Net income of £3.4m in the three months to April is a lot better than the £62.4m loss the year before. The number of bets placed was up a quarter, at £364m, with Euro and Aussie punters making up 96% of that revenue. This sparked a rise in the shares and analysts think the firm has turned the corner.

But there is still much further to go. The group’s shares slumped 30% in the past 12 months as the loss of an audience in the US, where online gambling was outlawed in October 2006, hit profit forecasts and broker recommendations knocking Sportingbet’s market cap down £50m.

The brokers now see an opportunity, “[The results] clearly demonstrate that Sportingbet has regained positive momentum across the group,” said Richard Carter at Numis Securities.

With major football contest Euro 2008 kicking off this summer, the firm is “confident of meeting” forecast earnings of £7m for the year.

It’s not all good news mind you. Some Sportingbet employees were arrested by the Turkish authorities last Thursday.

The nature of the arrests is suspect as Sportingbet has previously locked horns with the state-backed gambling business Spor Toto. With the investigation ongoing, McIver reassured investors, “It’s had absolutely zero impact on our operations in the area.”

Having made £200m in Europe in the third quarter, and bullish forecasts for the region, this much is evident.

Gambling Is FTSE’s Safest Bet

The betters market might be a great ‘recovery stock’ play.

The sector had its wings clipped in November 2006 when US authorities — in what was widely panned as a protectionist move — banned online gambling Stateside. This had a punishing impact on industry players like Sportingbet and 888 but it was PartyGaming that suffered the most agonizing fall from grace.

The bookie’s shares fell so hard that FTSE index experts took the unprecedented step of booting PartyGaming out of the FTSE 100 without waiting for the quarterly rebalancing.

However, like a phoenix from the flames, all three firms are back in the black.

888 recently boasted 2007 results way ahead of estimates and nudged forecast 1% higher for 2008. PartyGaming also posted “strong growth” and a 21% hike in first quarter revenues.

The stocks are being plugged as a recession-proof industry. This belief, propagated by 888 chief executive Gigi Levy, is based on the rationale that as the economy heads south, people are more likely to stay in and log on than go out.

Not only that, but the gamblers might also get some closure on the American situation. Sportingbet and PartyGaming sat down with the US Department of Justice to try and reduce any fines against the two firms that ‘illegally’ took bets from Americans before the sites were barred.

Sources close to the matter suggest that these talks are going very well… PartyGaming’s shares have rallied as relieved investors look forward to finally putting this circus behind them.

IG Group Spreads Its Operations

Looking for another way to speculate on other people’s speculations? Take a look at IG Group. This spreadbetting and CFD group are doing a fine trade through the market turmoil, specialising as they do in short-term trading services.

Following up soaring revenues in March, IG has produced a bullish trading statement that “current trading remains strong” and the firm is optimistic on the full-year prospects.

Trading is expected to be 50% higher at around £184m from £122m the year before driven by expansion in France and Spain.

“While it remains difficult to predict future trends in volatility or customer reaction to any change in market conditions, IG is well positioned for further growth,” the company said in a statement.

A growing business, still in its infancy… IG Group looks like a good move.

However, as with Sportingbet and 888, this virtual gambling business is subject to potentially market-changing legislative risk. The weaknesses were clear in November 2006.

Should a government introduce new laws to curb gambling, and they tend to with these ‘vice stocks’ — smoking, alcohol and gambling — then the afflicted firms would be painfully short on options.

If smoking were outlawed worldwide, British American Tobacco would still have a stockpile of valuable physical assets. With online businesses like Sportingbet and IG Group, the core business is the only business. This represents huge potential volatility, as long-time investors in these markets will attest.

There is a less risky way to capitalise on ‘recession-proof’ shares. An opportunity, currently running in The Fleet Street Letter, that has already turned a profit for subscribers.

Theo Casey

Source: Sportingbet Profits Mark Turnaround

It wouldn’t have been a bad idea. In the last year, the junior Alternative Investment Market (Aim) index has fallen around 14 per cent while the FTSE 100 is down only 6.5 per cent. Admittedly, you’d have been better off in cash – you’d have made 5 per cent there. But, relatively speaking, at least the experts were right.

Now, however, it’s all the other way around. If you are looking for fundamentally cheap investments, you need to be looking at Aim where the average price-earnings (p/e) ratio has fallen to a mere 6.3 times.

