CLOSING COMMENTS 4-18-06

The Last Week in Review:

Earnings season begins in earnest this week. It may not change the market outlook. It could even make it worse. The Interest rate risks continue to hang over the market, and any weakness in earnings guidance could shake up the market. Q1 earnings reports should be reasonably good. The forecasts call for operating earnings on the S&P 500 to be up about 10% compared to Q1 2005. The problem is that the earnings growth rate will probably decrease in Q2 and for the rest of the year. The market has managed to stay afloat by focusing on the Q1 reports. That could soon change.

Forecasts for Q2 call for only 7% earnings growth. Assuming Q1 earnings come in with a double-digit gain. Q2 will be the first quarter in three years in which earnings do not grow at a double digit rate. Economic and earnings growth are both sliding back down towards their long-term trends.

The Fed is not done raising interest rates. Their goal is to slow economic growth down so that high rates of resource utilization do not lead to inflationary pressures. The Fed wants slower economic growth, which they believe is more sustainable over the long term. The Fed won't stop until growth slows and until there is a clear sign that interest rates are leveling off. Economic growth should not be severely impacted by higher rates.

For the week, the Dow did manage to gain 17 points and its year- to-date gain is at 3.9%, while the NASDAQ closed the week down 12 points reducing its year-to-date gain to 5.5%. The S&P lost 6 points during the holiday-shortened week and stands at plus 3.3% year-to-date. The Russell dropped 5 points on the week, but still has an annual gain of 11.6%.

The Week Ahead:

There are a flood of earnings reports due out this week that will impact the market, beginning with Citigroup (C) on Monday before the opening. On Tuesday Boston Scientific (BSX), Johnson & Johnson (JNJ), Merrill Lynch (MER) and State Street (STT) will report numbers along with tech giants IBM (IBM), Motorola (MOT), Texas Instruments (TXN) and Yahoo! (YHOO). On Wednesday morning Abbott Labs (ABT), Charles Schwab (SCWH), Coca-Cola (KO), and JP Morgan Chase (JPM) release numbers while Apple Computer (AAPL), eBay (EBAY) and Intel (INTC) reporting after the close. Thursday Bank of America (BAC), Eli Lilly (LLY), General Motors (GM), McDonald's (MCD) and Merck (MRK) all release numbers along with high-flying Google (GOOG). The week ends with 3M (MMM), Ford Motor (F) and Halliburton (HAL) releasing results Friday morning.

Economic reports this week include Tuesday's reports on March Building Permits, Producer Price Index (PPI) and Housing Starts followed by the release of the FOMC minutes. March Consumer Price Index (CPI) will be reported on Wednesday morning along with Weekly Crude Inventories. On Thursday the Weekly Jobless Claims will be released followed by March Leading Indicators and the April Philadelphia Fed Index.

In summary: Investors need to focus on the flood of earnings reports this entire week from a majority of the major companies and the price of oil as it breaches $70.

Stay tuned!