Posts Tagged ‘corporate earnings’
Earlier this month, Jeremy Siegal, a well-known “bull” on CNBC, took to the airwaves to predict the Dow Jones Industrial Average would go beyond 18,000 by the end of this year. Acknowledging overpriced valuations on the key stock indices are being ignored, he argued historical valuations should be taken with a grain of salt and nothing more. (Source: CNBC, July 2, 2014.)
Sadly, it’s not only Jeremy Siegal who has this point of view. Many other stock advisors who were previously bearish have thrown in the towel and turned bullish towards key stock indices—regardless of what the historical stock market valuation tools are saying.
We are getting to the point where today’s mentality about key stock indices—the sheer bullish belief stocks will only move higher—has surpassed the optimism that was prevalent in the stock market in 2007, before stocks crashed.
At the very core, when you pull away the stock buyback programs and the Fed’s tapering of the money supply and interest rates, there is one main factor that drives key stock indices higher or lower: corporate earnings. So, for key stock indices to continue to make new highs, corporate profits need to rise.
But there are two blatant threats to companies in the key stock indices and the profits they generate.
First, the U.S. economy is very, very weak. While we saw negative gross domestic product (GDP) growth in the first quarter of this year, the International Monetary Fund (IMF) just downgraded its U.S. economic projection. The IMF now expects the U.S. economy to grow by just 1.7% in 2014. (Source: International Monetary Fund, July 24, 2014.) One more … Read More
The earnings are beginning to flow and it’s a total mixed bag out there again.
Carnival Corporation (CCL) beat the Street with its second-quarter numbers, with cruise line sales growing four percent over the second quarter of 2013.
Guidance, however, was mediocre and the position sold off on its earnings results.
Walgreen Co. (WAG) has been very strong on the stock market over the last 12 months. The drugstore chain produced a six-percent gain in sales to $19.4 billion, and a 16% gain in earnings to $722 million.
But the company is getting squeezed both by health insurers and pharmaceutical manufacturers, so its business model is getting pressured.
Walgreen is considering reincorporating overseas to reduce its tax burden, but it won’t have details on any potential plan until later in the summer. The stock went up on the news.
Second-quarter earnings results were actually a bit better than expected and once we get into blue chip numbers, I think the market will be a bit more appeased.
It is important to remember where stocks are coming from. It’s been an exceptionally good last few years for equities; 2013 was outstanding.
The first quarter was a tough one, both due to the weather and general business cycle conditions. The market isn’t expecting second-quarter numbers to be strong, and that goes for both gross domestic product (GDP) and corporate earnings.
All that corporations have to do is meet or beat on one financial metric and either affirm or improve existing full-year guidance. With this backdrop, institutional investors will keep buying.
Monsanto Company (MON) soared to a record 52-week high after releasing a … Read More
Oracle Corp. (ORCL) reports on Thursday and it’s one of the first large corporations to do so this reporting season. Second-quarter earnings season is just about here, and it’s exactly what the stock market needs now.
The lull between earning seasons can make for some wacky trading action. Often trading volume diminishes and from a business perspective, what you want from a company you’re thinking about investing in (or divesting) is its most recent numbers.
I thought that first-quarter earnings season was pretty decent, and I think companies will surprise the marketplace again for the second quarter.
A couple of trends that emerged in the first quarter was that European operations of large multinationals showed improvement comparatively, and that’s important for these super big companies that do business in developed markets.
The other trend was that currency instability held back corporate earnings. In many cases I read reports where the bottom-line would’ve been one to three percent higher if it weren’t for major devaluations in developing economies with large populations. Of course, this is an ongoing investment risk that any multinational is going to face and as an investor, there really isn’t anything you can do about it.
It will be worthwhile perusing Oracle’s upcoming earnings report; it’s the company’s fourth fiscal quarter of 2014.
Oracle is a company that I’ve liked for a number of years as an investment-grade equity security for long-term investors. But the business does experience periods of stagnant growth. (See “Another Earnings Season Suggests Another Quarter of Slow Growth Ahead.”)