There are 1,600 companies listed on this market, so there are obviously huge variations within this – miners and oil companies trading on p/e ratios of 20-plus and the odd outlier, such as fashion super-success ASOS (LON:ASC), trading on 40 times. Even so, talk to a small-cap fund manager of any kind, and he’ll be quick to point to a pile of favourite stocks all throwing off cash yet selling in the market for the bargain prices of 4r or 5 times earnings.

One example is AT Communications (LON:ATCG), a perfectly respectable telecoms company on a historic p/e of 5 times and a prospective p/e for 2008 of a mere 4.75 times.

So just why are there so many apparent bargains about? One answer might be, tax.

Until recently, capital gains on Aim-listed stocks were taxed at only 25% of the normal rate for higher-rate taxpayers, as long as you held the stocks for two years – so an effective rate of 25% of 40%, which is 10%. Now, however, you pay 18%, just like anyone investing anywhere else.

Then there is inheritance tax to consider. Certain Aim stocks are immune from inheritance tax. But now that couples are able to leave their nil-rate bands to each other (automatically combining their tax- free allowances) perhaps fewer people feel the need to bother with the kind of estate planning that Aim provides.

Of course, there is – as there should be – more to this than just tax. There’s also general risk-aversion. Smaller companies tend to be more geared to the domestic economy than larger multinational companies so, when things turn down, their shares inevitably suffer more than most.

And things are turning down in the UK – big time. The housing market gets worse by the day; there are signs unemployment is about to take a turn for the worse as jobs in construction and retail start to go; oil prices have now started to “melt up” – even more quickly than I suggested they would – and rising inflation means no interest rate cuts.

However, an annual survey of the market from Baker Tilly and Faegre & Benson, entitled “Taking Aim”, throws another kind of light on the way things have changed in the market.

Back in 2005, there were 335 initial public offerings (IPOs) on Aim, raising an average of £17m each. In 2007, there were 82, but the average amount raised was a massive £231m. In some ways, this might look like a good thing – more money was raised in total. But for real smaller companies it might not be.

Why? It suggests, says John Glencross of Calculus Capital, that the London Stock Exchange (LSE) and the companies that work as brokers to Aim-listed companies are more interested in marketing Aim as a home “to foreign companies seeking an international listing, where the amounts involved are very large, than to growing UK companies which typically want under £10m”. A number of last year’s listings were also large funds of one sort or another, or property-related companies.

For these overseas companies, and the brokers getting paid for bringing them to the market, Aim also presents an opportunity for a form of regulatory arbitrage. Its relatively light regulation and less-than-arduous listing requirements make it an easier place to get a fundraising away – and earn those commissions.

This makes sense, of course, in that both the LSE and the brokers are looking to make money, and you make more from big listings and secondary fundraisings than small. But it does make it hard for small companies to get their hands on funding.

This might be the key to the low-looking valuations. Right now, a small company, however good, doesn’t really have anywhere to go to get money to expand. The banks are closed or upping their rates; the debt markets have never been small-cap friendly; and if they only want a few million, Aim isn’t suiting them very well either.

At the same time, liquidity has disappeared from the market itself. Spreads are wide and volumes are low. So buying and selling stakes in listed companies has become little easier than buying and selling in private companies.

The combination of these two factors means that, right now, being listed on Aim isn’t really all that different to being a private company.

And what do private buyers pay for private companies? It depends on all sorts of issues but, in general, the answer is around five times profits. Look at it like this and maybe the seemingly cheap stocks rattling around Aim aren’t so cheap after all.

It would be nice if there were something to be done about all this – small companies are incredibly important to the UK economy. But, as it probably won’t be, I think we can expect the sector to continue to be starved of both funding and investor interest. Both are compelling reasons not to leap in just yet.

Source: Why You Should Stay Away From the Alternative Investment Market

Down in Putney, along the bank of the Thames, there’s an oldish Jag parked on a side street with a personalised number plate. Given the one time reliability reputation of Jags, it was perhaps chosen with some justification.

It reads: PE51MST.

The word fits the view prevailing on the UK economic outlook – whether you’re a central bankers, a politician or most likely amongst the majority economists call ‘consumers’. Bad news is chasing us down the street…

The Bank of England says it could be recession down the road. Inflation is going up for some time to come – north of 3%, unemployment is starting to edge up too, credit is harder to come by and costs more – in spite of the best efforts of the Bank of England, house prices are going down and house building has slumped, commercial property prices have too – by 16% since last summer says the Bank of England. Our leading banks have lost billions – Barclays announces another £1bn write down this morning – and once proudly touted government golden rules on borrowing become instead lead weights around Gordon Brown’s increasingly vulnerable neck.

