InTheMoneyStocks Market Analysis

This is a discussion on InTheMoneyStocks Market Analysis within the Daily Analysis forums, part of the Commercial category; As earnings season is now in full swing, I cannot help but analyze the earnings results from countless companies. So ...

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Old Jul 23, 2009, 10:10pm   #25
Joined Jan 2009
The Numbers Do Lie – Corporate America Trying To Pull The Wool Over Your Eyes

InTheMoneyStocks started this thread As earnings season is now in full swing, I cannot help but analyze the earnings results from countless companies. So far the markets have rallied 10% in just the last two weeks. Most earnings have blown through estimates. It has been a meteoric rise, the markets blasting up through the double top from mid June. Things seem to be rosy once more on Wall Street. Talk of a recovery, V-bottom and the next monster bull market are now spewing from the media.

Be afraid. Main Street is having a major disconnect from Wall Street. Along with Wall Street, our government, Federal Reserve and the media are too blame. The wool is been pulled over your eyes!

While the markets continue to soar, I sit back and shutter. Why you ask? Because for those of us that really analyze the numbers, it is a very scary thing to behold. For the common investor, they will simply look at the earnings per share and do their P/E calculations. This tells them whether or not a stock is cheap relative to the S&P historic multiples. If it were only that simple these days.... Accounting changes for financial firms have given them the ability to knock the earnings out of the park. Recently, JP Morgan Chase (JPM) and Goldman Sachs (GS) both blew away estimates. However, does anyone really wonder what the accounting changes actually did to these numbers? Why AIG was saved? Or look at the credit card defaults and risk these companies face going forward? Or better yet, does anyone note the new risks companies like Goldman Sachs are now undertaking in order to turn such big profits? I continue to shutter. The next disaster may be in the works.

While the financial companies are in a league of their own when it comes to earnings, I am here to discuss the earnings of other companies, non financial firms.

What has me so scared for the next two years? While most companies are blowing out earnings per share (EPS) numbers, they are missing on revenue. So how are they able to beat on earnings but then miss on revenue? Simple. Cutting costs. Now think about this. How are they cutting costs? Obviously, as the unemployment numbers tell us, they are cutting jobs. In addition, they are cutting out projects that were not profitable, buying less inventory, trimming the fat in other words. While this is a smart thing to do to make these companies more efficient, in an economy that has unemployment spinning out of control, it may not be the best scenario. Each person that is laid off spends less money. With less money spent by that one person, the trickle down effect is drastic. Imagine how each person with a job spends a certain amount, each place they spend, someone else must work and is paid. They spend, others need jobs and the cycle continues. So imagine the effect of just one layout.

In addition, cutting costs can only go so far. Think of it as a company on steroids in the near term. Yes, they look very strong but wait until certain things start to shrivel or the steroid supply ceases. This is right around the corner, once cost cutting can go no further. Eventually, there is nothing left to cut. So while earnings are blowing away estimates, the real key is to watch the revenue numbers. Within a quarter or two, earnings will start to lag as revenue continues to decline and there are no more costs to cut.

In many ways it is a double edged sword. Near term, the earnings are blowing out expectations, but as a result of the cost cutting, unemployment is spiking higher. This will cause the recession to last much longer. As I have pointed out, cutting costs to boost earnings is not showing the true nature of a company.

To give proof of this you only have to look at the earnings over the past couple weeks. Pick out any handful of companies that reported earnings. Most have blasted through earnings yet revenue was in line or missed.

Let's start with EI DuPont de Nemours & Co. (Symbol: DD). Analysts had projected that they would make $.53 on $7.10 billion in revenue. The stock reported earnings excluding items of $0.61 which beat estimates. However, revenue came in light at $7.09 billion.

Next, let's take a look at Coca Cola (Symbol: KO). Analysts estimated they would make $1.00 per share while raking in $10.95 billion in revenue. The company reported earnings per share at $1.02, beating by $.02 but revenue missed, coming in at $10.59 billion.

Last, take a look at Chipotle Mexican Grill (Symbol: CMG). Analyst expected earnings of $.88 per share on revenue of $391.2 million. When the company reported, they blew the earnings out of the water at $1.10 per share. However, revenue again came in light at $388.8 million.

