Here Comes Earnings Season

ETF action was mixed this week as the New Year got off to a fast start but enthusiasm waned towards the end of the week after a less positive than expected employment report.

This week marks the start of the all important earnings season and also includes some important economic reports with a particularly significant wave on Friday. Together these events should set the tone for stock markets and exchange traded funds in January.

The View From 35,000 Feet

Last week’s action was punctuated by the disappointing non farms payroll report that showed a gain of 103,000 jobs versus the consensus 150,000. Unemployment edged down to 9.4% from the previous 9.8% while U6 unemployment, the “underemployment” indicator was at 16.6% and the work week remained flat. The percent of the population in the work force clocked in at 64.3% which is the lowest in 25 years.

Adding to the employment gloom, Fed Chairman Bernanke told the Senate Budget Committee that it could take another four to five years for the labor market to return to normal and since we’re already three years and trillions of dollars into this crisis, the news could only be described as dismal.

The Fed remains committed to their asset buying program known as “QE2” although so far the program remains short of its stated goal of reducing interest rates as both long and short term rates have climbed since the commencement of this second round of Fed quantitative easing.

Other big news items came from various corners of the world:

• Bullish sentiment remains at extreme levels according to Investors Intelligence
• U.S. Bancorp and Wells Fargo lost an important case in front of the Massachusetts Supreme Court in the ongoing foreclosure litigation and saw their stock prices decline by 0.8% for U.S. Bancorp and -2% for Wells Fargo
• The dollar continued to rally against the Euro as the European currency touched a three month low amid ongoing fears of the sovereign debt problems on the Continent.
• One in seven Americans, some 43 million people, are now on food stamps.
• Multiple retailers reported misses on Holiday sales expectations which makes Friday’s December retail sales report even more important as Holiday sales were previously reported to be the best in years.

Top Headlines of the Week

IMF’s Linsky Calls U.S. Government Finances a ‘Major’ Challenge to Policy Bloomberg

Jobs growth disappoints, but jobless rate falls Reuters

Shooting Spree Wounds Ariz. Congresswoman, Kills 6 The Slatest

What It All Means and What to Expect

Central bankers around the world remain confounded that their unprecedented and historic attempts to revive the global economies are having such mediocre results.

As we reported earlier in the week, the cost of insuring European debt and the spread between many nations’ bond rates and the benchmark German bund continued to widen while the Eurodollar continued its decline, suggesting nervousness over the future of the European financial system.

At home, unemployment and economic growth remains sluggish at best and with continued weakness in housing and employment, the fate of the U.S. consumer which accounts for 70% of our GDP remains in perilous condition.

Wall Street Sector Selector remains in “Yellow Flag” status, expecting choppy to lower prices ahead

The Week Ahead

This week will provide important leading indicators as to the health of U.S. corporations as Alcoa reports on Monday, Lennar, a major builder, on Tuesday, tech bellwether Intel on Thursday and financial behemoth JP Morgan/Chase on Friday. These reports cover the materials, building, tech and financial sectors and so should give an accurate indication of how major sectors of our economy are fairing.

In addition to the earnings action, a major series of economic reports hits Friday.

Economic Reports

Tuesday: November Wholesale Inventories

Wednesday: December Treasury Budget, January Fed Beige Book

Thursday: Initial Unemployment Claims, Continuing Unemployment Claims

Friday: December Producer Price Index, December Retail Sales, December Industrial Production, December Capital Utilization, January University of Michigan Consumer Sentiment, November Business Inventories

Sector Spotlight

Winners: (NYSEArca: EWH) Hong Kong, (NYSEArca: ITA) Aerospace and Defense, (NYSEArca: EWM) Malaysia

Losers: (NYSEArca: ECH) Chile, (NYSEArca: SLV) Silver, (NYSEArca: EWP) Spain

Check out SuperSectors.net for great New Year reading and a free membership to Wall Street Sector Selector

Disclosure: No positions in ETFs or stocks discussed in this article. Wall Street Sector Selector actively trades exchange traded funds and positions can change at any time.

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