Dow Surge Ignores the Real Story in Earnings

The Dow Jones Industrial Average cracked 9,000 this morning for the first time since January as investors continued to cheer a wave of better-than-expected corporate earnings.

It's not that the earnings are good - they're off by an average of 30 percent for the second quarter compared with a year earlier - but the companies that have reported so far have exceeded analyst forecasts by an average of 12 percent, according to Bloomberg News.

In all, two out of every three companies reporting earnings have beat estimates. The problem is, two out of three have also fallen short of revenue estimates.

For example, Houston-based Nabors Industries (NBR) on Tuesday beat earnings estimates by 5 cents a share, but its revenue came in 7 percent below what most analysts forecast. Other examples nationally include insurer UnitedHealth Group (UNH) and manufacturer United Technologies (UTX), both of which beat earnings estimate only to have revenue fall short.

In other words, companies are making money by cutting costs, but there's no sign that their businesses are improving or that they expect demand to pick up any time soon.

"No one's really anticipating sales," said Joseph Birkofer, president of Houston-based Legacy Asset Management, told me yesterday. "We've got a long way before there's a demand-based recovery."

Without increased demand, he doubts the market rally will last. The Standard & Poor's 500 Index is likely to bounce around within 200 points on either side of 900 for the next six months or so, Birkofer said.

"The equity market is sort of coming out of the hangover and wanting to feel better," he added.

Are we seeing the signs of a meaningful recovery, or is the market getting ahead of itself?

Comments

[Larry House:]

That is a good question. The bounce off the March low was called a relief rally, relief that we didn't fall into a depression. I am not sure what to call today's action. It seems to go against the fundamentals, but then again, a violent bear rally of some magnitude has happened before following such a huge downturn. I sure can't buy into the market at this level, but it appears to be headed higher.

Jul 23 03:53 PM

[Mad Hedge F...:]

Talk about blind traders. There is no doubt that the next trade from here in stocks is a sell. Buying NASDAQ on a 12th consecutive up day, the S&P 500 on the back of a 110 point move, and the Dow on top of a 1,000 point pop is not what great fortunes are made of. After stopping out of my own shorts in the 880’s, I have been holding back, holding back, holding back. See my warning not to sell too soon at www.madhedgefundtrader.... I have never been one to fight the tape. The only trader who is always right is Mr. Market. The earnings to support a full fledged bull market are not just there. Deleveraging worlds don’t support expanding earnings multiples. It all works for me because the more it goes up now, the bigger the fall later. Even the raging bulls are warning about a “W” shaped recession and another market dive in 2010. How finely do you want to trade this thing? It’s clear the big core shorts at the major hedge funds haven’t budged, and that most of the recent low volume action has come from day traders, momentum players and CTA’s. All we need now is for mom and pop to come in and ring the bell at the top. Is 2009 going to be replay of 2008? Is a “Sell in May and go Away” at www.madhedgefundtrader... to be followed by another October crash? If your friends’ long positions make money from here, just revel in their good fortune, and let them pick up the dinner check.

Jul 23 06:32 PM

[thiazole:]

"It's not that the earnings are good - they're off by an average of 30 percent for the second quarter compared with a year earlier"

So what are stock prices compared to a year ago? If you are going to compare earnings to a year ago to say that prices are too high, you should also be comparing prices to a year ago...

Jul 23 06:49 PM

[ain't no fo...:]

Yah, great earnings. Its amazing what intentionally lowballing earnings estimates by companies and analysts will do for engineering a false "beat" that CNBC and the rest of the sugar plum fairies can lead off the day on sqwuak box with... the daily early-morning "Things are great, every one of the reporting companies "beat" today" line of absolute unadulterated bullschitt.

Its all a monstrous lie, but who the "f..." gives a schitt at this point - everyone with a brain knows the fix is in.

I'd suggest that the SEC look into why these companies are being allowed to mislead investors and "the Street" so egregiously, but the sound of thousands of posters laughing their asses off is just too much to bear.