Okay so we’ve had our fill of the bad news. Is there anything we can be OPT1M1ST about? Well, looking at the stock market Mr Market’s mood appears to be cautiously more positive. The FTSE 100 hit a low for the year to date on March 17 closing a little over 5,400. It’s up 15% since at a little over 6,200. MoneyWeek is bullish on Japan and the Nikkei is showing signs of recovery. It hit a four month high close today.

UK stock market sentiment as measured by Sharescope has risen since its March low though remains marginally bearish. As we’ve said, stock markets are the great expectation machines and always straining their eyes on the horizon to see what’s coming…then discounting it before it arrives.

The worst of the credit crisis is over they say but as we can see from Barclays latest £1bn write down and collapsing bank shares, it is by no means over. The FTSE 100 is marginally higher today yet RBS, a constituent of it, has slumped 14%. The bank has given up half its market value over the past year, a grim stat that causes some degree of personal financial pain to your editor. Given the bank is reported to be sounding out shareholders about the level of support for top management; it has hardly a vote of confidence.

Commodities have edged down from their highs perhaps only temporarily but no boom lasts forever. Central bankers will hope this one ends sooner rather than later and the market price mechanism will assert itself once again as the universal regulator of demand. Oil is a little down from its high at $124 and food prices are showing signs of stabilising reports the FT.

As for the Eurozone, “old Europe” – France and Germany – is leading the charge. European growth in the first quarter came in at 0.7% against consensus of 0.5% and that in spite of the drag of sluggish Med economies such as Spain and Italy.

Growth has hit its fastest pace in 12 years in Germany and surprised on the upside in France. Eurozone rates remain at 4% as inflation has bubbled up to a 3.6% high in March, easing to 3.3% in April. If he can keep that virtuous cycle going in the face of ‘cost shocks from abroad’ the European Central Bank’s Jean-Claude Trichet will be in clover.

*** News from the frontline on the ongoing creative destruction of traditional print media… Johnston Press plc, a regional newspaper publishing business with a heavy debt load, is raising £200m plus in emergency funds as ad revenue wilts under the pressure of the internet.

“Traditionally,” reports the Independent “three-quarters of its revenue comes from ad sales.” Those sales have been falling relentlessly. Last year classified ads fell over 3%, car ads more than 8% and larger display ads 4%. Ad revenue fell another 4% in January and February this year. We’ve said it before, we’ll say it again. Sooner or later someone is going to start closing newspapers.

Regards,

Rob Mackrill
The Daily Reckoning

Source: Old Europe, New Growth

While driving would have offered more freedom and the chance to crank up the CD player, I didn’t fancy paying the equivalent of $9.75 a gallon for gasoline, in addition to rental charges. So although the train was hardly cheap – £90 ($176) for the return trip from Southampton to Liverpool – it was much easier on the wallet. Particularly a wallet already getting hammered because of the awful dollar-pound exchange rate.

Yes, Britain is still in the same shape as the last time I went: Bloody expensive! But although it’s enduring several similar economic problems as the US, that hasn’t stopped a significant Anglo-American corporate merger…

Fine With 5… For Now

Having cut interest rates three times since December – from 5.75% to 5% – the Bank of England’s Monetary Policy Committee decided to hold fire this time around.

But with more bad economic data this week, many don’t expect the status quo to last long. In fact, the bankers could chop again as soon as next month. Consider this:

• The Chartered Institute for Purchasing and Supply said the British service sector grew at the slowest rate in five years in April.
• The Office for National Statistics reported that Britain’s manufacturing sector output dropped 0.5% in March – the worst performance in six months.
• The number of mortgage lending approvals has halved over the past year, leaving many homebuyers unable to get financing at an affordable price. In addition, the number of first-quarter home repossession orders shot up by 17% over Q1 2007.
• First quarter GDP growth crawled in at 0.4%, compared with the 0.6% rate over the final three months of 2007. It was the weakest quarter-over-quarter growth rate since the first quarter of 2005.

Like the Federal Reserve, the Bank of England is trying to balance poor economic data against high inflation. The current UK inflation rate is 2.5% – 0.5% higher than the government’s 2% target.

