10/21/09   Earnings Great, Revenues…Not So Much

Editor’s Corner

Edge Chart 10/21/09

Earnings Great, Revenues…Not So Much

Ron Rowland

The Dow Jones Industrial Average has bounced back and forth across the 10,000 line since closing above it a week ago. The up days have been due to generally good quarterly earnings and a falling U.S. Dollar. The bad days have been due to some big name misses. Today it was a downgrade of Wells Fargo (WFC) and news that the “Pay Czar” was cutting compensation by 50% at seven large firms that caused the late-day decline in stock prices. Energy has been particularly strong the last few days, reminding us of those halcyon days back in 2006-2007. With crude oil prices rising, we may get to do more reminiscing soon.

So far this earnings season, more than 70% of the S&P 500 companies reporting managed to beat profit expectations. Whether this is because the companies were especially successful or because analysts were unduly pessimistic is not entirely clear. Revenues have been less impressive than profitability, which suggests that earnings are still being propped up by cost-cutting and inventory liquidation. Consumer spending is still very weak and seems likely to remain so. The credit-fueled consumption spending that boosted the economy in the last decade is not coming back any time soon. Companies will spend the next few years adjusting to this new reality.

Since last week we criticized JPMorgan Chase (JPM) for its great success, it is only fair that we point out the earnings miss at Bank of America (BAC). The split among major banks into winners and losers is becoming more apparent. JPM, Goldman Sachs (GS), and Morgan Stanley (MS) are all winners. Citigroup (C) and BAC are on the losing end, and they will likely remain wards of the state for years. Given that Washington is at the very least heavily influenced (and some would say controlled) by the leading banks, what is really happening is that the winners are using the government to destroy their competitors. The unwinding of Citi and BAC, along with the liquidation of Bear Stearns and Lehman Brothers, leaves the other group of banks in an enviable position for the moment. They are too big to fail and getting bigger every day.

Bond yields have been consolidating, with the ten-year Treasury rate ranging between roughly 3.30% and 3.48% for over a week now. This has not prevented the dollar from continuing its downtrend. Other nations are starting to react against the resulting strength in their own currencies. Brazil, for example, imposed a new 2% tax on foreign stock and bond investments in an attempt to rein in the climbing Real. Commodity prices are also rising in dollar terms, though analysts disagree as to whether this is a cause or an effect of the dollar move. Crude oil climbed over the $80 mark, and gold is holding its breakout above $1,000.


As our momentum chart shows, Materials managed to hang on to the top sector spot but Energy is close behind. Energy was the fastest climber for the second week in a row, having been in seventh place only two weeks ago. All segments of the energy sector are on fire: integrated, exploration, production, services, and crude oil itself. Financials fell from #2 to #6 as one of only two sectors to lose momentum in the last week. The other was Telecom, which has now replaced Utilities in last place.


The Style categories continue to compress, which means relative rankings can shift dramatically without much actual significance. With that caveat, we will note that Mid Caps continue to hold the top three spots while the Large Cap categories are starting to overtake Small Caps. The two size extremes – Micro and Mega – are curiously both lumped together at the bottom of the list.


There was no change in the upper tier of our Global rankings. Latin America, Pacific Ex-Japan, and Emerging Markets are still on top. The EU stayed in fourth place helped by the strong Euro. Canada held its relative place but lost some absolute strength as energy and materials gains could not overcome weakness in the Canadian Dollar. The UK moved ahead of China and the USA as even the much-maligned British Pound gained strength vs. the greenback. Japan separated itself even further from the pack and now owns the bottom of the list with no real competition. As weak as the U.S. Dollar is, the Yen is even weaker.


The charts above depict both the relative strength and absolute strength of various market sectors, styles, and geographic locations on an intermediate-term basis. Each grouping is sorted (top to bottom) by relative strength. The magnitude of the displayed RSM value is a measure of absolute strength, which is our proprietary method of measuring and reporting the intermediate-term strength as an annualized value.

“I would do anything for you and for this country, but not if it’s going to jeopardize JPMorgan.

JPMorgan Chase CEO Jamie Dimon, speaking to former Goldman Sachs CEO and then-Treasury Secretary Hank Paulson, 2008


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