forecasts, amid higher energy and raw-material costs, as well as a weak dollar. Net income was $303 million, or 37 cents a share, compared with $662 million, or 75 cents a share, a year earlier.

Excluding one-time items, Alcoa earned 44 cents a share, below the 48 cents a share analysts had expected. Analysts had slashed their forecast for this quarter but expect earnings to be helped later this year by higher aluminum prices.

Later in the week, investors will hear from Dow component General Electric , which reports on Friday.

"I'm encouraged that investors will actually pay attention to earnings this season," Jeffrey Kleintop, chief market strategist at LPL Financial, told CNBC. "In the last couple seasons, [earnings] were overshadowed by so many things going on in the market. Now, with credit conditions and liquidity beginning to heal ... the attention is now, I think, back on fundamentals," Kleintop said.

The first-quarter earnings season "may be one of the few times in the past year when we see actual, accurate earnings reports" that show exactly where companies -- and the market -- are right now, said Yiorgo Aretos, founder of thetmpgroup.com.

Aretos's team expects to see results mostly meeting or exceeding expectations -- for the simple reason that analysts started lowering their estimates in the fall. Earnings may be bad for some companies, but we know what to expect.

"With 7 out of 10 sectors likely to post gains -- year-over-year in terms of earnings -- I think investors will recognize the resilience in S&P corporate profits and begin to sustain this rally," Kleintop said.

We've already seen the bottom of this correction," Aretos said, and tested it several times. "We may get a couple of swing days this month, but overall the tone of this market is -- it's a solid rebuilding month," he said.

"Start thinking Dow 13000," Aretos said. "Set your mind there -- that's truly closer and more accurate to what the market is worth now."

Wall Street has shifted its gaze to earnings, but there are a few economy/recession headlines worth noting.

Martin Feldstein, who heads the group that is considered the official word on recessions, told CNBC that he, personally, believes that the U.S. has been sliding into a recession since December or January. He also said that the downturn could go on longer and deeper than the last two recessions, and that GDP would be a positive -- but misleading -- number. The NBER, however, hasn't officially declared that the economy is in a recession.

Meanwhile, former Fed Chairman Alan Greenspan said it wasn't the Fed's low-interest-rate policy that created the current credit crisis -- it was investors. "The U.S. bubble was close to median world experience and the evidence that monetary policy added to the bubble is statistically very fragile," Greenspan wrote in an op-ed in Monday's Financial Times. In a weekend interview, Greenspan said the U.S. isn't currently in a recession, but there's more than a 50 percent chancethat it's headed into one.

The big news in banking today is that US private-equity firm TPG and other investors are near a deal to infuse $5 billionin Washington Mutual, according to a report in the Wall Street Journal, citing people familiar with the matter. A deal has not yet been finalized but sources say the announcement could come as soon as today.

WaMu shares closed up nearly 30 percent higher as investors looked favorably on the potential improvement in the bank's liquidity position.

"Financials are early cycle leaders and the news is consistent ... People are willing to step up to the plate to supply capital and liquidity to the financials," Subodh Kumar, chief investment strategist at Subodh Kumar & Associates in Toronto, Canada, told Reuters.

Financials also got a boost after Merrill Lynch upgraded its rating on Swiss bank UBS to "buy." UBS shares, which rose 3.7 percent Monday, have benefited from increasing investor optimism that reform is on the way at the Swiss bank as activist investor Luqman Arnold continues to turn up the heat. Arnold on Monday again urged UBS to mull a sale of of its investment bank. UBS says it will respond to calls for restructuring "in due course."

Rounding out the trifecta of news from the sector, Citigroup , which has suggested that it might start unloading nonessential assets, has agreed to sell its Diners Club International unit to Discover Financial Services for $165 million. Citigroup, the biggest gainer on the Dow, finished up 2.2 percent, while Discover jumped 5.5 percent.

General Motors was the second-biggest gainer on the Dow with a 2.1-percent advance following news that talks between union leaders and the auto maker's biggest parts supplier have resumed in an attempt to end a six-week strike.

After a weekend letterfrom Microsoft, which set a deadline of three weeks to make a decision on its offer, Yahoo on Monday fired back with a letter of its own, saying it's not opposed to Microsoft's offer as long as it's at the right price.

"We have continued to make clear that we are not opposed to a transaction with Microsoft if it is in the best interests of our stockholders," Yahoo's board said in the letter.

Elsewhere in tech, Apple rose 1.8 percent to finish at nearly $156 after Thomas Weisel raised its rating on the stock to "overweight" from "market weight" and raised its price target on the stock to $195, saying the company's current range "excessively discounts" its longer-term opportunities. Caris raised its price target on the stock to $170. Reports have swirled in recent weeks that shortages reported in supplies of Apple's popular iPhone point to an impending launch of a 3G model. The reason why that could be the cause for so much excitement can be summed up in two words: global roaming. It's worth watching to see if other analysts follow suit with higher price targetsor bide their time ahead of earnings. Apple is due to report earnings on April 23.

Cisco fell nearly 2 percent after JPMorgan cut its revenue estimate for the network-gear maker.

The head of the world's largest chip maker, Intel, said in a weekend interview that the company doesn't expect a significant drop in demanddue to the U.S. economic slowdown because most of its chips are exported.

Motorola said it had settled all litigation with billionaire investor Carl Icahn ahead of the cellphone maker's annual meeting.

Shares of Delta and Northwest rose 6.2 percent and 4 percent, respectively, following news that the airlines have revived merger talks. The talks are intensifying, according to a report in the Financial Times, and the two sides are set to meet again this week.

This Week:

MONDAY: Alcoa earnings after the closing bell
TUESDAY: Existing-home sales; Fed minutes
WEDNESDAY: MBA mortgage survey; wholesale trade; crude inventories; Fed's Fisher speaks; Circuit City earnings
THURSDAY: Monthly same-store sales reports; Weekly jobless claims; international trade; Bernanke speaks about President's Working Group; U.S. budget; Earnings from Pier 1, Rite Aid, Genentech
FRIDAY: Import prices; consumer sentiment; GE earnings; G7 finance chiefs meet in Washington

Send comments to cindy.perman@nbcuni.com.

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