The S&P is sitting right at its highest levels since November. The central thesis is earnings: P/E multiples will expand in the next several quarters due to the combination of cost cutting and gradually rising revenues.
Caterpillar, out with earnings tomorrow morning, will be a key to the winning or losing of this argument.
1) Investors are looking for signs of a construction bottom.
2) Two-thirds of Cat’s sales are outside the U.S., and bulls are betting that the combination of China's stimulus package, along with the relative outperformance of Brazil (a big buyer of construction and agricultural equipment), will create stability in sales..
3) Here's the rub: most analysts agree that 2009 sales will be comparatively awful. Current guidance of $1.25 could well be reduced.
4) Bank of America upgraded the stock this morning, saying "Once operations stabilize in 2H09, multiple should expand to historical levels."
But the bet is that 2010 revenues will expand, leading to a notably better bottom line.
Keep an eye on comments about the Caterpillar Financial division—they will be making comments on credit losses and what percentage of the receivables portfolio is past due.
Regional banks: if you want to see why bears are grinding their teeth, look no further than today's results from M&T Bank , a large regional bank based in Buffalo, New York.
M&T is trading up almost 5 percent because they handily beat earnings estimates.
They beat earnings expectations handily because some metrics have clearly improved: better balance sheet, higher deposits, higher fees, etc.
But remember the bear thesis on financials, but particularly on regional banks: they will continue to have mounting problems around credit, but particularly around credit cards and commercial real estate.
M&T did not disappoint on that front. Profits were down 75 percent compared to last year, and they did indeed have mounting credit card losses, and acknowledged that commercial real estate was continuing to deteriorate, an acknowledgment made by JP Morgan as well.
The bull argument is that the rate of credit deterioration is showing some signs of improvement and the key credit metrics (non-performing assets, net charge-offs) will peak in the first half of 2010.
And that is the argument that is moving financials to the upside.
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