Thursday, February 11, 2016

Stock Market: Earnings Season Is Still Disproving The Doom & Gloom

(Drivebycuriosity) - It`s earnings season, but nobody seems to care. "More than three-quarters of companies that have reported so far have exceeded analysts’ profit estimates", wrote Bloomberg this morning (bloomberg). In the recent years about 60% to 70% of company reports had beaten the profit expectations of the analysts, so it looks like that this earning season might reach a new record.

But the company earnings are widely ignored, instead the financial markets - stocks & bonds - are ruled by hysteria about falling oil prices and an alleged China hard-landing. Especially the stocks of the bank stocks are getting dumped these days. "A gauge of financial shares on the S&P 500 has slumped more than 17 percent just this year, to its lowest level since 2013" reported Bloomberg (bloomberg). The bears claim that the oil collapse will damage the bank loans and will bring the financial companies into trouble.

How did the banks do after 18 months of falling oil prices? All the big banks could disprove the gloomy allegations so far: JP Morgan, Citigroup,  Bank of America, Morgan Stanley, Goldman Sachs, Wells Fargo & PNC Financial, Bank of New York Mellon, Capital One.  They all beat the analysts`earnings expectations. JP Morgan declared that its fourth-quarter profits rose 9 percent from a year earlier, helped by a strong performance in its consumer banking division and lower legal expenses (  The banks managed the impacts of the steep drop in prices for oil and other commodities on their loan portfolios better than feared, helped by a solid consumer business.  Other financial companies also surprised positively: American Express beat expectations for earnings & revenue, the competitors MasterCard, Visa and the insurance holding companie Travelers delivered  earnings beats as well.

Internet stocks are big losers this year as well.  The market ignores that the Internet sector delivered strong numbers: Alphabet (the holding for Google) earned $8.67 vs analyst expectations of $8.09. Revenues rose $21.32 billion vs analyst expectations of $20.77 billion (and up 18% year-over-year). Facebook also crushed expectations for earning & revenue and reported its first profit above $1 billion. The online payment service PayPal, Yelp & LinkedIn beat profit & revenu expecations as well. Twitter earned more than expected and Amazon’s profit more than doubled to $482 million in the fourth quarter and rose per share to $1,00 from 45 cents, but missed the expectations ($1,56).

The rest of the technology sector also did well: The bellwethers Microsoft, Intel & IBM, Cisco (routers), the wireless technology specialist Qualcom and the storage manufacturer SanDisk beat earnings & revenue expectations and  Netflix reported a profit of 7 cents per share, more than triple of the analyst´s expectation (just 2 cents.) The cable & mobile provider Verizon joined the club of companies which beat earnings & revenue expectations. Apple reported slowing revenues and iPhone sales, but earnings rose to $3.28 (plus 7%) - 5 cents more than expected. The chip producer Texas Instruments also beat the profit expectations

The consumer companies sector showed that they belong to the winners of collapsing oil & other commodity prices because consumers worldwide have more money to spend and costs for materials are falling. McDonald's & Coca Cola beat earnings and revenue expectations, the same with Whole Foods, Walt Disney, Under Armour (sports fashion), Estée Lauder (cosmetics), Good Year Tire & Rubber  and the toymakers Hasbro & Mattel.  Other consumer companies did well too: Yum Brands (owner of KFC, Pizza Hut & Taco Bell), United Parcel Service (UPS), Procter & Gamble, Colgate-Palmolive, Starbucks, Time Warner, Polo Ralph Lauren (fashion), Whirlpool  (home appliances) the homebuilder D.R.Horton and the pharmacy firms Johnson & Johnson & Merck all earned more than expected.

The rest of the industrial sector also convinced. Profit & revenue at Boeing, the pill giant Pfizer, the biotech companies Biogen & Gilead Sciences all beat expectations. General Motors, Ford, Caterpillar (construction & mining machines),  the chemical giants DuPont & Dow Chemical, the defense & aerospace company General Dynamics & the conglomerates 3M and  General Electric all earned more than expected as well.

Even the battered commodities sector didn`t confirm the doom & gloom: The aluminum bellwether Alcoa delivered more profit than expected, even that the revenues dropped more than feared, thanks to the tumbling metal prices. Exxon Mobil`s profit dropped less than feared. Anadarko Petroleum and the oilfield-services-companies Schlumperger & Halliburton lost less than feared. U.S. Steel reported a loss of 23 cents a share, topping estimates for a loss of 85 cents a share (barrons).

                                                 The Clear Winners 

The earning season also showed the clear winner of the oil price collapse: The airlines: Delta Airlines boosted their earnings 51% from a year earlier, thanks to the falling costs of fuel (businessinsider). According to Business Insider the airline saved $5.1 billion fuel costs last year, thanks to the oil price crash. American Airlines beat the earning expectations as well.

Many companies benefit from lower transport costs and from cheaper oil, steel, aluminum and other commodities which reduce their costs significantly. The pessimistic majority also underestimated how efficiency gains and technological progress enable companies to create rising earnings even in a sluggish economy. Companies are learning organisms. They are managed by humans who are getting better and better over time by continuously improving themselves and their companies.

I think that the recent stock market slump is caused by the herding behavior of the hedge funds, who follow each other, and a gloomy sentiment rather by the economic fundamentals. Today´s stock market reminds of 2011when many traders panicked spooked by a gloomy sentiment. I believe today´s panic will soon be forgotten like the panic of 2011.  


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