Trader Talk

Wall St. & Main St. Agree: Rally Is 'Baloney'


At the annual dinner of the Securities Traders Association of New York (STANY) last night, the two main topics were: 1) why business is so awful, and 2) why the market does not go down.

Like I've been saying: this is the most unloved rally of modern times. Not only does Main Street not believe it, a good part of Wall Street thinks it's baloney as well.

The fact that a good portion of the 600 or so attendees appear to have been unemployed may be coloring their thinking. But I'm just speculating.

Regardless, just like last summer, the bears are getting run over. New highs on the Nasdaq, Russell 2000 and S&P Midcap, and we are sitting right at new highs for the S&P 500 and Dow Industrials as well.

We are completing the first week of earnings season, and the key metric is sales, not earnings. With 27 percent of the S&P 500 reporting, 70 percent have exceeded sales expectations, according to Charles Campbell at Miller Tabak. Eighty-five percent are beating earnings; both of these metrics are above long-term averages.


1) Greece has requested the activation of the EU-IMF aid package, we don't know how long this will satisfy their funding requirements, or even if the EU membership will all sign on, or even if the Greek electorate will accept the austerity measures. The Street continues to believe that a restructuring is increasingly likely. (See CNBC's Greece Crisis coverage, below.)

2) American Express reported earnings above consensus, but more importantly, spending seems to be picking up. Billed business was up 16 percent year over year. Also: net charge-offs declined, and provisions for losses were down as well.

Capital One also reported results better than expected. Once again, credit costs declined, including a large reserve release.

3) Honeywell beat estimates ($0.54 vs. $0.47 consensus). Sales also topped estimates as the company saw "improvements in many of our end markets." Aerospace revenues were quite weak, falling 9 percent, but that was more than offset by very strong demand for products that go into vehicles (transportation systems division sales up 33 percent).

Despite noting that "the timing and shape of the recovery is uncertain," earnings guidance for the full year is raised from $2.20-$2.40 to $2.30-$2.45 vs. $2.42 consensus, while the diversified manufacturer raised its sales forecast to $31.3 billion-$32.2 billion vs. $31.9 billion consensus.

4) No love for IPOs: Excel Trust (EXL), a REIT that is buying retail properites, priced 15 million shares at $14, well below the price talk of $16 to $18. This ends an awful week for IPOs: while it was one of the busiest weeks in years (seven priced Wednesday alone), all but one priced at the low end of the price talk, and several priced below.

5) Schlumberger rises 1 percent after Q1 earnings beat analyst estimates by a penny. Revenues were disappointing (down 7 percent vs. expectations of down 5 percent) as North America operations remained fairly weak overall (revenues down 13 percent). However, the oil services giant saw some sequential improvement in North America as margins and activity rose.

Another good sign: Chief Executive Andrew Gould expressed his belief that international margins already "have bottomed," which is encouraging as he originally had expected a bottom only at the end of the current quarter.

6) Shares of Microsoft are down fractionally despite beating Q3 earnings estimates ($0.45 vs. $0.42 consensus). Sales for the Dow component rose a greater-than-expected 6 percent. The tech giant benefited from robust sales of its new Windows 7 operating system, which has also been boosted by rising PC industry sales.

7) Western Digital rises 4 percent after strong results and guidance. Q3 earnings beat estimates ($1.71 vs. $1.55 consensus) on better-than-expected margins and stronger-than-expected sales. Shipments for the computer hard drive maker surged 62 percent

Earnings and revenue guidance for the year also exceeded the Street's current expectations.

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