Jul 23 08:10 PM

[Swashbuckler:]

No relief from the SEC. They're bought.

Jul 23 08:33 PM

[Nick36:]

Perhaps this cost-cutting by companies will make their earnings look relatively good for this quarter only.

For one thing, many of these companies probably ended up with excess inventories. Which enabled them to lay off temporarily some of their workers and sell their excess inventories. This was cost saving alright. But that's not something they can do again.

And a lot of companies probably have fired some of their workers altogether. Which has reduced their costs. But the fired workers are consumers too. And they will likely decrease their spending even more than before.

Cost cutting like that creates negative feedback in the economy, where companies and consumers keep cutting their spending because of each other's cutbacks. And for this reason, this better than expected profitability of companies probably won't last.

Jul 23 09:31 PM

[Moon Kil Woong:]

If anyone hasn't noticed even though early announcements this quarter tend to be better in terms of earnings revenue is quite lackluster. And that is the good companies. Companies really feeling the pain will show terrible revenue. At this point in time I care more about revenue solidifiction than earnings if I am looking for broad economic recovery.

Thus, I tend to believe that this rally is either a misguided and decieved market believing in a recovery before it materializes or it's moving do to other reasons be it manipulation, liquidity flows from fixed rate securitries, or simply bulls dominating and shutting out bears on low volume. Thus it is hard to tell exactly when these market forces will subside (it could be all summer). When they do, a snapback could be quite nasty.

Jul 23 10:20 PM

[Common Cents:]

"the Standard & Poor's 500 Index is likely to bounce around within 200 points on either side of 900 for the next six months or so"

This says the market will be up or down 22% in the next 6 months.....not too long ago people talked about 20% moves as a full bear/bull market....now it is just "bouncing around"

Jul 23 10:20 PM

[Smu the Won...:]

Now I might have a brain the size of a sultana, and I am about as pessimistic about the general state of the developed economies as the next quadruped, but I wonder about this rally.

OK, it seems that the fundamentals stink, and, perhaps like many of the readers of these pages, I had thought the DOW would head south to, oh, say, 4500 back in March -- but, let's face it, that hasn't happened. Could this all be as simple as a rudimentary Austrian school approach would have us believe?

After the autumn '08/winter '09 crash, the (evil) Fed conjured up some new ways to inflate the money supply, and those funds, while largely sequestered by terrified banks, are beginning to trickle into the stock markets, commodities, etc. -- hence the rally. Many contributors to these pages are convinced that the only long-term option the US has is to inflate it's way out of it's massive debts -- in which case, cash, while briefly king, might once again be a hot potato.

Those who decry the Fed's inflationary policies (like me) and point out that the long-term uptrend of equities isn't "real" in the sense that it is inflation-driven, should remember that, in an inflationary regime, while the return on any given investment is less than it's nominal return, that doesn't mean that those returns should not be taken.

The Chinese may hate us because they are compelled to put their dough into US treasuries -- but, so far, they haven't had much of a choice (that will change -- eventually). We may hate the Fed -- but perhaps it's true that one can't fight them (for now). I strongly believe that the US -- it's currency, government, social fabric, etc. -- is headed onto the ash-heap of history (what will a post-US North America look like?), but sitting on the sidelines in US dollars can't make any sense in any kind of long-term situation. Is that what we are seeing now in this rally? Investors desperate to flee oncoming price inflation and so diving into equities even when the fundamentals stink? Precious metals would make more sense, but then, as these pages have pointed out quite cogently, we know their prices are suppressed. We know that Volker -- and, by extension, the Fed generally -- believes that the critical error in the early '80s was allowing the price of gold to soar, thus absorbing all that money that was supposed to go elsewhere. Is the Fed now showing itself more successful in forcing it's newly-created money into equities? Would this not also explain the impressive run-up in oil, which is increasingly (IMHO) behaving like gold, the traditional anti-currency?

