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Earnings Have Bullish Ring

Results from Yahoo!, IBM and Motorola should add to the renewed sense of confidence.

Updated from 7:07 a.m. EST

As earnings reporting season picks up steam this week, the stock market is starting to see more upside surprises. Both before and after the bell Tuesday, the tone shifted from last week's, when a smattering of disappointments held the markets in check until Friday.

Ahead of earnings after the close from (most notably)









, the major indices moved higher Tuesday, notching the first back-to-back gains of 2005. The


rose 0.7% to 10,628.79, the

S&P 500

gained 1% to 1195.98 and the

Nasdaq Composite

rose 0.9% to 2106.04.

And the earnings after the close from three tech bellwethers ought to add to the renewed sense of confidence: Motorola said its new Razr phone was selling like crazy; IBM said profit from continuing operations rose 12% to $3.1 billion, or $1.81 a share -- 5 cents ahead of analysts' estimates; and Yahoo! said net income, excluding a big investment gain, more than doubled to $187 million, or 13 cents a share, slightly ahead of estimates.

"Ought" is a loaded word on Wall Street, however, and index futures -- while strengthening from earlier levels -- were pointing to a mild easing in Wednesday's premarket.

Other firms surprising on the upside included




Bank of America






Charles Schwab



Still, it wasn't all happiness as Motorola's forecast was at the low end of a previous signal, and IBM posted the slowest sales growth in two years.

Solid Foundation

Although the markets stumbled to start 2005, the solid macro indications for the fourth quarter -- with growth and retail sales looking solid -- are blinking a warning to bears and an invitation to bulls, according to Charles Kirk of the eponymous

Kirk Report


"We should at least prepare for some great, not just good, earnings reports over the next few days," he wrote on Tuesday. The fourth quarter "was not a bad quarter for the economy, and while not every company will report solid numbers, quite a few certainly will. In many ways, Wall Street is using this quarter to separate the winners from the losers and while the market's reaction to good reports hasn't been ideal so far, it is still early."

Thomson Financial says the quarter's preannouncements have been about average. For all stocks included in the First Call database, companies issuing warnings outnumbered companies revealing positive news by 2 to 1 vs. the long-term average of 2.2 to 1. But for the past week, 28 companies were negative and 25 positive.

One exception may be in basic industrial materials stocks, which passed a peak in analyst upward earnings revisions back in October, according to Lehman strategists Ian Scott and Inigo Fraser-Jenkins. Three previous peaks -- in 1988, 1994 and 1999 -- signaled trouble ahead for the sector. Stocks in the sector lost an average of 15% in the 12 months after those three prior peaks.

"Although we have been somewhat surprised by the resilience of this part of the market in the face of factors that would normally have signaled a correction -- especially the flattening yield curve -- the next and final shoe is about to drop for the sector," the Lehman analysts write. "The very strong earnings momentum enjoyed by the sector is now starting to wane."

The report doesn't mention specific stocks except to say that



remains in the firm's global recommended portfolio but

Sealed Air


has been removed.

Among the most prominent stocks in the space are

Dow Chemical









However, the previous periods of weakness for the sector did not foreshadow poor performance by the market as a whole. In fact, the markets gained an average of 18% over the 12 months following a peak in analyst upgrades for basic industry stocks.

Fed Freakout

The economic news for Tuesday was solid, although speeches by

Federal Reserve

bankers had traders freaking out in the early going. Bond investors have gotten comfortable with the Fed's thus far "measured" campaign of interest rate hikes. All five of last year's increases were by 25 basis points. But last week, St. Louis Fed President William Poole indicated the Fed could drop the measured pace and on Tuesday, Philadelphia Fed President Anthony Santomero repeated the message.

"If signs of price pressures emerge on a consistent basis, we will need to consider quickening the pace at which we move toward policy neutrality," Santomero said, while adding that at least so far there were no signs mandating such a change in policy.

Bonds slipped early but managed to post slight gains as other speakers sounded less worrisome. Fixed-income players also were reassured by a Treasury Department report showing that foreign investors, including foreign central banks, markedly increased their purchases of U.S. securities in November.

The yield on the 10-year Treasury note declined slightly to 4.20% from 4.22% on Friday. On Wednesday, the Labor Department reports how the consumer price index performed last month. November's annual rate of 3.5% was the highest in more than three years.

Bonds also were helped by a slowdown in the New York Fed's manufacturing report. Barry Webb, senior market analyst at Legg Mason, makes an insightful point about how that statistic was misreported.

Tuesday's New York survey for January was reported as 20.1, lower than the 27.1 reported in December. Many news reports said the index showed that manufacturing activity had slowed from the previous month.

Not so fast -- the index is a diffusion index and the headline number is simply the percentage of respondents who say conditions are improving from the previous month minus those who say conditions are getting worse. In other words, any reading above zero shows that manufacturing activity expanded in January from December. The pace of improvement slowed, but that's it.

"Before activity could be legitimately reported to have actually fallen based on this measure the index level would have had to show a negative value," Webb wrote.

In keeping with TSC's editorial policy, Pressman doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send

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