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Thank you, Wells Fargo. The S&P 500 ramped nearly 4% on Friday as Wells Fargo said it expects its first-quarter earnings to be nearly double what analysts were expecting. And it wasn’t even Wells Fargo’s earnings day – the company pre-announced earnings that will be released on April 22. These days, if you have something to crow about, you do it. ASAP.
Financials have been at the forefront of the current rally, and that’s as it should be. Any good rally has to have the financials out in front. Of course, the financials are moving off such low levels that even huge percentage gains, like the 12% Citigroup was up or the 31% Wells Fargo jumped, are barely a drop in the weighted index bucket.
Still, stocks are up and that’s good.
*****There is some concern that Wells Fargo’s earnings surprise is more about accounting than an actual uptick in business. Some are saying that Wells Fargo’s loss reserves (money it sets aside to account for future losses) are too low, considering the loan portfolio of its Wachovia acquisition.
If that’s true, Wells Fargo’s apparent health is just that: an appearance. We’ll find out down the road …
*****But really, this rally is less about financials leading as it is about government fixes for the financial sector’s problems. Bailouts and toxic asset programs are the reasons the financials are no longer standing at death’s door.
So the banks may have less debt. That doesn’t mean the debt has disappeared. It’s just been transferred. And it will have to be dealt with eventually.
*****JP Morgan, Goldman Sachs and Citigroup all report earnings this week. We’ll also hear from General Electric and Intel. We’re off to a good start with earnings, but there’s a long way to go.
*****Daily Profit recommendation Graham Corp (AMEX:GHM) jumped 8% to $12.22 on Thursday. That’s a 30% gain from my recommended entry at $9.44. Graham doesn’t report earnings until May 29, and that’s probably a good thing. There won’t be any dose of reality to undermine that "optimism effect" the rally is having on Graham’s share price.
Graham has resistance ahead at $13.40. That would be a 42% gain and I will be inclined to recommend you take that gain, if we get it.
The other stock I’ve recommended, Hovnanian (NYSE:HOV), jumped 10% Thursday. It still hasn’t made it back to recent highs and significant resistance near $2.
*****The International Energy Agency is saying that global oil consumption will be down 2.4 million barrels to 83.4 million barrels per day. That’s a 2.8% drop and it’s the worst demand destruction we’ve seen for oil in a long time.
OPEC has cut production by 4.2 million barrels per day. And even though that’s more than the drop in demand, oil prices are weak. Supply in being cut when, really, it should be increased. The current recession has put a temporary dent in oil use. But it won’t last.
When the world economy starts growing again will take up the slack in oil production quickly. Don’t be surprised to see the world go from oversupply to shortage in a few short years.