I was enthusiastic about this position early last year as a long-term cycle … Read More
Don’t buy into the notion that there’s economic growth in America!
We’ve already seen U.S. gross domestic product (GDP) “unexpectedly” decline in the first quarter of 2014, and now there are signs of another contraction in the current quarter. (The technical definition of a recession is two negative quarters of GDP—we’re halfway there!)
As you know, consumer spending is the biggest part of our U.S. economy, accounting for about two-thirds of our GDP. And consumers are pulling back.
Consumer spending in the U.S. economy declined 0.26% in April from March. This was the first monthly decline since December of 2013. (Source: Federal Reserve Bank of St. Louis web site, last accessed June 4, 2014.)
And while consumer spending is one indicator that suggests a recession may soon be coming into play in the U.S. economy, there’s also one very interesting phenomenon occurring that suggests the very same.
The Federal Reserve is serious about pulling back on its quantitative easing program. And in anticipation of the Fed pulling back on money printing (when it first indicated it would start tapering), the yields on bonds shot up.
But since 2014 began, and the Federal Reserve actually started to taper, the yield on the long-term 30-year U.S. bond has declined more than 12%.
Chart courtesy of www.StockCharts.com
If the Fed is pulling back on printing (it has said it wants to be out of the money printing business by the end of this year), why are bond yields declining?
From a fundamental point of view, it suggests the market anticipates very slow growth for the U.S. economy ahead.
Dear reader, the perfect … Read More
With the Dow Jones hitting 17,000 being pretty likely in the not-too-distant future, from there, it’s only another 18% or so until the Dow hits 20,000, which is pretty incredible.
These numbers seemed so unrealistic just a few years ago but now, it’s not too farfetched. The most amazing thing to me is that stocks still haven’t experienced a material price correction since the financial crisis.
Stocks aren’t necessarily stretched in terms of valuation, especially with corporate earnings outlooks holding up for this year and going into 2015. What is stretched is investor determination with a market at its high.
Johnson & Johnson (JNJ) is a great company and a worthy long-term investment (see “Three Blue Chips Set to Drive Higher”), but it’s tough to buy stocks at all-time record-highs. In Johnson & Johnson’s case, the position’s up almost 20 points since the beginning of February, and this is on top of a previous 20-point gain in 2013.
One of these days, stocks are going to get walloped. But there’s got to be some sort of catalyst for it to happen.
The Federal Reserve can be a catalyst if it decides to suddenly change its outlook for interest rate certainty. The catalyst could also be a geopolitical event or something that comes out of nowhere, like a big derivatives trade gone bad.
In any event, there will have to be a shock that is perceived to have a lasting effect on capital markets.
In the lull between earnings seasons, which we’re currently experiencing, stocks reaccelerated on the back of very modest economic news and that in itself is … Read More
There’s one long-term investing adage that has shown a great amount of success over the years: buy when everyone is fearful and sell when optimism is over the top. This theory worked extremely well when key stock indices fell to their lowest levels. It worked in 1987, in 2000, and then in 2009—three of the greatest times to buy stocks in history.
With this in mind, take a look at the long-term chart of the Chicago Board Options Exchange (CBOE) Volatility Index (VIX) below. This index is often referred to as the “fear index” for key stock indices, since it is a gauge/measure of how fearful investors are about the stock market declining. The higher the index goes, the more fear in the market; the lower the index goes, the more optimism in the market.
Chart courtesy of www.StockCharts.com
The VIX clearly shows investor concern about key stock indices declining, sitting close to the same point it was at back in 2007—just a few months before stocks started to collapse.
Aside from the VIX flashing red…there are two other key stock market indicators in the trouble zone.
According to the CNBC Market Insider Activity, insiders of companies on the key stock indices continue to sell billions of dollars worth of stock monthly. The sell-to-buy ratio—that is how many shares they sold compared to how many they bought—was 10 to 1 in May, meaning they sold 10 shares for every one share bought. (Source: CNBC Market Insider Activity, last accessed May 27, 2014.) Corporate insiders have been selling their shares at an accelerated pace for some time now.
