The Yajnik Letter

The market is up on light volume, in part to the Yom Kipper holiday, but also as there is a pool of money committed to buying much lower. If the employment report comes in better than expected on Friday, then that pool of money will change its mind real fast. There is strength across the board, although energy and retail stand out…again anecdotal signs of increased consumer demand right around the corner. This is just simply an impressive session. Part of it may be attributed to window dressing which means that fund managers sell off their negative positions and enhance their winners to make their portfolio look better (it’s all bs if you ask me) as the quarter is coming to a close.

One thing is for sure, I believe it’s going to take much more than silver linings this earnings season to drive the market higher. I honestly didn’t think that stocks could surge the way they did during the last round of earnings releases but there was sufficient enthusiasm for results that lacked quality. Plus, earnings expectations were so low, that many companies could do no wrong and only impress. This is why I think the concept of “earnings expectations” is hogwash. If you beat below par expectations but your earnings are 50% lower than same period last year and it’s been degrading each quarter, is that a good sign? So, the big question coming into the session is will this time be different? If the reactions to Research in Motion (RIMM) and KB Home (KBH) results were any indication I think the answer is yes. The bar will probably be much higher than it has been this thus far this year. Earnings season doesn’t officially begin until October 7, when Alcoa (AA) posts its results. There will be some earnings releases this week, however, and they should provide further clues. In the meantime, the market’s reaction to Alcoa’s results this year has been fantastic harbingers of things to come.

• April 7: Alcoa releases earnings results and the Dow Jones Industrial Average trades at 7,789.0; it hasn’t been that low since
• July 8: Alcoa releases earnings results and the Dow Jones Industrial Average trades at 8,178.0; it hasn’t been that low since

I have to say that the Xerox (XRX) bid for Affiliated Computer (ACS) surprised me a little. I thought that Affiliated Computer was attractive but was surprised that Xerox would step up to the plate. It’s a bold move for the company, but one that was overdue. Look for more deals in the tech space with the focus on:

• IT Outsourcing
• Business Intelligence
• Cloud Computing

Abbott Labs (ABT) buying the pharmaceutical division of Solvay is a big deal as it points to more trans-Atlantic deals and how large drug companies have to pull the trigger to make up for thin pipelines and lots of blockbusters coming off patent protection.

Have a good evening and hope your weekend went well.

-Samir