And with the British Retail Consortium reporting that food costs are up 4.7% over this time last year, British households are now spending almost one-third of their income on food and bills. One possible reason why the bank left rates unchanged is because it fears a poor inflation number next week and another cut would make it look irresponsible.

Britain Following In America’s Footsteps… And The Bankers Are Divided

Many economists agree that the UK economy is mirroring the US – and with its performance just a few quarters behind the US, the current situation could get worse.

That’s a view shared by Bank of England’s most dovish monetary policy board member, David Blanchflower, who favors low interest rates over a potential inflationary spike. He says the risk of not being more aggressive with rate cuts could send the UK economy down the same rocky path as America, triggering a sharp economic downturn.

But at least the Bank of England has one advantage. Having seen how the Fed has handled the crisis, it has a better idea of what steps to take to avoid a similar blow-up.

However, the April meeting showed the bankers are split. While six of the nine members favored the interest rate cut, two voted for no change and one (Blanchflower) wanted a larger chop to 4.75%.

While they debate, though, Britain’s stock market has actually performed well over the past few months. In fact, since the Bear Stearns mess caused global turmoil on March 17, the FTSE-100 index has risen around 800 points – as you can see on this chart.

And eager to tap into that strength, one of America’s big boys just came knocking…

The “Best Buy” For America’s Biggest Electronics Retailer

With a 20% market share, Best Buy (NYSE: BBY) is already winning the battle against the likes of Circuit City (NYSE: CC). But the world’s largest consumer electronics retailer just strengthened further by beefing up its international presence.

The firm announced on Thursday that it will spend $2.1 billion to acquire half of British mobile telecommunications company Carphone Warehouse (CPW.L). Having already worked with Carphone Warehouse for two years and bought a 2.9% stake in the firm last year, this deal will now see Best Buy add to Carphone’s existing 2,400 stores and take its large, superstore-style US shops to the UK and Europe under the Best Buy brand name in 2009.

For Best Buy, it’s a lucrative opportunity to tap into Europe’s annual $175 billion consumer electronics market. And rather than trying to crack the European retail market by itself – a move that has proved tricky for other US retailers – it’s teaming up with an already dominant, well-established company (Carphone was founded in 1989) that has the experience, expertise, and strong brand. In addition, Best Buy will take its successful Geek Squad in-home technical support team to Britain.

Moreover, with the high profit margins in the mobile phone market, the partnership will add $5 billion to Best Buy’s fiscal 2009 revenues and 5-9 cents in earnings per share.

That’s on top of the 11.4% sales jump to $40 billion in Best Buy’s last fiscal year, which produced earnings of $1.4 billion, up 2.2%. The firm also offers a $0.52 annual dividend per share (1.2% yield) to shareholders.

So what about the other side of the merger? And how are investors reacting to the deal?

Investors Are Non-Plussed Now… But This Deal Should Pay Off Later

Judging by the share price action of both Best Buy and Carphone Warehouse, you’d think it’s a bad deal. Investors have bailed on the shares over the past couple of days.

Obviously, there are risks – not least of which being the fact that consumer spending is currently slowing as inflation rises and demand for high-end electronics has cooled

But ultimately, I believe it’s actually a good move for both sides. In Carphone’s case, the firm gains access to Best Buy’s hugely successful, proven model, which should give it a healthy boost in the ultra-competitive UK telecommunications and electronics market.

But then stock markets don’t deal in the present. They are “the great expectation machine” as one author had it. They look as far ahead as they can and try to picture how it will look. Evidently, they see an improving picture later in the year. Sounds encouraging, though as with all forecasts it could prove dead wrong. Much as the Met Office produces long-range weather forecasts using the latest technology which also can go hopelessly awry. Even their short term forecasting can be a disaster for those of us who remember Michael Fish dismissing the wild notion of a hurricane one fateful evening in October ’87.

What financial markets spy in the distance and what the rest of us experience day to day are two different things, of course. Warren Buffett thinks the US recession will be longer and deeper than most expect as consumers struggle with a wealth squeeze from falling house prices coupled with higher expenses from fuel and food prices. The Fed lopped another 25 basis points off the Fed funds rate as new data reveals the US grew in the fourth quarter of last year, but not by much. US interest rates now sit at 2%, about half the rate of inflation.

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Recession is not the central forecast for most analysts of the UK economy but the signs of deterioration continue apace. Most visibly in the housing market, a powerful symbol in our home owning culture, which continues to weaken. British bank HBOS is the latest to report house prices are falling – by 3.7% over the year to April.