And corporate earnings … Read More
In the first quarter of 2014, Retail Metrics, a retail industry research firm, found U.S. retailers missed their corporate earnings estimates by the most since the year 2000!
As I have been writing, consumer spending only increases when consumer confidence is rising. Unfortunately, in the U.S. economy today, that confidence is plummeting.
Last month, the Thomson Reuters/University of Michigan’s consumer sentiment index declined three percent from a month earlier. It was 84.1 in April, and it declined to 81.8 in May. (Source: Reuters, May 16, 2014.)
But consumer confidence is just one leading indicator that suggests consumer spending will decline in the U.S. economy; the unemployment situation and wages suggest the same.
The worst kept secret on Wall Street is that the big U.S. retailers are in trouble. While stocks, in general, have held their own this year (up about one percent so far in 2014), the stock prices of retail stores have fallen sharply. The chart below is of the Dow Jones U.S. General Retailers Index. The chart clearly shows the stock price of big U.S. retailers are falling quickly, down more than seven percent in the first five months of this year.
Chart courtesy of www.StockCharts.com
The story that consumer spending suffered in the first quarter of this year because of bad weather doesn’t sit well with me—I simply don’t buy it. The U.S. economy contracted one percent in the first quarter of 2014, the first time our economy has experienced an “official” contraction since the first quarter of 2011 for the simple reason that consumers are tapped out; their incomes are not keeping up with inflation.
All … Read More
Yesterday was an amazing day for the markets.
Gold bullion hit a three-month low despite: 1) inflation rising rapidly in North America; and 2) the Chinese buying half of this year’s world gold production.
The stock market was up to a new high despite: 1) corporate insiders selling like mad; 2) corporate earnings growth collapsing; 3) the amount of money investors have borrowed to buy stocks standing at a record high; and 4) the economy stinking.
In the words of Robert Appel, my esteemed colleague, the following best describes what is happening with the markets:
“Time to take those ruby slippers out of the closet because we are definitely on our way to the ‘Wizard of Oz’ show once again. There is a view that the government and its ‘special contractor’ (the Fed) have things under control and we are now at the beginning of the biggest stock bull in history. We don’t buy that theory for a minute but we do acknowledge it exists.
“Those opposing this view—an ever-declining number—suggest that if inflation were defined as it was when the greatest economic minds of our age were still alive—the U.S. economy would be in big trouble. The recent corporate earnings wipeout in the retail sector was one of the most under-reported financial stories of the year.
“Interestingly (this is too bizarre to make up) the only major upside surprise in the retail sector in respect to first quarter earnings reports was Tiffany’s…where they can barely keep up with demand. No surprise for our readers as the ‘gap’ between rich and poor under QE [quantitative easing] has only intensified. QE … Read More
When we asked our readers what they enjoy reading the most on Profit Confidential, less than 10% of them said they like to read about the eurozone. We understand it’s not a topic of interest with the majority of our readers, but I can’t stress enough that what’s happening in the eurozone right now is very critical to the U.S. economy.
American-based companies have massive operations in the eurozone and generate significant portions of their sales from the region. American companies are already struggling to post revenue gains in 2014. If the economic slowdown in the eurozone continues, American companies’ revenues will be pressured further, and that means lower corporate earnings.
While giving its 2014 outlook during it first-quarter earnings release, Caterpillar Inc. (NYSE/CAT) said, “The Eurozone economy is recovering but is far from healthy. The ongoing decline in business lending, slowing inflation and recent strengthening in the euro are all concerns. The unwillingness of the ECB to take more aggressive actions risks leaving the economy struggling for years. Continued weak growth would make it difficult for businesses to maintain existing operations, let alone make new investments.” (Source: “Caterpillar Reports Higher First-Quarter Profit Per Share and Raises its 2014 Profit Outlook,” Caterpillar Inc. web site, April 24, 2014.)
But when you listen to the mainstream media, they are saying the opposite of Caterpillar; they are saying the economic slowdown in the eurozone is over. I think they are completely wrong.
