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The Recap

 By Steve Romasko

 The S&P 500 ended the holiday shortened week up 1.7%, led by financials. Trade was volatile despite only four sessions that had a relatively small amount of news and economic reports. The upside move came despite Alcoa (AA) kicking off first quarter earnings reporting season on a weaker-than expected note.

 On Tuesday evening, Alcoa reported a loss of $0.59 per share, $0.02 worse than the First Call consensus that called for a loss of $0.57. Alcoa said the sharp drop in revenue resulted from the impact of the economic downturn on the company’s end markets — automotive, transportation, building and construction and aerospace. Despite the miss, the results were better than many had feared, and as a result Alcoa finished the week with an 4.0% gain.

 There were some upside earnings results, however. Wells Fargo (WFC) preannounced record first quarter earnings of approximately $3 billion and earnings of $0.55 per share, topping the consensus estimate of $0.23. Wells Fargo expects revenues of $20.0 billion, versus the consensus of $18.98 billion.

 The news gave a healthy boost to financials, which ended up 15.9% on the week and provided a measure of confidence going into the coming week when JPMorgan Chase (JPM), Goldman Sachs (GS) and Citigroup (C) report their quarterly results. On a related note, life insurers also helped lift financials, gaining 15.9%, after it was reported that the Treasury will soon announce it will extend the TALF program to aid some life insurers.

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Recap

By Steve Romasko

Reoccurring themes tend to be the norm for the market, as the entire month of January was largely motivated by poor economic data, earnings guidance (or lack thereof), and the indecision of the government on how best to handle the financial crisis and economic policy. This week followed the same pattern, marking the worst month of January on record—closing down 8.6%

The market was given a surplus of earnings data to mull over this week as the heart of 4Q earnings season is upon us. The lack of appropriate guidance ahead of estimates, and the consistent results coming in below expectations provided an indication that estimates may be too high. This was most evident in Dow component, Caterpillar (CAT), as the industrial giant missed earnings—reporting $1.08 EPS compared to consensus $1.31; guidance was also far off-pace, as they issued rather vigilant guidance of $2.50 EPS for FY09, well below analysts’ guesstimate of $4.50—With  60% of its revenue generated abroad, the careful guidance reflects their concern on the continually deteriorating global economy and its effects on infrastructure spending.

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Recap of Last Week

9a.m., it’s a Sunday and you’re woken by the piercing sun shining through your apartment window. What happened? Where did everyone go? Ugh. You’re dehydrated and your head is POUNDING uncontrollably as you reach for the Ibuprofen. This is going to be a nasty hangover. And what is that awful smell? Is that? No. It can’t be. . .But it’s too late, you know all too well what it is—the stench is that hot heaping pile of toxic assets still sitting on your balance sheet. You could take the trash out but who’s going to pick it up? Everyone in the neighborhood is facing the same hangover and your Uncle is only able to stop by the really decrepit houses—but look on the bright side, if a nephew can help his Uncle by taking on a little more trash from the neighboring houses, then he’ll get some money pitched his way to manage the deteriorating pile and the pain that comes with it.

 Such is the situation on Wall Street for the past several months, and the second week in the New Year was no different as financials fell 16%, dragging the broad market down with it, -3.7%, as investors mulled over a wave of capital raises and weakening credit quality. Trouble mounted early in the week as Citigroup announced plans to sell a significant stake in its brokerage house, Smith Barney, to Morgan Stanley. They then went on to announce another bold initiative during the Q408 conference call by unveiling plans to split the company into two units. Investors took this as a sign of forced selling to stay alive and by the time the carnage came to an end, their stock had fallen 59% amid an $8.3 billion Q4 loss.

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