Earnings Beat; Bears Getting Bullish

by Zubin Driver
July 21, 2009

Just as markets appeared ready to enter the second leg of a slide that began at the outset of July, last week saw a strong rally as North American markets posted gains every day of trading. This action served to take indexes back up to the high end of a volatile channel that they have been trading in since May.

Q2 earnings reporting provided the catalyst for markets' outperformance. Q2 earnings will be the second round of earnings since markets began a recovery from the March lows, and so far, as was the case for Q1 earnings, companies' numbers are coming in above low expectations. The big two highlights came from Goldman Sachs and Intel, who both substantially beat analysts' forecasts. Most market participants agree that a broad economic recovery cannot truly begin without financial companies returning to a healthy state, so positive numbers from Goldman, Bank of America, and Citigroup last week gave investors cause for improved confidence. Intel's robust earnings are considered to have broader significance for the overall economy because the company is the biggest chip-maker in the world, a required component for all PCs and laptops. As was quoted here a month ago when Cisco Systems replaced GM in the Dow Jones Industrials, computers are as important to the 21st century as cars were to the 20th, so improving chip and computer sales will play a crucial role in the economy's recovery.

As stated above, markets currently occupy a volatile trading range. Investor sentiment is skittish, with a trading rather than buy and hold mentality. Cash seems to rush into, and out of the markets at equal speeds. Last week's positive earnings and market activity are therefore definitely encouraging, but if this week's numbers don't come in as strong don't be surprised to see the wall of worry get rebuilt just as quickly as last week climbed over it.

Bears getting bullish

Last Monday a buy rating was given to Goldman Sachs by Meredith Whitney, an analyst renowned for her accuracy in predicting the collapse of 2008. Due to her notoriety as a bear, her bullish call on Goldman was given extra weight by the market. Everyone is used to hearing positive predictions from pundits, analysts, brokers, and of course, policy makers and politicians. Few and far between are those who both predicted and profited from the carnage of '08. Those who did are famous, and the market respects the accuracy of their predictions; when those predictions become more positive, people pay attention.

Last week was therefore a noteworthy week as another prominent bear, economist Nouriel Roubini, joined the growing chorus of those who believe the worst has already occurred, and that the economy should move out of recession by the end of this year. Just a few months ago, Roubini was dismissing those who saw such an early recovery, stating that the recession would extend well into 2010. Yet when it comes to the dynamism of the markets, people's views, especially with respect to timing, are obviously subject to change. It is the direction of the change which is of greatest interest. Roubini's statement from last week gives strength to the notion that the direction seems, incrementally but consistently, with gathering force, to be changing in a bullish direction.

Best regards,
Zubin

Zubin Driver
Investment Advisor
(W) 604 643-7608 / (F) 604 643-7606
Email: zubin_driver@canaccord.com

Canaccord Capital Corporation
Attention: Zubin Driver
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OFFICES IN MAJOR CENTRES ACROSS CANADA. MEMBER OF ALL CANADIAN STOCK EXCHANGES AND THE INVESTMENT INDUSTRY REGULATORY ORGANIZATION OF CANADA. MEMBER CANADIAN INVESTOR PROTECTION FUND (CIPF).