The big test for the current market rebound starts next week when the first spate of first quarter profit reports emerge, with Alcoa the first on Tuesday night our time.
Alcoa’s won’t be pretty, it’s already warned of losses, raised over $US 1 billion and some spruikers are spreading the story that BHP Billiton could bid for the ailing giant.
After watching the problems Rio Tinto is having with Alcan, why would BHP want to go deeper into aluminium at a time when its outlook is so depressed?
Big losses are expected, but an accounting change may see banks able to report better than expected earnings: it will be all paper and no substance and highly misleading.
But for many companies in the media, retailing and consumer products and heavy engineering, the results will show clear signs of the recession biting sales and putting a big hole in profits.
Much will be made about how the first quarter is historical and how the way ahead now looks better. But many companies made those very same points three months ago.
Reuters says its surveys have shown that analysts are going for a 35.6% drop in first quarter earnings at this stage.
That’s much more realistic than the way they assessed the December quarter profits with initial estimates for a small rise!
"According to the latest Thomson Reuters data, first-quarter earnings for the S&P 500 should drop 35.6 percent from a year earlier, marking the longest streak of negative growth since Thomson Reuters began tracking the data in 1998," the newsagency said a week ago.
Bank profits will be once again the key (along with other non-bank financial stocks).
An accounting change for mark to market valuation of bank assets and securities has created a big fuss in the US.
The change lessens the need for banks and others to mark assets to fair value and could allow the likes of Citigroup and Bank of America to boost profits by 20% if implemented for this quarter.
The change in accounting law is due to happen overnight.
The Financial Times reported:
"Rushed through by FASB after lender and political pressure, the changes have been strongly opposed by investment banks, investors, auditors and analysts.
"The changes will make it easier for companies, including banks, to value assets using their own internal models rather than market prices. They will also only have to recognise a part of any impairment in their profits.
"Proponents of the changes, such as Citi, BofA, Wells and their political allies, argue the current regime unfairly magnifies losses by requiring banks to use market prices even though those prices are illiquid and often from fire sales.
"Critics say changing the rules would further undermine investor confidence in the battered sector by reducing the transparency of banks’ balance sheets."
The top 19 banks in the US are in the final throes of being ‘stressed tested’ by regulators to check how well their capital reserves can withstand a sharp slump in the economy, a surge in unemployment and more pressure on asset values as house prices fall and foreclosures rise.
There are some media reports appearing now of tensions between banks and the regulators and the bank executives, with leaks about how the banks are under pressure and feeling hard done by.
Complicating the issue is the push by some US banks to return government financial aid because they don’t like the rules. 21 US banks have failed so far this year and the credit union and insurance sectors have been crippled as well.
But there’s nothing like a 20% rally to bring the bulls back to life.
Investors have started wondering about stock valuations (never mind that all have been shown to be wrong).
Watch the sentiment in company comments with the US quarterly reports. There will be lots of talk about ‘improved visibility’, ‘green shoots’, a ‘steadying’ or a ‘bottoming’; anything to send a positive message after the unrelenting gloom since late 2007.
Remember what the Financial Times wrote this week: "Still, markets can overshoot a long way. It is worth remembering that, since 1923, equities have, on average, bottomed four months before a recovery in the economy. Who would bet the US is at that point today?"
And finally, remember that companies in the Standard & Poor’s 500 Index reported their first ever net loss in the 4th quarter since the data was first collected in 1935.
The net loss was around $US180 billion and was boosted by the big losses for the banks, some insurers and media companies. AIG’s write-down of $61.7 billion was the biggest loss in US corporate history.
Reuters Thomson pointed out that even on an operating earnings level (stripping out the impairments and other one-offs) companies in the index still lost far more money than they made: in fact the losses were 13 times the size of profits made.
The actual losses were far worse than any analyst had forecast. That’s something to remember.
