MarketView for April 7

A new earnings season is upon us and it did not get off to a good start on Tuesday. Stock prices were lower, the result of concerns that the first quarter’s recession was a distinct drag on earnings. Unfortunately, first quarter’s numbers are coming on the heels of the worst fourth-quarter earnings season on record. Earnings for companies making up the S&P 500 index are expected to fall by 36.9 percent.

Kicking off the season, as is usually the case, was Dow component Alcoa and the news was disappointing. The company reported a second consecutive quarterly loss as a result of falling demand and sharply lower prices. Its shares slipped 1.4 percent to $7.68 in extended trading, after initially rising following the results. Alcoa had closed down 1.5 percent in regular trade ahead of the results.

It was the second day of declines after stocks rallied off 12-year lows in the last month. Despite the declines, the S&P 500 is up more than 20 percent since hitting a bear market closing low in early March, on hopes the economic slump is moderating and banks are stabilizing.

Oil prices fell nearly $2 a barrel to below $50 a barrel as the market eyed another rise in crude inventories, taking energy stocks lower. Chevron and Exxon Mobil were among the top drags on the Dow Jones industrial average, with Chevron down 2.1 percent at $68.40, while Exxon Mobil fell 1.9 percent to $68.71.

Shares of General Motors were down 12 percent to $2.00 after it became known that the company was in "intense" and "earnest" preparations for a possible bankruptcy filing. Now the Street is building up fears of the spill-over effects a bankruptcy in the auto sector could have on the rest of the economy and other companies in the industry.

Also weighing on sentiment was a report that the International Monetary Fund was set to forecast that the amount of toxic assets on the balance sheets of financial corporations could reach $4 trillion.

Bg-cap tech companies on the Nasdaq also took a hit on Tuesday, with Apple down 2.9 percent to $115.00, and Research In Motion down 6.3 percent to $59.95.

Earnings Season Could Torpedo Latest Rally

The question on everyone’s mind now is whether earnings season, which is ready to begin in earnest, will be so poor so as to stop the latest stock rally cold in its tracks. Early indications of a return to profitability by some of the largest U.S. banks helped to fuel a March stock market rally. However, if Alcoa’s disappointing results are a harbinger of things to come, who knows what lies in store.

The S&P 500 slumped 19 percent in the first two months of 2009 as companies published their worst quarterly results in more than 80 years. It didn't help that companies followed up their poor showing at the close of fourth quarter with bleak forecasts for the year ahead, while others withdrew or refused to provide guidance, citing the unprecedented economic situation.

The S&P 500 rallied 8.5 percent in March, before stalling out this week, but a repeat of cautious or negative outlooks could throw cold water on hopes that the worst is past for the economy. First-quarter corporate earnings for S&P 500 companies are now expected to decline by 36.7 percent. In comparison, fourth-quarter earnings slid by 67 percent.

Results in all 10 of the S&P's sectors are expected to fall this quarter. Last quarter, three sectors stayed above water, led by the health-care sector with 10.5 percent growth, followed by a gain in consumer staples, while the utilities was flat.

From a valuation perspective, stocks are a bit more expensive this time around. The S&P 500 is trading at 13.3 times expected earnings over the next 12 months, compared with 12.5 percent at the end of 2008.

Some market watchers are optimistic stocks have put in a bottom as recent retail and housing data have shown "green shoots" that the economy is stabilizing and are hoping profits will surprise skeptics to the upside. Others, however, fear the rally will prove a product of oversold conditions rather than any real underlying improvement.

As well as the encouraging economic data, comments from major U.S. banks including Citigroup and Bank of America indicated that they had been profitable in the first two months of the year fueled the March rally. Meanwhile, it is the struggling financial sector that will be a key player in bringing the market back up.

Banks typically write down assets at the end of a quarter, making investors wary of surprises still lurking on their balance sheets. However, the chief executive of JPMorgan Chase, Jamie Dimon, said at the end of last month that March "was a little tough."

