Poor Corporate Profits And Inflation

A little more than half of all companies in the S&P 500 have now reported Q1 earnings. Outside of financials and home builders, profits are actually growing at decent clip. All in all, its not a very good earnings season but in comparison to last quarter it is a definite improvement.



Financials continue to be the main drag, with first-quarter profit falling 70%. Compare that to the fourth when they suffered an outright loss. Consumer discretionary profits also are down due to builders and other housing-related companies.

Excluding financials, S&P 500 profits are expected to rise 8.6%. Energy firms, riding record prices, should deliver 29% growth. Tech profits are rising 9%, easily eclipsing analyst forecasts.

Much of the earnings growth in the large cap index is coming from multi-national companies like Caterpillar (CAT) IBM, and McDonalds (MCD), which are benefiting from overseas sales growth due to the weak dollar.

The market has been firming, pushing prices on the major indices higher. The chart I've posted today is of the S&P 500, and you'll see that as of Friday's close we're now pushing up against the downward trend line.

This is crunch time for the market. Do we break through the trend line and start carving higher highs and higher lows, or do stock prices fall back and continue along the slope of this bearish trend line?

Obviously, only time will tell. I have been adding some positive deltas to my portfolio, however. Much of that is in response to an increase in negative deltas due to the market's push higher.

I've been cautious about selling too much put premium, for fear of a reversal. What I've opted for is to add some long call options, which in turn I've hedged. This "one foot in and on foot out" approach is due to the continuing uncertainty as to where we are headed.

The general consensus seems to be that our second half will see growth. However, with inflation now a real concern it is unlikely that we'll see much more than a quarter point rate cut from the Fed. Mr. Bernanke and company will need to shift their attention from concerns about recession to inflation.

This summer you can expect to see gasoline prices push into the $4 to $5 per gallon territory. We could still see growth in the second half, I'd just be cautious about over committing myself.

Christopher Smith
TheOptionClub.com