1st Quarter Earnings: What Have We Learned?
Posted by Larry Doyle on April 22, 2009 5:45 PM |
As we work our way through the 1st quarter earnings reports, what have we learned?
1. Earnings for certain tech companies (Google, E-Bay, Apple, Qualcomm) have beat expectations. The fact that these companies have large cash positions and are not overly burdened with debt has benefitted them.
2. Major money center bank (Citi, BofA, JP Morgan, Wells Fargo) earnings looked good on the surface but there remain real questions about the quality and transparency of the numbers. The Bank Stress Tests hang over this sector. Independent analysis indicates that banks in general are lending less as credit writedowns continue to increase. The earnings in these banks are focused more on trading activities and mortgage refinancing while core consumer banking is quite weak. The strength in trading and refinancing is directly linked to government supported actions (related to AIG, Fed purchases of mortgage and government securities). Many analysts question whether the earnings from trading are repeatable while core banking activity is a drag.
3. Earnings for regional banks (KeyCorp, First Horizon, Bank of New York, Suntrust, Regions) and banks without sizable trading businesses are weak across the board. Credit chargeoffs on existing loans (credit cards, residential, commercial mortgages, corporate loans) continue to move higher and limited demand for new credit are hurting these institutions.
4. Industrial and consumer product companies have had very mixed earnings. While a few companies have actually outperformed expectations on an earnings per share basis, almost universally these companies have only performed due to cost cuts and expense reductions. Revenues for most of these companies have disappointed. Expense reductions are typically viewed as a one time event and not recurring so without growth in revenue a number of these stocks have sold off. Stocks in this camp are companies such as Caterpillar, Schering-Plough, Coke, Merck, and Dupont.
The WSJ reports Late Dive Upends Stocks:
Traders and analysts say the market remains on shaky ground, with participants unwilling to hold positions for very long because of the lingering effects of the global recession.
“As I look at my handheld (trading device), all I’m seeing is small orders,” said Alan Valdes, a trader for the brokerage Hilliard Lyons on the floor of the New York Stock Exchange. “That tells you there’s still no conviction in this market.”
Many analysts view the high percentage of cash held by investors as fuel to drive the market higher. However, that cash has been built as a cushion due to concerns about job security. With expectations that the unemployment rate is headed to at least 10% (if not higher), I do not expect to see this cash put to work in the market.
The fact is the real juice to drive the market higher comes from the availability and flow of credit in all parts of the economy.
Please recall that the shadow banking system (credit derived from the capital markets) had represented approximately 40% of the total flow of credit. With those lines still heavily blocked, especially in the securitized markets (consumer finance, commercial mortgages, residential mortgages), the economy is adjusting to operating in an environment with less upside growth potential.
So what have we learned? There are a few rays of sunshine emanating from tech but there are major major crosscurrents and headwinds in almost every other sector of the economy. I still believe the best course of action is to remain in a safe harbor.