Some Company Earnings Were Hot, Some Were Not

07/19/10 — Earnings season started with a bang following strong reports from Intel Corporation (NASDAQ/INTC), CSX Corporation (NYSE/CSX), JPMorgan Chase & Co (NYSE/JPM), and Advanced Micro Devices, Inc. (NYSE/AMD).

But, wait, maybe all is not as rosy as we thought earlier last week. In the first miscue of the earnings season, search engine giant Google Inc. (NASDAQ/GOOG) came up short on the earnings side despite a positive 24% year-over-year rise in revenues. Revenues were slightly ahead of estimates. The decline is not that bad given that it could be much worse. The shortfall may be Google-specific and impacted by stagnant advertising.

Bellwether General Electric Company. (NYSE/GE) reported its first profits since 2007. Yet, a four percent year-over-year decline in revenues represents a red flag in my view, since GE is widely considered a barometer for the economy due to its diversified businesses, such as industrial, medical and energy.

Moving over to banking, The Goldman Sachs Group, Inc. (NYSE/GS) was fined a massive 550 million dollars for its questionable and unethical dealings in the subprime meltdown. The
Bank of America Corporation (NYSE/BAC) and Citigroup Inc. (NYSE/C) reported mixed results and indicated that there were still problems with lackluster loan demand. A plus is a decline in loan losses, indicating that borrowers are able to better pay back loans. The financial sector is looking for leadership to help drive any upward moves.

So far, early on, I am encouraged by some of the results, specifically the key revenue growth. Yet the stagnant economy is halting any sustainable upside gains for the time being.

On the economic front, inflation remains benign, with the June PPI declining 0.5%, which supports the low-rate environment.

In housing, estimates call for about one million foreclosed homes this year, according to RealtyTrac. Again, not encouraging news for a sector that continues to be distressed, which poses problems for consumer spending and GDP growth. There are concerns of potential
slowing in the second half, after Retail Sales fell a worse than expected 0.5% in June, the second straight monthly decline. The demand for loans for mortgages fell to a 13-week low, according to the Mortgage Bankers Association. The decline in loans is despite rates for mortgages being at a record low, so clearly there continues to be an issue in housing, which is not unexpected given the soft jobs market. Continuing claims rose for the recent week.

So, here you have a battle in the market, with everyone trying to digest the economic and earnings results. Of course, the next several weeks of earnings to come could make it clearer.

The fear now is that the economy may slow in the second half, with the possibility of a double-dip recession, albeit I do not expect this will happen unless jobs and housing tank.

Technically, the extreme overbought condition in stocks makes the market vulnerable to any major negative news, and we are seeing some of this now.