Easing commodity prices if sustained will be welcomed by the world’s central bankers. It takes some of the “push” out of “cost-push” inflation – where higher input costs force higher prices – and opens up more wiggle room for further easing in interest rates. The impact of relentless price increases showed up once again in the latest UK factory gate prices this week.

Manufacturers have been paying more for raw materials and charging higher prices on finished goods.Given a slowing global economy, commodity prices should ease up as aggregate demand turns down. But then there’s the elephant in the room in the shape of China. As such a sustained easing of commodity is probably a big ask, at the very least until after the closing ceremony at the Beijing Olympics this summer.

The dollar has rallied from its recent low against the euro. A euro now buys $1.54 against a recent low of $1.60. As for the pound, it buys you a satisfactory $1.98 if you’re flying west and a miserly €1.28 if you’re flying east.

Our currency of choice, gold, has had a tough week down around $90 since its mid-April high. Is it over for gold? Not in our book. The inflation-adjusted high is more than twice its current level and when central banks are done reflating the global economy, we suspect it could go a lot higher yet.

Enjoy your week-end.

Regards,

Rob Mackrill
The Daily Reckoning

Yesterday, Land of Leather, the sofa retailer, warned that sales had plunged by 32% in the 12 weeks to last Sunday compared to the same quarter in 2007. The chain is holding a 12-hour sale today, in the hope of building up some steam in the Bank Holiday weekend.

Now, the news that a sofa company is in trouble during a property sales slump doesn’t come as a surprise. Interestingly, kitchens group Howden Joinery is still doing well, with same-store sales up 5.9% year-on-year, though that may be down to desperate sellers attempting to update hard-to-shift properties.

But forget furniture. The really worrying thing is that we’ve all started cutting back on lattes…

Starbucks is no longer an affordable luxury for some people

Starbucks (NASDAQ:SBUX) has warned that UK sales are starting to turn down. Chief executive Howard Schultz, quoted in the Evening Standard, told analysts that he had seen “some early signs of softness in traffic in our UK stores… Starbucks coffee and premium coffee experience has, over time, been an affordable luxury. And at this time, it isn’t for some people.”

It looks like all those personal finance articles on budgeting – you know, the ones that point out that if you spend £2 each working day on coffee, that’s more than £40 a month – are taking their toll. And no wonder. £40 a month is just about enough to offset a decent chunk of your increased mortgage payments, if you’ve just come off a fixed rate.

Some analysts argue that the coffee industry is in some way immune to the slowdown. “When times are tough, people might stop buying designer shoes but they will still go to the shopping centre and buy a coffee,” said Jeffrey Young of market research group Allegra Strategy.

Why? Why will they still buy a coffee? There can be few things more easily substituted than a coffee from Starbucks, or Costa or wherever. For a start, you can drink coffee for pennies at home. Or you can do without it all together. People talk about the morning latte as being something almost indispensable these` days, but that’s just force of habit. It’s amazing what you can do without when your wallet makes you put your mind to it.

Coffee’s an obvious expendable item, but there are plenty of others. Fashion’s another victim. The last four weeks have been a “graveyard,” according to Bhs and Top Shop owner Sir Philip Green. As Evening Standard writer Gideon Spanier points out, those who are surviving best are the stores offering cheap and cheerful goods – Primark for example (owned by AB Foods) saw sales rise 25% in the 24 weeks to March 1st – and online retailers, such as ASOS, which recently reported sales up 80% year on year.

Even these might struggle in the coming months. As Anthony Hilton reports, the nation is “tightening its belt”. As he says, the recent hopes from bankers that they might be over the worst sound premature. But “ even if true… it looks increasingly likely that for the rest of the economy the troubles are only just beginning.”

Why markets are still too optimistic on the UK

What does this all mean? Well, as ever, I’d keep avoiding retailers and other consumer-facing stocks, even the ones that have already fallen substantially. Why? Because just as few people in the markets realised how quickly and devastatingly the property market would turn, most people are still just too optimistic on the UK economy at the moment.

It may not feel like that, with the government in turmoil and bad news headlines everywhere, but the market is still in ‘glass half-full’ mode. As the news on the economy continues to get worse, and more and more people realise this isn’t easily resolved, that attitude will gradually shift. But for just now, there are still too many ready to “buy on the dips” rather than “sell into the rallies.” So that means the most vulnerable stocks still have further to fall.

