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It looks as though the tone of earnings season has taken a
bullish turn. Weak earnings from banks, along with a couple revenue misses
had investors on edge.
But yesterday’s decidedly positive results from Caterpillar
(NYSE:CAT), 3M (NYSE:MMM)
and UPS (NYSE:UPS)
sparked a big rally. And positive earnings from Microsoft
(Nasdaq:MSFT), Verizon (NYSE:VZ) and Ford (NYSE:F) look
like they will extend the rally.
Bloomberg reports that 85% of S&P 500 companies that
have reported have beaten earnings estimates.
Perhaps more importantly, though, is the fact that the
latest round of economic data from Europe is
very good. Second quarter GDP growth in England came in at 1.2%, twice what
economists were expecting. And Germany‘s business climate index jumped
to a three-year high.
Slowing growth in Europe is
an important leg of the “double-dip recession” argument. Today’s data
from Europe is kicking that leg out from under the
bears. And assuming we get positive results from Europe‘s
bank “stress tests” later today, the double-dip talk fade further into the
background.
You mayremember
when the U.S. Treasury conducted stress tests on U.S. banks. The conditions that Geithner
& Co. laid out for the banks were absurdly easy to pass. It was pretty
obvious at the time that the stress tests were not meant to really test the
banks, but rather, to instill some confidence in the marketplace.
Still, even though some of the stress tests worse case
scenarios came to pass. No big banks failed.
I do not know if Europe‘s
banks will be held to a similarly low standard. But early reports from
Goldman Sachs that as many as 10 banks have failed the tests suggest that
maybe Europe‘s standards were higher.
Oil pricesmade a
huge move yesterday. The immediate catalyst was Tropical Storm Bonnie’s
projected course through the oil production region of the Gulf of Mexico.
Oil companies are already evacuating non-essential personnel
and BP (NYSE:BP) will be suspending work on its permanent fix for the leaking
well.
But from an investment perspective, the strength of oil’s
move yesterday should not be ignored.
Yes, hurricane season is coming early this year. We’ve also
seen some positive economic data from Europe.
And finally, strong earnings are an indication that the U.S. economy is stronger than some
expected.
So, oil may have moved in reaction to the hurricane, but
don’t ignore the economic fundamentals that are supportive of higher oil
prices.
Even as the Fed cut U.S. GDP growth to 3% for 2010, and investors have pondered the potential for
another round of recession, oil prices have remained at high levels.
With relatively weak growth in the U.S., it may seem that oil prices are
disconnected from reality. But as Energy World
Profits‘ energy economist Gregor Macdonald
has pointed out, U.S. demand no longer controls the price of
oil.
Demand from emerging markets now drives the price of oil.
And it is for this reason that you should pay close attention to the
possibility that China might start
removing some of the restrictive policies it put in place to slow its
economy.
The U.S. economy, and
even a hurricane, can move oil prices higher. But it is demand from
China and other emerging economies that
that supports oil at +$70 a barrel.
Earningsfor energy
stocks kick off at the end of next week. But I’m looking forward to the first
week of August, when the Bakken oil stocks in the Energy World Profits
portfolio report.
My favorite Bakken play has had earnings estimates raised
three times in the last month. And the stock price has barely budged. And the
thing is, I think earnings estimates are still too low.
This company has greatly accelerated its drilling program.
That’s lifted production from previous estimates of 6,500 boepd (barrels of
oil equivalent per day) to 7,000 to 7,500 boepd.
Given that this company has some of the highest production
rates of any company operating in the Bakken, I’m expecting an earnings
blowout.
And with a forward P/E of 16, I think a big move is
coming.
For more on my top Bakken stocks, click
HERE.
As always, thanks
for all of your comments, and please keep them coming:[email protected]