Another area of interest will be health care, which has become one of the biggest sectors on the S&P as investors have been drawn to its defensive nature, typically seen as performing better during a recession than its more cyclical peers. While the group is expected to see a decline in earnings compared to the same quarter a year ago, it is still expected to outperform the rest of the market, falling just 3.1 percent.

Crude Oil Fall Again

Crude oil futures fell sharply after Tuesday's settlement close as the American Petroleum Institute reported a big build in crude supply. Domestic sweet crude for May delivery hit $48.14 a barrel on the New York Mercantile Exchange's Globex trading platform.

Earlier on Tuesday, U.S. crude settled down $1.90 per barrel at $49.15. It was the third straight trading session that crude prices slipped.

Consumer Credit Falls Sharply

Consumer credit fell more steeply than expected in February as credit and charge card use dropped by the most on record, the Federal Reserve reported on Tuesday, falling $7.48 billion, or 3.5 percent, after advancing at a rate of 3.8 percent or an upwardly revised $8.14 billion the prior month, previously reported as a $1.8 billion rise.

Non-revolving credit, which includes closed-end loans for big-ticket items like cars, boats, college educations and holidays, rose $313 million, or at a 0.2 percent rate.

However, revolving credit, made up of credit and charge cards, plunged at a 9.7 percent rate, or $7.79 billion in February, the largest dollar drop since the Fed started tracking the series in 1968. In percentage terms, the 9.7 percent decline was the biggest since January 1978, when it dropped 15.7 percent.

Alcoa Reports Loss

Always the first of the large cap stocks making up the Dow Jones industrial average officially kicked off the earnings season on Tuesday with a second consecutive quarterly loss on Tuesday. Key among the reasons was a slump in Metal prices and the autos industry slumped and global demand fell in the economic downturn.

In response to the tough times, Alcoa the first member of the Dow Jones Industrial Average to report, has cut thousands of jobs, slashed its dividend, trimmed spending and raised $1.3 billion to help it through the slowdown.

On a conference call with Wall Street analysts, Alcoa Chief Executive Officer Klaus Kleinfeld was more upbeat, despite weakness in demand from industries it supplies.

"In the U.S., we are seeing the first signs of markets stabilizing at lower levels," he said.

Auto industry demand is down 18 percent globally and is worse in the United States, he said, "but the U.S. residential (construction) market might see some signs of bottoming out."

But Kleinfeld repeated his forecast that global aluminum consumption will decline 7 percent this year, although he is hopeful government stimulus action will revive metal demand.

Alcoa's first-quarter net loss was $497 million, or 61 cents per share as compared with a profit of $303 million, or 37 cents, in the 2008 quarter. The loss from continuing operations was 59 cents per share. Revenues fell 36 percent to $4.1 billion from $6.5 billion a year earlier after excluding divested businesses.

Kleinfeld said in a press statement the steps the company has taken so far to cut costs should significantly improve its profitability and cash flow in 2009 and beyond.

"We also see both near-term and long-term catalysts that should improve the prospects for the aluminum industry," he said. "Current stimulus programs that target infrastructure and energy efficiency will create a demand for ... aluminum.

But Alcoa expects second-quarter alumina production to drop slightly as it cuts refinery production to meet smelter demand. Alumina, refined from bauxite, is smelted into aluminum. The company also sees continued end market weakness for its flat-rolled products in the aerospace, construction and global transportation sectors in the second quarter.

Alcoa said the drop in revenue was the impact of the economic downturn on Alcoa's end markets. As demand weakened, realized metal prices fell an additional $558 per ton resulting in prices now about 60 percent lower than last summer. Aluminum prices are down from a peak of $3,380 per ton last July. In the first quarter, the price fell 9 percent from $1,530 to $1,392.

Alcoa, like most rivals, has cut production in the last six months. Last week, it announced it was curtailing 120,000 annual tons at its smelter in Massena, New York, bringing the company's total aluminum output cuts to over 850,000 tons, or 20 percent of annualized output.