These are just a few of the many earnings beats but revenue misses. As of now the market has swept the revenue misses under the rug. A rally on hope and ignorance continues. It will only last so long. The average investor has no clue as the media is pumping the recovery and the great earnings results. The cost cutting can only last another quarter or two and it will level off. After that, earnings could see a massive plunge. Contrary to many, I see no recovery starting yet. As long as the unemployment rate climbs, people will hold back from spending, not buy houses and continue to struggle to pay their bills.

Unfortunately, earnings numbers do lie and the wool is being successfully pulled over the average investors eyes. They has bought in, hook, line and sinker, putting their hard earned money at what could be a major top.


By: Gareth Soloway
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Old Jul 24, 2009, 8:36am   #26
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I believe that changing the accounting rules is as bigger scam as any we have seen so far in this crisis. The so called bank profits were down to this and sales of assets. Surely reporting larger profits and more earnings per share is a major mistake at this stage, when companies should be paying down debt and using any savings to invest in future projects instead of paying it out in dividends. Raising capital through the markets is still getting harder not easier. How many more commercial banks like CIT are out there? The banking system is probably still insolvent despite all the trillions thrown at it. This market rally is more than likely designed to allow the banks to recapitalize to as larger extent as is possible and keep the next bailout costs down. Reported growth in the US economy has been down to under-reported inflation for many years. The AIG bailout looks more and more suspect as the govt are prepared to allow CIT to go into bankruptcy. The propaganda for the original bailout was partly based on the fact that business credit would be affected. Apparently CIT provide funding for over 1 million businesses. It is likely that the crisis has only just begun.
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Old Jul 24, 2009, 11:29am   #27
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Don't you think these earnings figures could have something to do with bonuses being cut and the fact that proprietary trading has been a huge earner in the past year?
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Old Jul 24, 2009, 3:45pm   #28
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Financial Darwinism at its finest, can't get a decent return on investments? may as well play the markets...The middle classes/baby boomers are being asset stripped like they wouldn't believe...gonna hurt like fook and the moaning will be deafening
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Old Jul 26, 2009, 9:36am   #29
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I guess the thinking is that we might as well take their money now, because when hyper-inflation hits then the middle class will be wiped out anyway.
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Old Jul 26, 2009, 10:43am   #30
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Interesting way of controlling interest rates.

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Old Jul 26, 2009, 10:55am   #31
 
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Originally Posted by Black Swan View Post
Financial Darwinism at its finest, can't get a decent return on investments? may as well play the markets...The middle classes/baby boomers are being asset stripped like they wouldn't believe...gonna hurt like fook and the moaning will be deafening
I think you're right... and then everyone will be calling for more regulation which essentially protects the idiots from themselves.
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Old Jul 26, 2009, 12:00pm   #32
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I think you're right... and then everyone will be calling for more regulation which essentially protects the idiots from themselves.
Interesting how the UK meeja have 'gone off on one' this weekend re. bank lending being as (if not more) expensive with base rate at 0.5% as it was when rates were 3%. Also complaints and phony anger from Darling re. banks not lending to small businesses; who apparently need overdarfts to survive and or prosper. If they're on respirator let them die, sad, but heh...

Firstly, not withstanding the estimated £1trillion fresh cash/digits they have had (or will be getting) in order to repair their solvency issues, banks need to hoover up as much liquidity (out of everyone's pockets) as they can from the economy hence SVRs and CC rates will continue to rise. Banks want your/their/the state's money back in whatever ruse they can conjure up.

They are not interested in lernding and Darling knows and approves of this, Gordo's masters have told him the system must be saved at the expense of taxing two future generations; suggestion from a think tank last week was that an extra 9p in the pound has to be raised to balance the books over the next decade.

What is the point of banks lending (en masse) to fluffy businesses that will fail, or offering up jumbo mortgages when house prices will continue to fall? They know (as do the govt) that the only canary in the mine is unemployment. Until millions of new purposeful jobs are created as opposed to destroyed there is no recovery in sight and asset destruction (both businesses and personal) will be decimated. We're not even at the start of the start of the misery of unemployment, perhaps the elite can arrange another unecessary 14-18 war to 'get rid' of the 750,000 unemployed youths currently with little hope of getting a decent wage or prospects...

The only companies that will be saved, (through leaning on banks by Mandy & Co), will be those with high levels of employment in Nu Lab heartlands, or those such as BA which are allowed to raid pension schemes in order to continue to fund their day to day huge losses. Decisions on Vauxhall etc they'd prefer to kick into the long grass/keep playing keepy uppy until after next May's election, but BA failing cannot be allowed..
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