As for what you can buy in a downturn, we suggested some defensive stocks in a recent MoneyWeek cover story.

Yesterday the FTSE 100 closed unchanged on the day at 6,087.3. Housebuilders were hammered as downbeat broker comments, suggesting that Spring sales reservations have collapsed compared with last year, prompted further selling. Retailers were also under pressure on consumer spending fears. In contrast British Airways soared 7% in response to potential co-operation talks with US rivals.Euroland stock markets were closed to celebrate 1st May. Wall Street enjoyed a 1.7% rally following the previous day’s Fed rate cut, rising 190 points and breaching the 13000 barrier for the first time since early January. The broader S&P 500 also put on 1.7%, gaining almost 24 points to end the day at 1,409, while the tech-heavy Nasdaq fared even better, adding 2.8% to close at 2,481.

In Asia this morning, Japanese stocks followed the US lead, with the Nikkei 225 climbing 2% to close at 14049. In Hong Kong, the Hang Seng improved 1.9% to 26241.

Brent spot was trading this morning at $110.46, while spot gold stood at around $856. Silver was trading at $16.31.

Turning to forex, this morning sterling was trading broadly unchanged at 1.9748 against the dollar, but was appreciating against the euro, rising above 1.28 for the first time since late March. The dollar was last trading at 0.6456 against the euro and 104.75 against the Japanese yen.

Until Monday,

John Stepek

Deputy Editor, MoneyWeek

http://www.moneyweek.com/file/46443/things-are-getting-really-bad–latte-sales-are-down.html

At midday in New York, the blue-chip Dow Jones Industrial Average Index was down 76.86 points (-0.60%), to trade at 12,748.16. The tech-laden Nasdaq Composite Index shed 17.41 points (-0.72%), to reach 2,390.63. And the broader Standard & Poor’s 500 Index decreased 8.41 points (-0.61%), to hit 1,379.76.

Most sectors were down, with the energy sector (up 0.43%) and the basic materials sector (up 0.08%) posting the only gains. The consumer cyclical sector (down 1.75%) and the technology sector (down 1.12%) had the largest declines.

“Earnings and earnings estimates are coming down,” Mike Ryan, the New York-based head of wealth management research for the Americas at UBS Financial Services Inc., which oversees about $734 billion, said in an interview on Bloomberg Television. “We’re likely to see stocks continuing to be under pressure” in the first half of 2008.

Despite a 24% increase in profit, McDonald’s Corp. (MCD) slumped after it announced a slight decrease in same-store sales for March.

Shares of UnitedHealth Group Inc. (UNH) and Texas Instruments Inc. (TXN) were also down sharply after announcing first quarter results.

In overseas markets earlier today, Japan’s Nikkei 225 Index lost 1.1% with a decrease of 148.73 points to close at 13,547.82. Hong Kong’s blue-chip Hang Seng Index gained almost 1% with a 217.48-point climb, to 24,939.15.

European bourses were down, with the Paris-based CAC40, London’s FTSE 100, Madrid’s IBEX 35 and the Frankfurt-based DAX all posting losses.

At midday, the dollar had lost ground against the euro (down 0.457%) and the pound sterling (down 0.812%), but gained ground against the yen (up 0.204%).

At midday in New York, the blue-chip Dow Jones Industrial Average Index was down 40.87 points (-0.32%), to trade at 12,578.40. The tech-laden Nasdaq Composite Index dropped 20.58 points (-0.88%), to reach 2,329.53. And the broader Standard & Poor’s 500 Index decreased 6.31 points (-0.46%), to hit 1,358.40.

Most sectors were down, with the transportation sector (down 1.31%) posting the largest decline.

“Analysts are expecting a pretty dour earnings season, and so are portfolio managers,” Charles Reinhard, director of portfolio strategy at Neuberger Berman, a unit of Lehman Brothers Holdings Inc. (LEH) that manages $129 billion, said in a Bloomberg Television interview. “The market is discounting a lot.”

Pharmaceutical firm Pfizer Inc. (PFE) dropped after announcing a 19% drop in first quarter profits as generic drugs continue to take a hit on the drug giant’s bottom line.

But blue-chip technology stock, International Business Machines Corp. (IBM), gained after the Dow component announced a 26% increase in first quarter profit, beating analyst estimates, and boosted its outlook for full-year 2008.

“IBM beat revenue and earnings expectations substantially with strength across the board,” American Technology Research Analyst Shaw Wu told MarketWatch. “We find this quite impressive in light of the tough economic environment.”

