The CRB Commodity Index lost 2.1% on the week, adding onto what has been a 5.3% slide in 2 weeks, with Oil leading the way down at 4.4% loss on the week. Precious metals also lost value, with gold closing the week’s pit session at $1089.70 per ounce, down 2.5% on the week. The US Dollar in turn continued to gain strength specifically from expectations of Chinese restrictive monetary supply, as seen particularly on the EUR/USD spot price, dropping from $1.4386 and ending the session at $1.4163 (indicating USD strength). The USD did show signs of weakness around mid-week after proposed legislation came out from the Obama Administration that would require harsher regulation and restrictions on banks, specifically disallowing them from investing in hedge funds or private equity funds.(Reuters)(WSJ) Uncertainty around this proposal led to an increase in the EUR/USD (signifying USD weakness) as well as increases for the Japanese YEN, which typically benefits from such uncertainty.(Reuters)

The name of the game as read in last week’s recap continues to be “Uncertainty.” Since March 2009, equity markets in particular have been on apparent cruise control, continuing along their upward path in spite of negative fundamental reports on underlying value. The markets provide a big picture view of our dynamic economic environment based on future expectations, regardless of whether those expectations are 10 years, 10 months, or 10 minutes out.

In any case, one circumstance that one can always rely on for palpable, if not immediate consequences to Commodity, FOREX, and Equity Prices is Government Action. Look for its continued effect as Federal Reserve Chairman Ben Bernanke’s nomination for 2nd term takes place, the same week as key politicians stated they would not support his nomination. As for the potential effect this could have on the markets, Warren Buffett quipped “Just tell me a day ahead of time, so I can sell some stocks.” (The Washington Times)

The Outlook by Steve Romasko
For this Week: Expect more of the same

This week has the potential to resemble that of last week—uncertainty will lead the market as investors (i) look toward revenue growth in this week’s earnings for an indication on the health of the consumer, (ii) assess economic data (particularly advanced GDP numbers, unemployment, and the FOMC’s rate decision), and (iii) continue to weigh the implications of the Obama Administration’s planned regulation on financial institutions.

While the bulk of last week’s earnings came in better than expected with respect to the bottom line, Wall Street was less impressed with top-line figures (see JP Morgan, Citigroup, Morgan Stanley, and Wells Fargo for specific examples) and reacted to the reports by initiating a broad-based selloff. The selling pressure started on Wednesday, despite a major victory for the markets on Tuesday after Republican Scott Brown unexpectedly won the election in Massachusetts; simultaneously breaking the filibuster for Democrats in the Senate and bringing healthcare legislation to a halt. Following the election news, President Obama’s scathing announcement on regulatory reform coupled with earnings from Bank of America, Morgan Stanley, and Wells Fargo, and the uncertainty over the reappointment of Ben Bernanke as Fed Chairman caused investors to reassess their appetite for risk–selling pressure only accelerated through the end of the week, sending the S&P 500 down 3.9%, recording its worst week since October 2009. The index is now down 2.1% YTD.

This week will be even more earnings-intensive than last week as reports are due from a variety of major companies spanning all sectors. Pay particular attention to Apple and Halliburton (Monday); Delta, DuPont, EMC, Johnson & Johnson, Sun Microsystems, U.S. Steel, Verizon and Yahoo (Tuesday); BlackRock, Boeing, Caterpillar, ConocoPhillips, Qualcomm, UAL and United Technologies (Wednesday); AT&T, Altria, Amazon.com, Bristol-Myers Squibb, CA, Colgate-Palmolive, Eli Lilly, Ford, JetBlue, Lockheed Martin, Microsoft, Procter & Gamble, Raytheon, 3M and US Airways (Thursday); and Chevron, Honeywell and Mattel (Friday).

