Technology Turnaround

The next two weeks will be dominated by corporate news as companies announce their 4Q financial results. Naturally the performance of individual companies, even in the same sector, can vary quite a bit. It is always tempting to extrapolate the results from one company to the larger market. More often than not, this will lead to wrong conclusions. The thing to watch for is composite trends that are relatively consistent within each sector.

For example, today brought news that the venerable International Business Machines Corporation (IBM) had topped analysts expectations with 4Q sales of $28.9 billion. Previously, there had been a great deal of fear that economic weakness would cut into the sales of computer-related companies. Prior to today, technology was one of the weaker sectors so far in January. The IBM news dealt a blow to this argument and technology shares surged higher. Yet IBM is only one company, and it happens to be one which earns more than half its revenue from outside the U.S. So this news may not tell us much about the U.S. economy - or the prospects for companies that do not share IBM's international exposure. Our confidence will grow if more companies report similar recoveries.

Corporate earnings are not the only thing on the week's agenda, of course. We will also get important data on retail sales, wholesale and consumer inflation, jobless claims, housing starts, and the Index of Leading Economic Indicators. Speculation surrounding the Jan 30th Fed meeting is rampant, with a substantial number of traders expecting a 75-basis point cut. Some are looking for an interim cut even before the meeting. It is true that the Fed is signalling new flexibility; Bernanke and friends have been doing all they can to show that they "get it" and won't let the economy sink too far. Whether it is actually in the Fed's power to control the economy for more than the short-term is something not many people seem to be considering. We have our doubts.