The Week Ahead 2/1/10

{+++}Equity indices gapped lower last week in the face of growing risk aversion, with traders disregarding robust corporate earnings and a strong first reading of US GDP. The Shanghai Composite dropped below 3,000 for the first time since late 2008, while the DJIA closed within 44 points of 10,000 and commodities traded off hard. On Friday, advance GDP showed the US economy grew faster than expected in Q4, at an annualized rate of 5.4%. If the GDP reading holds up upon revision, GDP in the final quarter of 2009 would be higher than at any time since September 2003. Housing data was mixed: the November S&P/CS index gained for the sixth consecutive month, although the move up was modest. Meanwhile, December new home sales fell nearly 8% m/m (following an 11% m/m decline in November), prompting Yale Economist Robert Shiller to reiterate that he believes home prices could be faltering yet again. President Obama gave his first State of the Union speech on Wednesday, offering a trenchant defense of his first year in office while also admitting certain mistakes had been made. The President promised to double US exports over the next five years and make job creation a primary focus, and also said $30B in repaid TARP funding would be redirect to loans for small businesses. Ahead of the speech, the Congressional Budget Office released predictions for a $1.35T deficit for this year as the economy continues to slowly recover from the recession. After a flurry of Washington drama last week (full of implicit threats to Fed policy independence), the Senate handed Ben Bernanke a second term as Fed chairman in a 70 to 30 vote. For the week, the DJIA lost 1.1%, the Nasdaq dropped 2.6% and the S&P 500 fell 1.7%.

Dow components Johnson & Johnson, DuPont, 3M, Procter & Gamble and Travelers all beat earnings estimates by respectable margins. Full-year EPS guidance ranges were largely in line with expectations. AT&T and Verizon met expectations and both telecoms saw big increases in wireless subscriber additions on a q/q basis. DJIA industrial names Boeing, Caterpillar and United Technologies offered strong quarterly results. On the other hand, full year EPS forecasts at Boeing and Cat were weaker than expected. Chevron’s results were surprisingly mixed: earnings missed expectations while revenue was way ahead of the consensus view. The firm’s upstream revenue was up by nearly 30% on a q/q basis, but the downstream operation racked up a substantial loss due to weak demand and excess supply.

Leading tech names Microsoft, Apple, Amazon, Yahoo, Qualcomm, SanDisk and Juniper Networks all exceeded or greatly exceeded earnings expectations. Apple’s launch of the widely anticipated iPad tablet computer dominated the newsflow in the tech universe, and Apple stock jumped $10 when CEO Steve Jobs announced the new product would start at an affordable $499. Exceptional demand for Microsoft’s new Windows 7 operating system led to very strong top-line growth for the company. Traders should note that results from Apple and Microsoft were inflated to a certain degree by the adoption of new deferred revenue recognition accounting rules. Motorola offered in line results, while competitor Nokia’s operating profit was twice the expected amount. Both firms expect very strong growth in smart phone sales this year.

I’ve added some shorts tonight, but as usual, when the shorts come out of hiding it usually means the market is near term over sold. Use the stops and if need be we will be proactive and change them if we have to.

Indexes look burnt out and are clearly in rollover mode, country ETF’s look horrible as well, take a look at RSX,FXI,EWZ, and EWP just to name a few.

Materials (XLB) and Metals and Mining (XME) are down hard as well but could be nearing buypoints after the dust settles.

I re-shorted XHB on Friday and added to my RSX short, but they’re not on the list, as I want it to be manageable.

Good luck next week.


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