Business Analysis for 7/26/10

Farrar:  Andy Foldenauer joins us now from RBC Wealth Management for analysis of business and financial news; he's sitting in today for
Brian Ford.  Good morning, Andy.

Foldenauer:  Good morning, Wayne.

Farrar:  Thanks for being with us.

Foldenauer:  Thank you.

Farrar:  Well, it was a busy week last week on the business front, with corporate earnings reports coming out and news on the European bank stress tests, and some notable comments from the Federal Reserve Chairman and the Treasury Secretary.  Tell us about it.

Foldenauer:  Yeah, that's right, Wayne, it was a busy week and if we have time, I'll try to touch on each of those topics.  The stock market's had a good week, with major industries rising approximately 3 1/2%, and the move was primarily driven by solid corporate earnings reports and better-than-expected European economic data; also, the initial results of Europe's bank stress tests added to the move on Friday.

You know, the positive performance for the week was really in spite of some definitely cautious comments from Federal Reserve Chairman Ben Bernanke earlier in the week; he pronounced the outlook on the economy to be unusually uncertain and emphasized that the labor market remains a key worry.  The U.S. has lost about 8 1/2 million jobs since the downturn started, and the rate of private payroll growth so far in 2010 is averaging about 100,00 jobs a month, which Mr. Bernanke characterized as being insufficient to reduce the unemployment rate materially.

You know, right now the Federal Reserve rate sees unemployment rate, which is currently at 9 1/2%, falling even more slowly than previously forecast, leaving it in the 7 to 7 1/2% range by the end of 2012.  Also in the Federal Reserve's recent media minutes, they warned that the U.S. economic growth might not return to its long-term trend rate until 2016.  So, you know, while the Fed is by no means a fool-proof forecasting body, you know, these statements are notable to us because it's an acknowledgement by, you know, the most powerful economic policy-making body of the structural long-term challennges facing the U.S. economy.

Farrar:  Mm-hmm.  Well, there has been a lot of talk about those so-called "stress tests" being done on a large number of the European banks.  With those results being released on Friday, what did we learn, if anything?

Foldenauer:  Well, that's a good question.  You know, if you remember, Wayne, back in the months of May and June, the topic of Europe's sovreign debt challenges and their potential spillover effects, were major sources of angst and concern for investors.  In summary, the stress tests were done to measure the banks' strength in case the continent's government debt crisis takes a turn for the worse.

The European union's main hope or goal is to provide results that would reassure markets worried about hidden bank losses from the crisis.  When the results were released, it surprisingly showed that only 7 of the 91 European banks failed the test; in total, the seven banks would have to raise 3 1/2 billion euros to shore up their finances.   You know, the results were pretty much met by skepticism here in the U.S. though, as most analysts felt that the testing was not very rigorous and potentially even set in such a way that most of the banks would pass.

While the credibility of the tests are already in question, you know, the one positive take-away, in our analyst's opinion, is that the test provided a far greater transparency than expected into each bank's individual holdings.  You know, by having this transparency and access, it will allow analysts to perform their own variation of their tests under different assumptions.

You know, the bottom line is, U.S. traders and investors will likely keep a close eye on European data and the potential trickle-down effect into the U.S. for months to come.

 Farrar:  Okay.  We've got a little over two minutes left this morning, Andy.  We're in the midst of the second-quarter earnings season for  large corporations.  What are the latest reports showing us?

Foldenauer:  Sure, sure.  Despite all the global cross-currents and the potential for additional economic swings, it is important for investors to keep an eye on the prize, as I call it, which is corporate earnings; after all, earnings and revenue growth, or the lack thereof, also may impact stocks' prices and dividend payments.

On balance, second-quarter earnings results have been good, considering the economic headwinds; of the S&P 500 companies that have reported so far, 85% have reported better-than-expected earnings, which is a good bit higher than the historical average.  Global companies that tend to lead their product categories, such as Caterpiller, 3M, Honeywell and Apple, have shown revenue growth that has been stronger than expected.  

Also, comments and guidance for future quarters' performance from corporate executives has been cautious, but also acknowledging that revenues are up and the outlook for the near term is good.  Expectations for the next quarter are getting pushed higher with not much of an indication of a slowdown on the horizon.

Farrar:  Okay, well, we have just about a minute left to go this morning.  What's on tap for the week ahead?

Foldenauer:  You know, Wayne, I think the focus is going to continue to be on corporate earnings, with about a quarter of the S&P 500 to release results this week; big oil companies, BP, Exxon, Mobil and Chevron are among those to announce, and while we are hearing this morning via multiple reports that BP will likely be replacing its CEO, Tony Heyward, today, it will also be interesting to see what the financial impact will be from the Gulf oil spill on their earnings.

Also on Friday, the quarterly GDP report will be released; generally speaking, this is the way the growth of the U.S. economy is measured and initial analysts' expectations are for the report to show between 2 and 2 1/2% growth for the quarter.  

Farrar:  All right.  Thanks to Andy Foldenauer of RBC Wealth Management for analysis of the business and financial news, sitting in today for Brian Ford.

Foldenauer:  Thanks, Wayne.

Farrar:  All right, appreciate it, Andy.