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Macro View

I think you’ll all agree that the earnings season thus far has been less than stellar.  In fact, as Sheraz noted earlier in the week; average earnings are down year over year. 

What’s even more odd is that some companies like Intel (INTC - Analyst Report) are warning about future performance and yet traders are still buying.  It had one of its best days of the past year on Wednesday. General Electric (GE - Analyst Report) reported a Q2 profit of $3.1 billion, or 29 cents a share, which was down from $3.8 billion, or 35 cents a share a year earlier and yet the stock is climbing this morning. Microsoft Corp. (MSFT - Analyst Report) came in with a fiscal fourth-quarter loss of $492 million (6 cents a share) and  revenue of $18.06 billion, compared with a profit of $5.9 billion, or 69 cents a share or $17.37 billion in the same period a year ago. The software company took a major write-down in its online services business which caused the loss.  Microsoft would have earned roughly 73 cents without that charge.  Still and yet, it’s certainly not the strongest gain for MSFT and yet shares are rising this morning. Of course, there are stocks that are beating estimates and subsequently moving lower, but the general theme is that earnings are “not that bad” and so investors are buying on average. At first glance this early in the earnings season I see three trends happening; let me know if you agree:
  1. Investors are favoring bigger, perhaps dividend yielding names that they are familiar with and almost ignoring the weakening earnings trends.
  2. Besides equities and perhaps high yield bonds, investors have nowhere to turn to even keep up with inflation.  Money markets are in the toilet and about to get another flush from the Fed if they remove the 25 basis point free interest ride that U.S. banks are enjoying on their excess capital.
  3. U.S. Based companies with minimal exposure to global economic trends and technology are also in favor on average.  As bad as things are here, they are better than most of the developed world.
Frankly I think investors are being too optimistic, although I wouldn’t be fair if I didn’t say that earnings have not been the bloodbath I thought they might be.  We must not forget though that earnings are a reflection of what HAS happened, not a statement of what WILL happen...

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