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Making Sense of Second-Quarter Corporate Earnings So Far

Companies / Corporate Earnings Jul 21, 2009 - 03:45 AM GMT

By: Money_and_Markets


Best Financial Markets Analysis ArticleNilus Mattive writes: As a stock guy, I keep a close eye on earnings releases … not just on the companies that I follow for Dividend Superstars, but across all sectors and industries.

That’s because earnings results are an important yardstick for sizing up the overall health of the stock markets and the underlying economy.

And equally important is the market’s reaction to the earnings reports coming out.

What I’m finding this quarter is that my reactions are not typically matching up with those of other investors.

Let’s start with what seems to be the biggest news …

Many Financial Firms Are Beating Estimates

The market has been cheering the news coming from our nation’s financial firms.

Indeed, the recent stock market rally was sparked by news that Goldman Sachs handily beat analysts’ profit estimates. And the party continued as JPMorgan Chase, Bank of America, Citigroup, and other institutions posted similarly upbeat reports.

A quick rundown of the headline highlights:

  • Goldman Sachs reported second-quarter earnings of $3.44 billion, the largest quarterly profit in its history as a publicly traded company
  • JPMorgan Chase earned $2.7 billion, 36 percent more than it made in the same quarter a year earlier
  • Bank of America’s net income fell 5.5 percent from a year earlier, but the company still raked in $3.22 billion
  • And Citigroup said its earnings came in at $4.2 billion, higher than many expected

But, wait a minute.

Aren’t these the same firms that were receiving billions and billions of our tax dollars just to (supposedly) stay afloat a couple months ago?

Um, yes.

And what have American taxpayers gotten in return?

That’s not exactly clear to me.

Goldman Sachs Group

Sure, Goldman has already repaid the $10 billion it borrowed directly from Uncle Sam. That’s probably just so it can hand out huge bonuses again this year.

Meanwhile, can anyone tell me how much more of our money is still being used by the company to rack up record profits? For example, what about the $12 billion we gave them on account of their dealings with AIG?

Investors don’t seem to care about such trivialities. They’re just cheering the news and move the stocks higher.

S&P 500 Index

Here are a few more things I’m thinking about the financial earnings hoopla:

First, as I already said, they are largely based on government handouts used for big trading profits during self-inflicted volatility.

Something stinks here and I’m not ready to call this a true recovery for the sector.

Second, not all financial companies are smelling like roses. Consider the fact that CIT — a major small business lender — just barely cleared a deal to keep itself out of bankruptcy.

Third, most banks beat estimates because their trading units were big winners. But take a closer look at what’s happening in other parts of their businesses …

Goldman is still wrestling with a losing commercial real estate loan portfolio and slow investment banking operations.

Meanwhile, JPM, BAC, and C are seeing deteriorating conditions in their consumer loan portfolios.

And with new legislation on the horizon — including the credit card reforms, possible caps on executive compensation, and other major initiatives — it’s hard to picture financial companies having smooth sailing from here on out.

Meanwhile …

Other Earnings Reports Have Also Been Typically Better Than Expected, But Here’s a Word of Warning

So far, about two-thirds of the companies that have reported earnings have beaten analysts’ expectations.

That’s fairly positive news for stocks, even if the expectations were already rather low.

But I have also seen some pitiful reports, particularly from some of the areas I’ve been warning you about in recent columns.

Harley-Davidson is the perfect example. Second-quarter profits fell 91 percent and the company is now laying off another 1,000 employees (11 percent of its workforce).

As I’ve been saying, consumers are changing their behavior. Credit is unavailable. And companies that produce frivolities are going to suffer the consequences.

Other examples of this same basic trend include Marriott, which said earnings dropped 76 percent as people travelled less and purchased fewer vacation timeshares, and Regency Centers, a shopping center real estate investment trust. The latter lowered its guidance for both the second-quarter and the full year.

As you can see, a consumer retrenchment is happening here. And in my opinion, that is an even bigger story than the individual earnings reports or big profits from Wall Street firms.

It’s going to dictate how quickly (or slowly) our economy turns around, and it has major implications for all the stocks in your portfolio.

So I suggest you pay attention to not just the earnings releases, but also the larger trends behind the numbers. The investing landscape is always changing, and some of these big-picture forces are going to affect your portfolio for years, not just the next few days or weeks.

Best wishes,


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