In overseas markets earlier today, Japan’s Nikkei 225 Index gained 1.9% with an increase of 252.17 points to close at 13,398.30. Hong Kong’s blue-chip Hang Seng Index rose 1.6% with a 380.61-point increase, to close at 24,258.96.

In Europe, most major bourses were down, with London’s FTSE 100, Madrid’s IBEX 35 and the Frankfurt-based DAX all posting losses. Only the Paris-based CAC40 managed to eke out a slight 7.04-point gain.

At midday, the dollar had gained ground against the euro (up 0.251%) and the yen (up 0.778%), but lost ground against the pound sterling (down 0.811%).

“On Friday, we had the bad surprise from [General Electric Co. (GE)],” Ken Tower, chief market strategist at Covered Bridge Tactical, told MarketWatch. “But this week, we’re seeing investors pleasantly surprised that earnings overall are not as bad, supporting the view of a shallow economic decline instead of a more severe one.”

At midday in New York, the blue-chip Dow Jones Industrial Average Index was up 179.37 points (1.45%), to trade at 12,541.84. The tech-laden Nasdaq Composite Index gained 48.43 points (2.12%), to reach 2,334.47. And the broader Standard & Poor’s 500 Index increased 18.68 points (1.40%), to hit 1,353.11.

All sectors were up, with the basic materials sector (up 3.02%) and the technology sector (up 2.55%) posting the largest gains.

Intel Corp. (INTC) shares got a boost from strong first quarter sales results in Asia and Europe. Sales increased 9.3% to $9.67 billion, beating analyst estimates.

“These big market-share multinationals are still benefiting from economic growth outside the U.S.,” Keith Wirtz, Cincinnati-based chief investment officer at Fifth Third Asset Management, told Bloomberg News. “It tells me conditions are not all that bad on a global basis.”

March industrial production also rose slightly for the month with a 0.3% increase.

“The manufacturing sector may not be expanding but it is not contracting either, which is good news,” Joel Naroff, president and chief economist of Naroff Economic Advisors, said in a note to clients today.

In overseas markets, Japan’s Nikkei 225 Index gained 1.2% with an increase of 155.55 points to close at 13,146.13. Hong Kong’s blue-chip Hang Seng Index was relatively flat with a 22.98-point drop, to close at 23,878.35.

The FTSEurofirst 300 index of top European shares gained 1.6%. Other major European bourses were up, with the Paris-based CAC40, London’s FTSE 100, Madrid’s IBEX 35 and the Frankfurt-based DAX all posting gains.

At midday, the dollar had lost ground against the euro (down 1.072%), the yen (down 0.010%) and the pound sterling (down 0.785%).

At midday in New York, the blue-chip Dow Jones Industrial Average Index was down 25.57 points (-0.21%), to trade at 12,276.49. The tech-laden Nasdaq Composite Index dropped 6.65 points (-0.29%), to reach 2,269.17. And the broader Standard & Poor’s 500 Index decreased 3.31 points (-0.25%), to hit 1,325.01.

The basic materials sector (up 0.87%) and the conglomerates sector (up 0.61%) posted the biggest gains, while the capital goods sector (down 0.42%) and the technology sector (down 0.49%) posted the largest declines.

“The market is digesting the whole banking and financial issues, but the market has still to digest the recession story and how much of a damage to earnings we’ll get,” Owen Fitzpatrick, head of the U.S. equity group at Deutsche Bank AG (DB), told MarketWatch.

Tech shares such as Dow-component International Business Machines Corp. (IBM) and Cisco Systems Inc. (CSCO) were down. Intel Corp.’s (INTC) earnings release is slated for after the market the closes this evening.

Oil futures traded near $114 a barrel, boosting energy stocks such as Exxon Mobil Corp. (XOM) and Chevron Corp. (CVX).

In overseas markets early today, Japan’s Nikkei 225 Index gained 0.6% with an increase of 73.07 points to close at 12,990.58. Hong Kong’s blue-chip Hang Seng Index inched up 0.4% with a 90.13-point gain, to close at 23,901.33.

European bourses were up, with the Paris-based CAC40, London’s FTSE 100, Madrid’s IBEX 35 and the Frankfurt-based DAX all posting slight gains.

At midday, the dollar had gained ground against the yen (up 0.486%) and the pound sterling (up 0.540%), but lost ground against the euro (down 0.051%).