Earnings Take Center Stage

The focus this week will shift to earnings and the challenge for investors is what to really expect from the data. Forecasts have been lowered, but the real wildcard is the impact of the economic data from March on earnings. On Friday the jobs report was very disappointing and it has led to plenty of speculation relative to the cause. The latest is to blame the spending cuts implemented March 1st are showing up in the data already. Real or not the blame for the slowing in jobs and other areas of the economy in March is all due to the cuts in government! Wow, that was quick. If the economy is that dependent on government spending we are in bigger trouble than many expect.

The real impact of the so called sequestration or cuts in government spending will take effect in the third and fourth quarter of the year. It is estimated that 750,000 jobs will be affected, not all of those lost jobs, but jobs not being created. Thus, if the impact in the first month was so dramatic, what should we expect in the second half of the year? The twist and turns of the what is taking place in the US economy are ever unfolding, and this is adding to the worries already in place.

Alcoa will announce today after the bell starting the official earning season, but the real data to watch will come from the banks later in the week with JP Morgan and Wells Fargo reporting on Friday. The sector is still undervalued relative to the longer term outlook, but that will not matter if the loan growth and margins fail to meet expectations for the quarter in the large banks. KBE, SPDR Bank ETF is the sector to watch relative to these stocks.  The growth in the capital markets (underwriting of equity and debt) has continued to be positive and the brokerage stocks stand to benefit. IAI, iShares Broker Dealer ETF is the sector to watch. The regional banks have been playing catch up as they deal with their balance sheets, and specifically the real estate loans. Some of the larger regional banks like SunTrust and Regions Bank will be key measures of how much progress has been made in the sector. KRE, SPDR Regional Bank ETF is the sector to watch for these stocks.

The financials will be the first sector on the hotseat as we begin earnings season. XLF, SPDR Financial ETF has been testing lower since hitting the high near $18.50 in March. The sector moved above key resistance in January at the $17.20 level and has been volatile ever since. The issues in Cypress have had a ripple effect to the sector, but the greater concern is the ability to grow earnings in face of the new regulations and sluggish economic picture. The growth in the housing sector over the last six months has helped, but the outlook is for that growth to moderate. The Fed has done their part in keeping rates essentially at zero, but the jobs market and slower economic growth aren’t doing their part. Thus, financials will have all eyes on them to start the earnings season.

Watch XLF to to move back above the $18.10 level or test $17.20 support depending on how the data unfolds. The parts may play out better than the whole. KBE will show the impact of the large banks, KRE the regional banks, IAI the brokerage based financials and KIE the insurance companies. Depending on who the winners and losers are each will offer a different strategy to capture the results… good or bad. On the bad side SKF, ProShares UltraShort Financials offers a way to plan the downside if things don’t go according to plans.