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From Briefing.com: 5:10 pm Weekly Wrap

Earnings propelled the stock market higher this week. The Dow posted the largest gain of the indices on the back of a number of good reports from key components. The market showed good resilience and momentum all week.

There was a heavy flood of earnings reports this week. About 25% of the S&P 500 companies have now reported. Individual stocks reacted favorably to better than expected reports, and companies with earnings at forecast were not punished. This reflects a good underlying tone for the market.

In reality, although earnings are beating Wall Street forecasts, this quarter is about in line with normal trends. That is, approximately 67% of companies are beating expectations. That is about the level of most quarters, but down from the near 70% levels of recent years when earnings growth was double digit.

The overall earnings beat is also tracking historical trends. Expectations as the quarter started were for first quarter operating earnings for the S&P in aggregate to be up about 3.5%. With one quarter having reported, that is now at about 5% (including forecasts for the ones not yet reported). Normally, the ultimate gain will exceed expectations by about 3%, sometimes more. The number of companies beating estimates and the total gain for earnings above expectations are therefore nothing out of the norm. And, the overall earnings growth this quarter will be an average 6% to 7%.

The reaction to the earnings says as much about market conditions as the actual earnings reports. The market has reacted very favorably to what could be considered a very average earnings season so far.

Good earnings this week included reports from: Citigroup, Eli Lilly, Wachovia, Coca-Cola, Johnson & Johnson, Wells Fargo, JP Morgan Chase, United Technologies, eBay, Harley-Davidson, Merrill Lynch, Caterpillar, American Express, Honeywell, and Pfizer, among others. IBM and Intel had only decent reports, but the stocks reacted relatively well. Yahoo was a notable disappointment.

The economic reports this week were also supportive to the stock market. March retail sales rose a larger than expected 0.7% with sales excluding the volatile auto component up 0.8%. March housing starts were up 0.8% to a 1.518 million seasonal rate and have now stabilized for five months. Housing permits were, coincidentally, also up 0.8%. March industrial production was down 0.2%, but that was due to a large aberrant drop in utility output. The core manufacturing component was up 0.7%. The only slightly bearish economic release was a relatively high level of 339,000 in new claims for unemployment for the week ended April 14. That was down from 343,000 the week before but the trend before that was in the 310,000 to 325,000 range.

The best release of the week, however, was the March CPI data. The core rate was up just 0.1%. That was down from 0.2% in February and 0.3% in January. Total CPI was up 0.6%, but the low core rate helped ease inflation fears considerably.

Oil ended the week little changed at $63.38 a barrel, and the yield on the 10-year note dipped to 4.67% on the low inflation number.

The market enters another heavy earnings week with good momentum.

 
 Index     Started Week Ended Week Change % Change YTD  
 DJIA        12612.13    12961.98  349.85    2.8 % 4.0 %  
 Nasdaq       2491.94     2526.39   34.45    1.4 % 4.6 %  
 S&P 500      1452.85     1484.35   31.50    2.2 % 4.7 %  
 Russell 2000  819.30      828.40    9.10    1.1 % 5.2 %

3:51PM Market View: Potential short term Dow targets (TECHX) : A quick review of the Dow as it trades in the final hour of the week shows that the solid performance off of the Mid-March low has seen the upside momentum accelerate. From low to high the index has advanced as much as 355 points off of Monday's low with today's advance bringing its win streak to seven which also leaves it up 15 out of the last 16 days. Since it bottomed in March it is up 22 out of 26 days for a gain of 1027 points from low to high or 8.6% (click for Dow chart). This week's extension to new highs necessitates a different method to identify areas of potential resistance where profit taking or a correction could begin. Based on the three separate advances off the March low and the Feb-March decline as well as the continued extended technical posture suggests watching for signs of short term consolidation/reversal near Fib targets at 12969, 12988/12996 and 13028 which obviously also brackets the 13000 psych barrier. At this point any pullback would be considered merely a corrective pause (possible wave 4 off the March low) with adjustments made for the next objective based the size/extent of the move.

08:10 am Advanced Micro Devices (AMD)

Management at Advanced Micro Devices (AMD 14.28) admitted the first quarter was a terrible quarter. That admission was unnecessary since AMD's terrible performance was plain for everyone to see.

The company, which is in an epic market share fight with Intel (INTC 21.81), a suggested holding in our Active Portfolio, reported an operating loss of $504 million versus an operating profit of $259 million last year. The company's net loss summed to $611 million or $1.11 per share. Revenues fell 7% to $1.233 billion from the prior year period and were down a whopping 30% on a sequential basis.

Most strikingly, AMD's gross margins plummeted to 31% from 40% in the fourth quarter, and from 56% in the first quarter of 2006. Intel's first quarter gross margin rate was 50.1%. AMD attributed the drop to lower unit shipments, lower average selling prices, and the inclusion of ATI, which generally has lower-margin products, for the entire quarter.

AMD pinned its terrible performance on four factors that combined to form what it said was a "perfect storm" during the quarter. Those factors were the following: (1) failure to manage its growth successfully (2) pricing pressure (3) a competitive product environment in both CPUs and GPUs and (4) weakening demand in the consumer electronics business.

On a brighter note, AMD said it expects revenue in the seasonally down second quarter to be flat to slightly up. Intel's revenue guidance for the second quarter computed to a projected 4.0% sequential decline at the midpoint of its $8.2 to $8.8 billion range. New products in the graphics business, and some progress in the channel at the end of the first quarter that continued into the second, are the factors behind AMD's relatively upbeat revenue forecast.

The latter, however, isn't why AMD is indicated to open higher today. Frankly, we're not sure if anyone is even buying the revenue guidance given what the market knows about Intel's competitive influence these days and considering AMD ended up revising its first quarter revenue guidance well below its original guidance.

The catalyst for the stock today is management's acknowledgment that it is open to a private equity deal if it makes sense. It is little more than that, frankly, since there was little reason in AMD's operating results to be pounding the table on the stock this morning.

--Patrick J. O'Hare, Briefing.com