Brian Ford's Business Analysis for 7/12/2010
Weekly Monday analysis of the business and financial news by Brian Ford from RBC Wealth Management.
Brian Ford joins us now from RVC Wealth Management for his analysis of business and financial news. Hello, Brian and welcome back after a break for the holiday last week.
Ford: Thank you very much and good morning to you.
Well, kind of like the break in the heat wave we experienced last week, Wall Street had its best week in a year. How about that?
Ford: Yes, and you might even call it a kind of a breath of fresh air, Wayne. Like you say, a break in the hot, muggy weather we had in late June, the market snapped its own bad run last week. In fact, you're right, in fact it turned out to be the best week for stocks since last July--up 5% just for the week. In case you're keeping score on the year, the major market averages are down about three percent on average for the year to date with many oversees index down still by ten percent or more. The big fears of a double dip in the recession seemed to slide somewhat last week, as the crush from the end of the second quarter changed. The second quarter, as you know, ended very badly--it was down about ten percent for the quarter. Late in the week, some analysts were questioning whether this latest rally has legs to run further, or if it's just what we call a 'short covering rally', in which people who had been betting negatively simply removed their sell orders. Either way, we'll take it. It was a good start and a good piece for July.
There was a merger of some note, I understand.
Ford: Yes, this is not a, sort of a Page One item for a lot of people, but, a company called Aon is buying Hewitt for about five billion dollars. Maybe names that most people don't know, but that's OK. Chicago-based Aon is the world's largest insurance brokerage. They are attempting to strengthen their consulting business by buying Hewitt, which is a human resources company. Many people's 401(k) plans and benefits plans are administered by Hewitt. This is a good sign of M and A, or mergers and acquisitions, activity. Aon is paying about a forty percent premium to Hewitt's stock price on Friday; obviously, they think Hewitt is undervalued. Analysts like to see this sort of activity in which corporations are putting their money to work. It's an encouraging sign as a step you would not take if you thought that things were getting worse. For the record, Aon expects this acquisition to add to their 2011 and 2012 earnings, so, it should be a good boost fairly quickly.
Well, earnings reporting season begins today and we've been doing this on Monday mornings long enough now that I know that the name of the game is "expectations".
Ford: Good, good. That's good, Wayne.
Did the earnings meet, exceed or fail to meet expectations.
Ford: It is very much a parade a lot of times--a show, a pageantry, if you will. But, corporate earnings reports do begin today for the prior quarter. It is always a fascinating episode. Most interesting to hear what corporations do expect for the future. It'll be interesting for us to see how many, if any, companies attribute a less than stellar profit report to the Gulf oil spill. Over the years we've noted that companies have found convenient excuses on which to blame bad earnings, such as the Y2K, ten years ago, the SARS Asian health epidemic years ago; maybe even the Bird Flu. Some of these things have nothing to do with a company's operations, but, as you say, expectations are fairly high for a strong quarter of profits. Alcoa and CSX will kick things off today. We also expect to hear from big companies, like Intel, Google, Marriott, JP Morgan, General Electric, Bank of America, even Gannett Corporation this week, too. As always, it is a fine line between having high expectations, in which case the stock prices may already reflect those expectations; or, is there more room to go up. As of right now, Wayne, the second quarter earnings are expected to be up over 25 percent from where they were this year, to that's a fairly sizable bump. Analysts do point out a positive trend in the size and amount of U.S. cash flow on behalf of companies--this is evidenced by dividends going up in some key areas. But, no one really expects hiring to pick up quickly in the face of just so much uncertainty with regard to government regulations on health care, financial reform and in tax policies. This may lead to some more conservative estimating for the rest of the year and it is leading, in fact, to more share buy-backs. Companies are putting their money to work by buying their shares, which they think are undervalued in the open market today.
We have just a little over a minute to go. What's the outlook for the recovery now? Slow, picking up or what?
Ford: Well, it is interesting. I'm glad you asked that because the outlook for the economy is bouyed by lots of different opinions, of course; and it seems these days that you don't get a lot of attention unless you have a very extreme market forecast. Some people call for very, very negative situations to develop further; some people are much more positive than that. But, it is the middle part of the year; it's a good time to take account of where we are in economic conditions and we're looking at which industries may be doing better. A lot of companies, including ours--RVC--have issued a strategy report, in which talk about the sectors that we like. I'll give you a few examples. A few of the industries that we would tend to look at favorably include the consumer staples area, typically because they're very conservative, defensively-minded and also very dividend-oriented. We also tend to like the energy and health care areas because they seem to be undervalued at this point. We also like the information technology area because we do think that in this new normal economy, technology will continue to be very, very key. But, in a world where extreme predictions go in the headlines, we think it will be a slow, steady recovery over the next twelve to eighteen months.