And the situation with “bad debt”—the reason the eurozone got into trouble in the first place—is getting worse, not better, as debt-infested countries like Spain and Italy are … Read More
If you want to see what happens when irrationality over a stock comes to an end, check out this chart of Amazon.com, Inc. (NASDAQ/AMZN).
In 2013, Amazon.com stock went up 63%. So far this year, the stock has collapsed 25% as investors realize converting growing revenues into corporate earnings for Internet-based stocks on key stock indices is not an easy task.
Mind you, Amazon.com isn’t the only tech stock on the key stock indices that is getting hit. Other tech stocks are under pressure, too, as evidenced by the NASDAQ being down for the year.
But despite stocks being overvalued—and some very big-name Internet stocks on the key stock indices coming down in price—investors continue to buy.
In the first three months of this year, the long-term stock mutual funds saw inflows of $54.13 billion. (Source: “Historical Flow Data,” Investment Company Institute web site, last accessed May 12, 2014.) April’s monthly figures aren’t available just yet, but from weekly data, we estimate another $10.0 billion worth of long-term stock mutual funds were bought in April.
And they are buying stocks with borrowed money. As of March, margin debt on the New York Stock Exchange (NYSE) stood at a record $450.2 billion, up 19% from March of 2013. (Source: New York Stock Exchange web site, last accessed May 12, 2014.)
But this is what I find most interesting…
Even though investors have borrowed more money than any other time in history to buy stocks, most key stock indices are flat for the year. Among the key stock indices, the Dow Jones Industrial Average is up marginally, while … Read More
Did you see this story in the Wall Street Journal last Friday?
“Retirement investors are putting more money into stocks than they have since markets were slammed by the financial crisis six years ago… Stocks accounted for 67% of employees’ new contributions into retirement portfolios in March… That is the highest percentage since March 2008…” (Source: Wall Street Journal, May 2, 2014.)
You read that right. With stocks at a record-high (and valuations stretched), retirees are pouring back into stocks. Are they getting ready to get slaughtered again? I believe so.
If you are a long-term reader of Profit Confidential, you know my take: the “bear” has done a masterful job at convincing investors the economy has recovered and the stock market is a safe place to invest again. Meanwhile, nothing could be further from the truth.
We are living the slowest post-recession recovery on record. And that recovery has been manipulated by the tampering of the Federal Reserve. You see, the Federal Reserve played a key role in driving the key stock indices higher. In 2009, in the midst of a financial crisis, the central bank started printing money and buying bonds. This resulted in lower bond yields. Those who had money in bonds, who had essentially paid nothing, moved into stocks.
And those record-low interest rates enabled companies in the key stock indices to borrow money and issue new equity, using the money to buy their own stock, thus pushing up per-share corporate earnings.
The end result? 2013 was a banner year for stocks on the key stock indices. But as 2014 came around, we began … Read More
It’s frustrating each morning to hear the anchors on the financial news channels say key stock indices are poised to open higher when you know the fundamentals are tormented…but it goes on day after day, week after week, month after month.
Dear reader, if there is one old adage I’d like to stress, it is this one by famed economist John Maynard Keynes: “Markets can remain irrational longer than you can remain solvent.”
Irrationality eventually ends, and when market participants are faced with reality, they panic and run for the exit. We have seen this phenomenon occur every single time key stock indices have gotten overvalued. In my life, I saw it in the years 1987, 2000, and 2007, and I believe we are seeing it again today.
Keep in mind that the further the markets soar on speculation, the harder they fall; the higher key stock indices go, the uglier the market sell-off that follows.
In today’s market, it’s not just stock advisors who are being irrational. The companies on key stock indices are doing their part as well to give the illusion that all is well, that their high stock prices are justified.
In 2012 and 2013, we saw public companies in key stock indices use “financial engineering” to make their corporate earnings per share look better. In specific, public companies undertook record stock buybacks in both years. Then we saw them cutting their expenses via workforce reductions. Mind you, they are still buying back their shares and cost-cutting to push up per-share earnings because revenue growth just isn’t there.
But now they have found another way to … Read More
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