Welcome to fourth-quarter earnings season. The parade of financial reports for the last three months of 2009 kicks off this afternoon when Alcoa Inc., the New York-based aluminum producer, becomes the first member of the Dow Jones industrial average to post results.
For several weeks these reports will vie with the latest economic data to shape market patterns and set stocks on their trajectory for the year. Investors can expect some blowout numbers from companies for several reasons. The main one is that the year-earlier comparable numbers were horrid - it was a period when banks stopped lending, consumers refrained from spending and the U.S. gross domestic product shrivelled by 5 per cent.
Fast forward to the last quarter of 2009 and companies were benefiting from record low borrowing rates and cost-savings from ruthless rounds of job cutting.
Analysts estimate that profit rose 60 per cent for the group of companies in the Standard & Poor's 500 index in the fourth quarter compared with a year earlier. If that comes to pass, it will represent the first quarterly gain after nine quarters of declines, as well as the biggest profit growth since 1993, according to data from Standard & Poor's and Bloomberg.
Their survey of analysts also found that the Street is expecting an increase in earnings this year for almost all industry groups in the S&P 500, with full-year profits forecast to climb 25 per cent, compared with a decline of 12 per cent in 2009.
These numbers should already be factored into stock prices, but investors will almost certainly get a psychological lift from seeing a barrage of double digit profit increases day after day, similar to the upbeat sentiment during the third-quarter reporting season.
But what the markets will also need to see this round, in addition to greater profitability, is an increase in sales. Cost-cutting strategies have largely run their course as a market catalyst and investors want to know that companies have begun to sell more.
Last week's employment data, which showed that the U.S. shed another 85,000 jobs in December, is a troubling sign, because normally companies need to hire people to produce more revenue.
Myles Zyblock, chief institutional strategist and director of capital markets research at RBC Dominion Securities Inc., says companies have in fact managed to boost sales in recent months. Hundreds of billions of dollars of government stimulus have put idle capacity to work and "provided a ballast for labour." Job creation will likely emerge in the next few months, he says.
Employment figures are a lagging indicator of a recovery, so few strategists are panicking yet. But if new jobs fail to emerge soon, "double dip" will become a more common phrase in economic forecasts and companies might be looking at a very different set of comparables a year from now.
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STOCKS
Department store sales in the United States were strong during December and that came in the midst of a bleak jobs picture. What happens if U.S. corporations start to hire again?
"Retailers knock it out of the park and raise earnings guidance," said Jharonne Martis, director of consumer research for Thomson Reuters, in a report to clients referring to a 2.9-per-cent increase in the Thomson Reuters same-store sales index.
Luxury store retailers Saks Inc. and Nordstrom Inc. posted better-than-expected results. Such retailers as Limited Brands Inc., Aéropostale Inc., Nordstrom, J.C. Penney Co. Inc. and Ross Stores Inc. all increased their earnings guidance, she said.
In addition to higher sales, there are signs of improved profitability for the apparel and accessory retailers such as Polo Ralph Lauren Corp. and VF Corp., said Michael Binetti, an analyst with UBS Securities LLC. He has "buy" ratings on both companies. Retailers carefully controlled their promotions this past year, which should translate into solid earnings for the apparel brands, he said.
COMMODITIES
It is cold out now, but natural gas prices are still being held back by high inventories and new drilling technology.
Natural gas prices late last week fell almost 2 per cent to $5.69 (U.S.) per million British thermal units. They had reached $6 earlier in the week and are well above their low of $2.51 in September.
Inventories have been declining as a result of the coldest December in the United States in nine years and the cold snap continues, but don't look for record high prices for natural gas.
"It's unlikely the prices will move up to levels we had between 2005 and 2008," said Patricia Mohr, vice-president of industry and commodity research at Bank of Nova Scotia. During that period, prices ranged between $7 and $9 per million British thermal units.
New drilling technology used in shale gas formations in North America during the past two years is creating huge new supplies in what are known as unconventional natural gas plays, which are profitable with natural gas prices between $3.20 and $4.45, Ms. Mohr said.
BONDS
The yield on two-year U.S. Treasuries spiked dramatically three times during 2009, before easing back to a relatively stable narrow trading range of between 0.9 per cent to 1 per cent.
"The markets wanted to wrap in a recovery story in a couple of weeks," said Mark Chandler, a fixed-income strategist with RBC Dominion Securities Inc. In the latest move - a part of the year-end asset allocation process - bond yields climbed sharply as investors sold U.S. Treasuries and moved into riskier assets, but it appears that is now being unwound, causing yields to drop back, he said.
Yields in the first half of 2010 are likely to stay in a narrow range, but the second half could provide something more dramatic, Mr. Chandler said.
The yield on two-year Treasuries also fell as a result of last week's weak U.S. jobs report, in which the economy shed 85,000 jobs during December. "Payrolls will have to rise by at least 100,000 a month if the unemployment rate [of 10 per cent]is to fall significantly," said economists with London-based Capital Economics Ltd.