The Recap by Kevin Maloney
After 4 weeks of posting weekly gains, equity markets posted their first week of losses as traders and investors took their first short term profits of 2010 with the NASDAQ losing 1.26%, S&P500 dropping 0.78%, and large caps outperforming as the Dow drifted down 0.08%. The sell off may have been overdue, as the markets have continued to rally against reports of further fundamental instability. Initial losses last week began early Tuesday, with the S&P 500 dipping to $1132.50 before recovering in full force Wednesday, however Friday would prove to be a difficult day to digest. JP Morgan led the way down for Financials, missing projected revenues by $1.06 billion during earnings calls that led to the domino effect of losses early Friday morning. The Bureau of Labor issued its monthly report the Friday beforehand (Jan.8), tallying 85,000 jobs lost in the month of December, keeping overall unemployment steady at 10%. Retail Sales also fell for the month of December, falling off 0.3% during the holiday season as fundamentals continue their inverse relationship to equity market performance.

The US Dollar posted another week of spectacular gains against the Euro as one short term sign of recovery during the months of November and December continued last week. The EUR/USD fell from $1.4450 to $1.4380 during the week (downward move indicating USD strength, although the dollar’s value still has a long way to retrace its losses of the past year. As expected with positive movement in the dollar, energy and precious metals fell, with oil prices dropping from $82 a barrel to a low of $77.50 on Friday, and gold falling from $1152 to $1130 during the week’s sessions.

Uncertainty continues to pervade the individual investor’s sentiment, personified by calls for new bull and bear markets penned on numerous blogs and other news media. The need for palpable evidence of recovery may still be keeping a large amount of investment capital on the sidelines. From a macro perspective, major banks continue to hoard cash or cash equivalents far above the Fed’s Required Reserve Ratio for their own protection from market downturn, but simultaneously prevent a strong step forward by keeping potential loans away from customers and businesses to invest. The story of the past week continues to be “Mixed Messages.”
Calendar

The Outlook by Steve Romasko
The Story this Earnings Season: Top Line Growth & the Consumer
This season, look for analysts to be concerned with revenue growth rather than overall results. During the height of the crisis investors were satisfied with bottom-line earnings performance, as their main concern was company survival and sustainability, and less so about market growth. Now that we’re under a new year, have a fresh performance start, and it is evident that a crisis has been averted; investors are becoming more critical of company performance. This was manifested in last week’s results, particularly JP Morgan (JPM), who quadrupled analysts’ estimates, earning 10x higher than a year ago with respect to the bottom line, but missed on revenue projects of $26.81 billion, reporting actual revenue of $25.2 billion. JPM’s results became the driving catalyst in Friday’s market, sending the S&P 500 and its own stock down 1.08%, and 2.26% respectively, snapping a 7-day winning streak for the broad index. Digging deeper into the results, JP Morgan’s earnings were rather dismal; almost all of their performance was attributable to market appreciation, while the lagging areas of their earnings primarily came from consumer-related segments. Jamie Dimon’s comments added to the negative sentiment of the earnings by citing that high unemployment, home price pressures, and a still-high level of loan loss provisioning are weighing on the business.
An argument can be made that the pullback in equities on Friday was a necessary correction after 7 days of gains, and was not entirely a consequence of the JP Morgan results. While the argument holds some truth, one would be ignorant to dismiss the results as mere noise. In my opinion, the significance on revenues this earnings season can either be validated or discredited Tuesday morning with results coming from Citigroup (C). Citigroup is a diversified bank that is known to have significant exposure to the consumer. As was the case with JP Morgan, analysts are going to be concerned with revenue growth and if Citi misses on the revenue line I would expect a prolonged market selloff. If the results show increased delinquency rates with regard to consumer products it can be inferred that if consumers aren’t paying down overdue debt balances they are most likely not making discretionary purchases. From that point, if consumers aren’t making discretionary purchases, then, it can be assumed that businesses are not making sales, and it is likely that they are not hiring. A lack of sales, leads to reduced overall earnings and subsequently lower growth. While it appears that unemployment has peaked at 10.2%, it seems plausible that job creation will be anemic until consumer confidence returns. A confident consumer leads to spending which ultimately greases the self-feeding mechanism and eventually leads to job growth. Remember, 70% of the GDP equation is attributable to the consumer. If Citigroup’s earnings show a distressed, frugal, consumer it is likely that the rest of the market will exhibit stress and reflect stagnant growth.

Also upcoming this week are several economic reports, particularly PPI data for December, the Conference Board’s index of leading economic indicators for December, as well as the Philadelphia Fed’s manufacturing index for January. In government, the House Financial Services Committee will conduct a hearing about compensation in the financial industry on Friday.