On The Earnings Front

July 16, 2009 Edition, Volume III

Inside Signature Update

- On the Earnings Front
- Mousetrap or Health Care Reform?
- CIT Group Bankruptcy Looming


On the Earnings Front

The US equities market posted slow but steady gains over the last five trading sessions to close Wednesday at 8,616 points on the DOW for the first time since mid June, and higher than at any point in the entire month of May. So much for the oft repeated phrase, ‘sell in May and go away’. As we noted two weeks ago, summer market sell off’s aren’t likely in the early stages of a recovery and this summer’s market may well push the DOW and S&P in to new territory for 2009, opening the door for potentially impressive third and fourth quarter market rebounds; it all depends on earnings.

While 2nd Quarter GDP (gross domestic product) figures won’t be released until the end of the month, early earnings reports from the technology and financial services sectors are sufficiently robust for most analysts to expect 2nd Quarter GDP declines to be much improved from 1st Quarter figures (5.5% decline) and well ahead of early expectations – something along the lines of -3.0% to -3.3%.

Strong earnings reports from industry leaders Intel and Goldman Sachs sparked Wednesday’s 257 point rally for the DOW as traders and investors expect other major firms to post better than expected earnings for the quarter. Weak retail sales and worsening employment figures notwithstanding, the US economy appears to have firmly turned the corner and is setting the stage for real GDP growth in the 3rd and 4th Quarters.

In addition to better-than-expected reports from Intel and Goldman Sachs, JP Morgan reported net income gains of 36% and drug manufacturers Novartis and Baxter soundly beat estimates, with Baxter recording a net income gain of 8%. Johnson & Johnson, a consumer products bellwether, posted a 3½% profit for the quarter based on consumers shifting to the firm’s lower-priced, mass-marketed brands as opposed to more expensive products offered through specialty retailers and high-end department stores. In economic terms, Johnson & Johnson’s products often act as substitutes for higher-priced alternatives and experience increasing sales volumes during more difficult times in much the same way that Wal-Mart and Target have benefited from the recent recession over Macy’s and Nordstrom’s.

Even rail transport company, CSX is benefiting from the improvement in the economy as their earnings came in at $.78 per share. Though the figure represents a 20% decline from the same period in 2008, they were higher than analyst’s estimates as CSX reported higher than anticipated rail volume. Railroads are more likely to ship raw goods into manufacturing plants, while surface transport (trucks) ship finished goods to wholesale and retail distribution points well in advance of retail sales activity, making rail transport a key economic indicator.

The markets continue to look for corroborating evidence that the worst is behind us – a wave of broad-based, strong earnings reports are as good as it gets and the reports filtering in thus far are nothing short of impressive. Admittedly, strong earnings are always among the first to be reported and the market will almost certainly give up some gains as retail and consumer-driven firms post their results.

Thursday’s decline in new jobless claims by some 100,000 came as a welcome surprise, but may not mean that the labor market is marking meaningful improvement. Employment figures, gauged on a week-by-week basis, experience greater fluctuation than other indicators marked over a longer time frame. The decrease is nonetheless important as it adds validity to the stabilization in the rate of increase in unemployment. Stabilization is one thing; improvement is altogether different and likely won’t be seen for some months to come as employment gains lag economic recovery by three months or more.


Mouse Trap or Health Care Reform?

For those who remember Mouse Trap, the 60’s era board game popularized by Rube Goldberg and Marvin Glass, the organizational chart of the Obama Health Care Plan will look pleasantly familiar, though substantially more complex.

While this may be the House and Senate’s idea of reform, few can follow the little ball as if makes its way from consumer to health care provider and back.

Complicated further by Representative John Dingell’s (D-Mich) confirmation that the plan will require a federal tax increase in excess of $1 trillion, the plan has little likelihood of passage in the Senate.

Senator Kaye Bailey Hutcheson (R-TX) declared the legislation non-passable in a CNBC interview Wednesday, citing the bill’s complex bureaucracy and extraordinary cost. This on the same day that the Democrat controlled Senate panel reviewing the legislation approved it for consideration by the entire Senate.

As hoped for, the Obama administration has backed off of some of the anti-business rhetoric of recent weeks, recognizing that their posturing, though popular among House and Senate liberals, was costing critical support from business leaders for any possible passage of healthcare and energy initiatives. Perhaps too little, too late – neither initiative appears now to have the support to make it through Congress this year and the administration has repeatedly stated that if it doesn’t happen this year, it’s likely not to happen in Obama’s first term.


CIT Group Bankruptcy Looming

The pending state of CIT Group (CIT), as is hangs on the edge of bankruptcy, may have much broader ranging impact than investor’s loss of market value. CIT is one of the nation’s largest lenders to small and medium sized businesses and the potential liquidity loss to the employers of some 70% of US workers could exacerbate an already troubled labor market. CIT’s provision of short-term financing and equipment leasing capital aid businesses in inventory and equipment purchasing, in addition to providing liquidity to cover payroll, rents, advertizing and other meaningful business expenses, without which, many small to medium sized businesses cannot operate.

Look for the current administration to offer a helping hand to CIT. The US Treasury extended $2.3 billion to CIT under the TARP programs and risks losing the entire investment, added to the expanding problems CIT’s demise might offer the still sensitive economy, the problem may be too substantial for policy makers to ignore.









Signature Update is offered by Richard Haskell, Managing Director of Signature Wealth Management and CEO of Signature Management, LLC