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Investors Mull Another Mulligan For Earnings Season By: Charles Payne

|Includes: Alcoa, Inc. (AA), BX, COP, COST, FDO, YUM

Maybe my thinking was right the first time and it's going to take more than beating on the bottom line to keep the rally going. I spent all morning rationalizing the market moving higher on results from Yum brands (NYSE:YUM), Costco (NASDAQ:COST), and Family Dollar (NYSE:FDO). Note our retail analyst, Brian Sozzi, has posted two retail related articles on today, one detailing Costco's earnings. All beat on the bottom line but missed on top. I began to think well maybe it's not the companies but analysts and their method of modeling. Let's face it, Costco might have missed on the top line but same-store sales were much better than expected for the quarter and September same-store sales came in +1.0% versus expectations for a decline. Still, it's going to be hard, I would imagine, for the market to move higher if this is the recurring script.

It worked two quarters in a row, and while nobody expects a massive surge in demand the fact remains it's just about time for companies to exceed on both ends of the income statement. The market has been handicapped and has taken full advantage of that, but how many mulligans can it receive before certain fundamental standards are enforced. I will say, on that note, that higher guidance or any swagger during the conference call mitigates top line misses as they should. Investors will mull the idea of whether these earnings should be rewarded as more reports come down the pike. But, right now, I think the bias is still to the upside.

Short Note
By: Brian Sozzi, Research Analyst

Those concerned with a surge in inflation should relax at the moment. Costco, one of the largest retailers in the world, noted throughout this morning's conference call that prices for fresh food and consumables remain lower year over year. In very few instances, prices have stabilized, but on balance the outlook is still calling for a controlled input environment.

I would also say to investors to review the meaning of LIFO. Costco reported a nice $17.0 million pre-tax credit in its latest quarter given deflationary forces; ultimately it boosted the bottom line.

Commodity Review
By: David Silver, Research Analyst

We have gold pressing new highs, oil prices trading very volatile as the market digests new economic data and improving expectations, and many other commodities rebounding after some weakness over the past few weeks. Looking ahead to this afternoon, Alcoa (NYSE:AA) officially starts off earnings season (it is the first Dow component to report third quarter earnings) and the cost of aluminum, which is up about 50% from the beginning of March is expected to force the Company into a quarterly loss. As we said earlier in this report, top line misses can't become the norm, but if management sees a light at the end of the tunnel, the market can resume its climb. Alcoa has been a perennial disappointment with respect to beating the Street's estimates. Only once (in the second quarter) in the past six has it surpassed the Street's expectations. CEO Klaus Kleinfeld (who took over in May 2008) has been trying to remake the company, slashing output, job, and pay for workers, but has he done enough to make the second quarter more than a fluke?

Little Tid Bits

* Conoco-Phillips (NYSE:COP) plans to sell $10 billion of assets in the next two years and cut capital spending in 2010 to reduce debt and increase returns on capital. Additionally, the Company increased its quarterly dividend to $0.50 per share from $0.47 per share.

* Blackstone Group (NYSE:BX) announced it will purchase Anheuser-Busch InBev's amusement park business, which includes SeaWorld and Busch Gardens, for $2.7 billion. Anheuser-Busch will get $2.3 billion in cash and a right to participate in Blackstone's return on investment capped at $400 million.

Energy Front
By: Conley Turner, Research Analyst

On the energy front, oil is trading in the red as traders and investors take their cue from the action taking place in the equity markets. The trading in stocks has been fairly erratic for the session with all of the major indexes hovering near the unchanged mark.

The oil inventory report from this morning for the week ending October 2 should have been an upside catalyst for the commodity. The data showed that there was a draw of 978,000 barrels of crude which stands in stark contrast to consensus expectations of a build of 2 million barrels. In addition, gasoline inventories had a build of 2.94 million barrels versus the expectation of a build of 1 million barrels. However, this report was all but ignored as traders and investors opted to look at the equity markets for evidence of the state of the economy.

Also driving the price of the commodity is the fact that the dollar has been gaining ground against a basket of other international currencies. Oil bears an inverse relationship with the value of the dollar. While, there is almost universal belief that demand for the commodity will rise with the increase in economic activity, that situation has but yet been manifested. It stands to reason then that more volatility in the price of oil can be expected at least in the short term.

Tech Stocks Tick Lower
By Carlos Guillen, Research Analyst

Overall tech shares, as measured by the Philadelphia Semiconductor Index (SOX), have traded lower during this morning's trading session, decreasing approximately 1% from yesterday's closing price. After reaching its 12-month high late last month (September 23), the SOX has been struggling to stay afloat. We believe that the main force putting pressure on the tech stocks is that the sector seems to be running out of catalysts to lift it. Consumer confidence and the overall level of unemployment continue to limit growth in the short term for this sector.

While it is becoming apparent that the economy may be coming out of the current recession much faster than previously anticipated, the concern is how quickly will the economy recover? Many are anticipating a fast recovery and have reacted accordingly. As a result, many original equipment manufactures (OEMs) and distributors have continued to replenish significantly depleted inventories in anticipation of better than expected bottom-of-the-food-chain demand. However, many companies are already seeing improvements in end-demand, so it is not just inventory restocking that is driving semiconductor revenues. The fact that manufactures and distributors have been very careful in managing their inventories provides support for the notion that end-demand is indeed contributing to the rise in revenues. However, we believe that the market has already priced this in, and as the third quarter earnings season begins, investors may be having a difficult time finding more catalysts pushing stocks higher.

As far as the tech sector is concerned, we expect that the combination of stock replenishment and end-demand improvement will continue to push utilization rates higher in the second half of 2010, increasing the likelihood of industry capacity expansion, which will ultimately benefit semiconductor equipment providers. As it stands, many flat panel display players are already operating at rather high capacity levels. Moreover, the memory market continues to improve, and while memory manufactures may not necessarily be planning on significantly expanding their current manufacturing capacity, we expect them to increase their technology buys in order to remain competitive once the macroeconomic backdrop begins to recover.

Written by Charles Payne, CEO and Principal Analyst of Wall Street Strategies ( providing independent stock market research to over 30,000 subscribers, in more than 60 countries. Mr. Payne is a regular contributor to the Fox Business and Fox News Networks. For more information about Mr. Payne, please refer to the company’s website