Wednesday, October 21, 2009

What Earnings Are Telling Us

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

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In general, company earnings are coming in ahead of extremely lowered expectations this quarter. This is a typical Wall Street game of setting the bar low enough so things look good, no matter how bad they are. The big success stories this quarter are technology firms, such as Intel, Apple, Yahoo and Sandisk. Tech earnings are cyclical however and the big traders tend to sell when earnings look the best. It is not clear yet if we are at that point his quarter. The large majority of tech company earnings come from outside the U.S. and their business picking up says more about the state of the economy in East Asia than it does about the U.S. economy.

In contrast to tech, banks are in increasingly bad shape, even in the cases where they are reporting good earnings. Wells Fargo's earnings were out today. Well Fargo said credit losses rose to $5.1 billion, up from $2 billion a year ago and $4.4 billion in the second quarter. Even though this is the bank's core business, it reported a profit of 56 cents per share last quarter, higher than the 49 cents reported a year ago. Wells is the fourth largest bank in the U.S. The pattern of deteriorating loan portfolios was also seen in Bank of America, Citigroup, and JP Morgan. Loan losses also increased in the second quarter. These numbers don't indicate that U.S. consumers and businesses are in good financial shape, nor that any economic recovery is taking place.

As for the the banking system having been saved, we will have to wait to see what happens when the unlimited flow of federal funds is cut off. TARP is supposed to expire at the end of this year. Today, however, President Obama is going to announce a $5 billion program to bail out community banks. Obama will tout the new program as funding to help these banks increase loans. TARP was supposed to accomplish this goal as well. Available U.S. consumer credit has taken a nosedive in the last year since TARP was implemented. There is obviously no lie too outrageous that Washington won't keep repeating it and the U.S. mainstream media won't print it.

It should also be kept in mind that many large cap firms other than tech get a lot of their earnings overseas. As the dollar falls, earnings made in other currencies increase proportionately. Once again this is not an indication of any U.S. economic recovery, but of U.S. economic weakness. The falling dollar is at least finally getting some coverage in the financial press. Business Week had a story on it in its latest issue. This is going to continue to be a big story for many years to come.

NEXT: Dance of the Declining Dollar Continues

Daryl Montgomery
Organizer,New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

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