4Q08.3 EARNINGS – STIMULUS, WHERE ART THOU?

All eyes will be on the U.S. this week as the East celebrates Lunar New Year for the week (or so) as of yesterday.

We are now entering the teeth of earnings season for the cyclical industries including coal, steel, machinery, energy exploration & production, and paper/packaging. Since current conditions are punk, and the outlook is impossible to discern without added clarity from Washington, anything that contributes to sharpening our forecasting confidence will be deemed as a positive, albeit very short-term. Ultimately, we will have to rationalize a much lower “fair value” for the S&P 500 as 2009 and 2010 operating earnings continue to ratchet down; then there’s always the question of a proper P/E multiplier.

In the meantime, bad company results will be viewed as a positive since it will help ensure the expedient passage of the Stimulus package. As we saw with drillers Noble (NE) and Schlumberger (SLB) last week, it will therefore be hard to disappoint investors in the aforementioned industries. As long as a company doesn’t have short-term solvency issues I expect lots of pops.  Missing consensus EPS estimates, suspending revenue forecasts, cutting dividends, anything short of declaring bankruptcy may be swept under the table. Collectively, none of the above violates the great (false) hope of a 2H recovery. That being said more listening versus acting is warranted this week.

Wednesday afternoon’s FOMC rate cut announcement may be a wildcard even though the 0-0.25% rate range is expected to be reiterated. In a speech in London couple weeks ago Chairman Bernanke expounded on the differences of the current situation in the U.S. with the Japanese quantitative easing policy of 2001-2006; ours is much worse and he favored calling our current tactics “credit easing.” In light of the growing support for creating an Aggregator Bank, I see a high probability that financials can enjoy a big relief rally if Bernanke reveals further support for purchasing toxic assets.  You want to own the garbage for this trade: C, BAC, and STT.

Gaming the Indices.  The Dow Jones Industrial Average (DJIA) index of 30 price-weighted stocks utilizes a dubiouus methodology as it is, and now a Bianco Research finding makes it apparent to me that it needs to be reconstituted post-haste. Better yet some traditions need to simply die - it's an absolute failure as useful market barometer.

For those who insist on relying on passive investing and want stock market exposure, I recommend going long of QQQQ. The “Qs”  gains exposure of the top-100 non-financial Nasdaq stocks.

Disclosure: No positions.