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  • No economic releases today
  • Earnings flow remains positive
  • Bernanke testimony on Wednesday a focal point
  • European bank stocks lower overnight
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February 8, 2010

Futures began this week with a modestly positive bias, but not long after the opening the major averages were moderately lower.

As has been true most mornings lately, the pre-opening earnings report flow was clearly slated toward firms that beat the consensus estimates. There were no economic reports scheduled for today.

This week has a relatively light calendar of economic releases, but the testimony on Wednesday by the Fed chairman could be more important than any of the reports.

Ben Bernanke is slated to appear before the House Banking and Finance committee where he is expected to address the issue of when and how the Fed will being withdrawing the stimulus the Fed has applied since the start of the credit crisis.

We suspect that Bernanke will be extraordinarily careful in his choice of words in order to avoid giving the markets the wrong impression.

We think that previous remarks by the Fed chairman and the formal comments from the Federal Reserve policy committee make it clear that the Fed will be very careful about tightening credit even modestly until there is solid evidence that the economy can function well on its own without the huge helping hand the Fed has provided recently.

Clearly there are market worries that the Fed will act to tighten credit sooner than later to avoid a build up in inflation potential. Or view is that the Fed actually might take a different approach and act later than sooner. Our reasoning is simple.

We feel that that the worst of all worlds for the Fed would be too tighten credit too much too soon and choke off a recovery before it can gain lasting momentum. By acting too quickly the Fed could contribute to a secondary turndown in the economy and have to fight the battle to rejuvenate the economy again. We think the task of doing it a second time so soon might be more difficult than it was the first time.

With the Fed fund target rate as low as it is now, moving the rate up 25 or 50 basis points probably would not have any great significance. The fear the market may have is such a move would be the first of many. Often it is not the rate that is important but rather the direction rates are heading.

Our view is that the Fed is likely to allow most of entire year pass before it nudges rates higher. The market is likely to discount a Fed move by several months, but we suspect that the discounting still is a quarter or two away.

Friday’s market activity dragged the S&P 500 to the middle of the 1040-1050 support range before a late-day rally pushed it higher. This suggested that the market was poised at least for a try at a bounce back toward the 1090 level. Today’s early weakness did not alter than potential. In fact after a weak start, the S&P 500 today was slightly positive by 11 AM.

For the time being the market probably will be range bound with a slight downside bias. Downside, however, should not be big.

As we noted several times last week earnings will be the key driver for stocks over the next few months.

As of Friday’s close, 316 of the S&P 500 companies had reported EPS. The reports largely continue on the better than expected path. Seventy-five percent of the companies that have reported have beaten earnings estimates, while 17% have reported a negative surprise. Seventy percent of the companies have reported a positive revenue surprise. The 2009 and 2010 calendar earnings estimates for the S&P 500 are now at $61.50 and $78.46 respectively. Achieving the 2010 estimate in our view would justify the S&P 500 moving to 1200-1250. This suggests using near-term market weakness as a time to add to positions.

Although earnings and potential Fed activity will be important elements throughout this year, taxes will be important also, especially since there are numerous tax code changes being proposed. The most notable might be the effort to tax foreign earnings that previously had escaped taxation. This is extremely consequential in some industries and specific companies. Consequential in this regard is defined as negative.

Have a great start to the week.

Additional items from Friday
Aetna, Inc. (AET, $29.23) missed consensus on the bottom line driven by lower commercial underwriting margins and operating earnings in its group insurance business. The company also guided 2010 EPS below analysts' estimates ($2.55-2.65 v. cons $2.84), citing a weak economy and high unemployment. However, shares advanced 1.30% as investors considered that the company's forecast may have been conservative.

Tyson Foods (TSN, $13.99,) jumped 4.72% following a better than expected quarter boosted by margin growth and strength in its chicken segment. Management said it expects seasonal demand to improve in 2010, as well as an improvement in pricing environment and lower YoY grain costs. Separately China imposed import duties on U.S. chicken products.

Weyerhaeuser Company (WY, $40.39) fell 2.33% after reporting wider than expected earnings losses driven by a weak U.S. housing market. Management said the market will continue to be challenging in 2010, but it expects significantly improved operating performance for the year.

Air Products and Chemicals, Inc. (APD, $73.69) sank 6.85% after announcing plans to acquire Airgas Inc. (ARG, $43.53) for $7 billion, including $5.1 billion ($60/sh) in equity and $1.9 billion in debt. The price per share represents a 38% premium over ARG yesterday's closing price. ARG rallied 40.04% off of the news

Corning Incorporated (GLW, $18.25) dropped 1.10% after saying it expects moderate growth in 2010. The company expects glass sales to increase up to 22% in the year as consumers resume buying televisions and personal computers. Moreover, management expects telecommunications spending to slightly increase in 2010, citing the continued reluctance by the carriers to make big capital bets amid the slow economic recovery.

The scope of The Janney Market View Daily is generally limited to commentary regarding economic, political or market conditions and certain of the previous day’s events; but such commentary does not recommend or rate individual securities. It may provide technical analysis concerning the demand and supply for a sector, an index or an industry, based on trading volume and price; but such technical analysis does not include an analysis of equity securities of any individual companies or industries, nor does it provide information reasonably sufficient upon which to base an investment decision. It may contain statistical summaries of multiple companies’ financial data; but such summaries do not include any narrative discussion or analysis of individual companies’ data. It may contain recommendations for increasing or decreasing holdings in particular industries or sectors; but it does not contain recommendations or ratings for any individual securities. It may analyze particular types of debt securities and may comment on characteristics of debt securities; but it does not include an analysis of any individual securities or companies, nor does it recommend or rate any individual securities or companies.

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