In short, is this a "genuine," inflation-induced rally that will huff and puff until it goes kablooey all over again like last year? With volume still low, it seems that it may have a long way to run as it attracts all that money hitherto on the sidelines (if it attracts it). But when does it finally pop?

Equine minds want to know.

Jul 23 10:39 PM

[Fighting Yoda:]

The news from AMEX, MSFT and AMZN today after hours should sober down the bulls. All these 3 are are big players in their respective mainstream markets - all not only had bad profits, also had bad revenues and even worse forecasts.

Jul 24 12:47 AM

[Dave Wrixon:]

You will know when the Fed is obliged to hike interest rates. As long as they can hold them at zero without the dollar vaporising, then they are winning. However, that will prove impossible. The lack of creditworthiness at all levels including government, combined with the demand for debt will mean that interest rates are forced higher. The alternative is to upstage Zimbabwe.


On Jul 23 10:39 PM Smu the Wonderhorse wrote:

> Now I might have a brain the size of a sultana, and I am about as
> pessimistic about the general state of the developed economies as
> the next quadruped, but I wonder about this rally.
>
> OK, it seems that the fundamentals stink, and, perhaps like many
> of the readers of these pages, I had thought the DOW would head south
> to, oh, say, 4500 back in March -- but, let's face it, that hasn't
> happened. Could this all be as simple as a rudimentary Austrian
> school approach would have us believe?
>
> After the autumn '08/winter '09 crash, the (evil) Fed conjured up
> some new ways to inflate the money supply, and those funds, while
> largely sequestered by terrified banks, are beginning to trickle
> into the stock markets, commodities, etc. -- hence the rally. Many
> contributors to these pages are convinced that the only long-term
> option the US has is to inflate it's way out of it's massive debts
> -- in which case, cash, while briefly king, might once again be a
> hot potato.
>
> Those who decry the Fed's inflationary policies (like me) and point
> out that the long-term uptrend of equities isn't "real" in the sense
> that it is inflation-driven, should remember that, in an inflationary
> regime, while the return on any given investment is less than it's
> nominal return, that doesn't mean that those returns should not be
> taken.
>
> The Chinese may hate us because they are compelled to put their dough
> into US treasuries -- but, so far, they haven't had much of a choice
> (that will change -- eventually). We may hate the Fed -- but perhaps
> it's true that one can't fight them (for now). I strongly believe
> that the US -- it's currency, government, social fabric, etc. --
> is headed onto the ash-heap of history (what will a post-US North
> America look like?), but sitting on the sidelines in US dollars can't
> make any sense in any kind of long-term situation. Is that what
> we are seeing now in this rally? Investors desperate to flee oncoming
> price inflation and so diving into equities even when the fundamentals
> stink? Precious metals would make more sense, but then, as these
> pages have pointed out quite cogently, we know their prices are suppressed.
> We know that Volker -- and, by extension, the Fed generally -- believes
> that the critical error in the early '80s was allowing the price
> of gold to soar, thus absorbing all that money that was supposed
> to go elsewhere. Is the Fed now showing itself more successful in
> forcing it's newly-created money into equities? Would this not also
> explain the impressive run-up in oil, which is increasingly (seekingalpha.com/symbo...)
> behaving like gold, the traditional anti-currency?
>
> In short, is this a "genuine," inflation-induced rally that will
> huff and puff until it goes kablooey all over again like last year?
> With volume still low, it seems that it may have a long way to run
> as it attracts all that money hitherto on the sidelines (if it attracts
> it). But when does it finally pop?
>
> Equine minds want to know.

Jul 24 01:04 AM

[Dave Wrixon:]

Oh, and just in case the numpties haven't worked it out high interest rates are bad for equities as they depress corporate earnings. Microsoft coming in well below expectations won't have exactly helped sentiment much either.

Jul 24 01:06 AM

[jeandit75:]

A fly will wander on a highway until it meets its "Windshield"!

Jul 24 06:53 AM