Saturday, April 21, 11:30 a.m.

The 1st quarter earnings reporting period is far enough along to provide some guidance, and so far it’s a mixed picture both of earnings and the market’s reaction to them.

As is usual, Wall Street had lowered its estimates for individual companies by enough that most earnings reports are beating the estimates, which is the headline news with each report.

The big question is whether the overall earnings will provide support for Wall Street’s rosy forecasts that S&P 500 earnings, $99 a share last year, will hit a record $106 this year, and $118 next year.

There are reasons for doubt.

As everyone is aware, the impressive earnings since the recession have been almost entirely due to cost-cutting that widened profit margins. The cost-cutting has been extreme, including lay-offs and plant closings, as indicated by the loss of jobs since the recession began.

But there is a limit to cost-cutting. At some point companies are running as lean and mean as they can get. That limit seems to have been met, given the increases in employment through the winter months. The Labor Department recently revised its measurement of labor costs in the final months of last year. It revised wages in the 3rd quarter from the initially reported decline of 2.1% to an increase of 3.9%. And it revised its measurement of ‘Unit Labor Costs’, which had been declining since 2008, to a jump of 2.8% annualized in the 4th quarter of last year.

Meanwhile, although most companies are beating 1st quarter earning estimates, few so far are issuing positive forward guidance that would support Wall Street’s rosy forecasts for continued record earnings growth this year and next.

As a result, a number of companies, including Intel, IBM, and the major banks, are seeing their stocks selling off, in spite of beating 1st quarter estimates.

I have to agree with Channing Smith, portfolio manager at Capital Advisors, who was quoted this morning in the Financial Times, saying “Looking at Wall Street’s forecasts, which are for record earnings this year and next, we’re scratching our heads as to how we get there. Profit margins are one of the most mean reverting indicators in finance. It’s just not possible for then to rise forever. The question is whether we see a rapid fall-off, which would presage a sharp market correction, or a gradual one.”

The International Monetary Fund began a weekend meeting in Washington yesterday, just as the euro-zone debt crisis is hitting the headlines again, with concerns it is spreading to Spain.

Already officials announced the IMF will almost double the size of its ‘firewall’ designed to contain the crisis, increasing its lending power to more than $700 billion.

The IMF said the move indicates the lengths to which the international community will go to contain the crisis.

But European Central Bank president Mario Draghi said the additional money was useless unless governments institute austerity measures sufficient to bring their budget deficits under control.

Meanwhile, I’m reading where Spain’s stock market has plunged to its level at the depths of the crisis 4 years ago. My charts show it down to its level of 10 years ago.   

Stocks & Commodities magazine (www.traders.com) for the multi-page interview and recognition of the performance of our Seasonal Timing Strategy.

To read my weekend newspaper column ‘Beware of Defensive Stock Advice’  Click here.

Subscribers to Street Smart Report: There is a hotline from last night, an in-depth ‘U.S. Market Signals and Recommendations’ report from Wednesday, an in-depth ‘Global Markets’ update from Tuesday, and an in-depth ‘Gold, Bonds, Dollar, Inflation’ report from Monday, in the subscribers’ area of the Street Smart Report website. And the next issue of the newsletter will be out next Wednesday.

It was a mixed day in the U.S. market yesterday. Volume was higher than it has been lately, as is normal on option expirations days, with 0.97 billion shares traded on the NYSE. The Dow was up 118 points at its high but sold off in the afternoon, to close up 65 points, or 0.5%.

The Dow closed up 65 points, or 0.5%. The S&P 500 closed up 0.4%. The NYSE Composite closed up 0.4%. The Nasdaq closed down 0.2%. The Nasdaq 100 closed down 0.4%. The Russell 2000 closed up 0.6%. The DJ Transportation Avg. closed up 0.1%. The DJ Utilities Avg closed up 0.9%.

Gold closed up $2 an ounce at 1,642, but down for the week.

Oil closed up $1.32 a barrel at $104.04 a barrel.

The U.S. dollar etf UUP closed down 0.5%.

The U.S. Treasury bond etf TLT closed unchanged.

European markets closed up yesterday. The London FTSE closed up 0.5%. The German DAX closed up 1.2%. And France’s CAC closed up 0.5%.

A mostly positive bounce-back week globally.

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Next week will be a very heavy week for potential market-moving economic reports, including New Home Sales, Consumer Confidence, Durable Goods Orders, the Fed’s FOMC economic forecasts, etc. To see the full list and times for each release click here, and look at the left side of the page it takes you to.

To read my weekend newspaper column ‘Beware of Defensive Stock Advice’ Click here

Subscribers to Street Smart Report:There is a hotline from last night, an in-depth ‘U.S. Market Signals and Recommendations’ report from Wednesday, an in-depth ‘Global Markets’ update from Tuesday, and an in-depth ‘Gold, Bonds, Dollar, Inflation’ report from Monday, in the subscribers’ area of the Street Smart Report website. And the next issue of the newsletter will be out next Wednesday

I’ll be back with the next regular blog post on Tuesday morning at 9:25 a.m.

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