Earnings season’s finally well underway – literally hundreds of companies announced their quarterly results this week, adding fuel to an already volatile market. But while Wall Street’s hemming and hawing continues to be a major issue for fundamental investors, early signs are pointing to some stabilization in the financial markets.
Here’s an updated chart for the S&P 500:
The S&P broke above two key resistance levels this week – the blue downtrending trading channel and its 50-day moving average. With this broad index above those two key levels, the market should start to give us some semblance of stability in the near term, particularly if economic news stays relatively muted.
But don’t be lulled into thinking that the worst is over. Stocks still need to clear the 200-day moving average (thin red line) before I’d be willing to believe that we’ll see another meaningful rally. That said, investor sentiment seems to be turning to stocks once again, and where investors see value price appreciation usually follows.
Frankly, added attention on stocks is a good thing – I’ve been concerned for a little while now about the potential of a bubble in bonds. Investors have flocked to the bond market in the last couple of years in an attempt to move from apparently risky investments to less risky ones… but with a slew of problems in sovereign, state, and municipal budgets right now, the potential for government defaults is relatively high.
Here in the U.S., the fact that the ratings agencies continue to rate shaky state and city debt at investment grade levels is something to watch out for. Not all bonds will be impacted by the bubble – corporate borrowings are likely to remain robust after the scrutiny investors put on their equity issues.
But I’ll be watching this issue pretty closely for the rest of the year. States and municipalities need to get their finances in order ASAP.
In the mean time, here’s an update on a few economic items…
Financial Reform: The Senate passed H.R.4173 earlier this week – and President Obama signed it into law on Wednesday. The act ushers in a number of financial reforms and consumer protections, most notably increased regulation and oversight on consumer financial products. Ultimately, though, the new law lacks many important features. It’ll have minimal impact on Wall Street.
Earnings Season Earns Respect: Despite a somewhat inauspicious start to earnings season last week, this week’s accelerated announcement pace has impressed investors. That should be a relieving fact for Main Street, because it means that the private sector is still seeing strong performance in 2010. We’ll see what this means for our portfolio companies…
The Happier Housing Market: Housing numbers released yesterday beat expectations, showing slight growth in home sales and residential real estate prices. These metrics lead the economy right now, so good performance is a great sign for stocks.
Applied Materials Restructures Its Energy Business
Our newest position, Applied Materials (NASDAQ:AMAT), announced Wednesday that they’d be undergoing restructuring for their energy and environmental solutions business and revised their Q3 outlook as a result.
Typically, restructuring is sort of like ripping off a band-aid: it hurts at first, but it ultimately a good thing. In Applied’s case, however, restructuring shouldn’t be as painful as Wall Street expects. Solar has been a thorn in Applied Materials’ side for the last few years as sales stalled and sentiment waned. That’s one of the things I wrote to you about when I recommended the stock last month. But in 2010, things look to change thanks to increased emphasis on solar technology and alternative energy.
Applied is trying to accelerate that growth by trimming underperforming parts of its nascent solar business. Ultimately, the company thinks that they’ll be able to save $100 million annually with the restructuring.
Despite the impressive savings, these changes won’t impact AMAT in a bad way this year. Revised Q3 guidance puts expected numbers on the higher end of the company’s previous target. That’s excellent management at work.
Becton, Dickinson (NYSE:BDX) is set to announce earnings next week on July 29. I’ll keep a close eye on how our second play of 2010 lives up to expectations.