Many individual investors (
) take their cues from tech stocks, or maybe energy or emerging markets. But the pros on Wall Street watch their own sector as the prime "tell" of the market's health, or lack thereof.
Brokerage earnings take center stage in the coming week, and results from
may determine if
last week's bounce proves fleeting or sustainable.
The brokerage stocks were "darlings that broke horribly" amid the overall selloff the week of Feb. 26, said Woody Dorsey, president of Market Semiotics, in an
interview on TheStreet.com TV. After falling approximately 12% from its peak on Feb. 20 through March 5, the Amex Broker/Dealer Index has since rebounded by 3.9%.
"They'll probably try to rally those areas a little more" in the coming week, says Dorsey, who nonetheless believes any near-term advance should be sold.
As for the particulars, Goldman Sachs is expected to report a slight year-over-year earnings drop and revenue growth of just 3.5% when it reports fourth-quarter results on Tuesday, which may explain why it fell more (down by 14%) than the Broker/Dealer Index during the recent selloff.
Wall Street expects Lehman, which reports Wednesday, to post year-over-year earnings growth of 6.5% and revenue growth of 11.4%. Bear Stearns is expected to show 7.3% profit growth and 13.7% higher revenue when it reports Thursday.
Beyond bottom-line numbers and comments about standard investment banking issues, the brokers also will be scrutinized for their exposure to the subprime mortgage market, which continued to be in the spotlight last week amid the
ongoing tribulations of
New Century Financial
The consensus view is that "concern over big brokers' exposures to subprime, while they are not totally immune, is overdone," as Keefe Bruyette & Woods analyst Lauren Smith wrote Thursday. "We believe ultimately they will navigate through this storm in good shape. Given the size of the balance sheets and the capital positions, direct mortgage exposures to subprime are relatively modest in the grand scheme of things."
Ahead of earnings, Smith upped her first-quarter and 2007 targets for both Goldman and
, which reports on March 20. (KBW either has done or is seeking investment banking business with all brokers mentioned above.)
Other companies slated to report earnings next week include
are holding analyst meetings.
But as the largest component of the
, "financials are always the key," as Teddy Weisberg, a veteran NYSE floor trader for Seaport Securities, said in a
recent interview on TheStreet.com TV.
"If the financials start to show strength, it will spill over into the rest of the market," he says. "If they remain weak, there's obviously a fundamental change in the economy and world economy which we haven't quite seen yet. That's unfortunately what the market would be telling us."
Macro Musings and Fearless Predictions
U.S. economic reports next week include Tuesday's February retail sales report, Thursday's producer price index release, and the New York State Empire Index and Philadelphia Fed Index regional manufacturing reports.
Friday's consumer price index report, however, likely is the most important item on the economic calendar.
As of January, core CPI inflation is up 2.7% on a year-over-year basis, "stubbornly above the
target level," writes Robert Pavlik, chief investment officer at Oaktree Asset Management. "Should February's report come in below estimates it would remove some pressure off the Fed and allow them room to cut rates should the economy near a recession" -- or should the subprime mortgage mess become more of a threat to the broader economy.
As for the fearless forecast,
last week I wrote about the potential for major indices to bounce back toward the 50-day moving averages, which are now 12,509 for the
, 1427.50 for the
and 2450 for the
On Friday, the Dow came within 200 points of its 50-day moving average, and a continuation of the bounce-back scenario still seems most likely in the coming week. Perhaps the aforementioned brokerage stocks will lead the way.
Friday's action was noteworthy in that the Philadelphia Stock Exchange Semiconductor Index rose 0.7% in the wake of
positive comments and a
upgrade. But the chip strength was accompanied by a (modest) down day for the Nasdaq -- 60% of volume was to the downside -- which is notable because chips are viewed as a leading indicator for the broader tech sector and (
) get many a daytrader's heart aflutter.
In this regard, Friday reminded me of the
action on Feb. 22, when it was a bit surprising to see the market "accentuate the negatives," as I wrote at the time. In hindsight, that session was a harbinger of the recent swoon.
Once bitten, twice shy.
Aaron L. Task is editor at large of TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He appreciates your feedback;
to send him an email.