Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

Disappointment Setting In?

Daily State of the Markets 
Tuesday Morning – July 20, 2010

Good morning. One of the most interesting things about the stock market game is that it is constantly changing. Think you've got it figured out? You might want to think again, because oftentimes, the baseline assumption of the game can change overnight.

Take earnings, for example. Normally, understanding a company's earnings report is pretty straightforward: If the numbers beat the street's estimates (i.e. the Reuters or First Call consensus) it is rewarded with a higher stock price. Never mind the fact that the analyst estimates are almost never accurate (or even close), the earnings game is usually about expectations versus reality. And for this reason, analysts have been expecting this season's earnings parade to be strong once again.

However, a funny thing might be happening on the way to the stock market rally that usually presages a strong earnings season. Despite the vast majority of reports coming in above expectations (86% as of Friday), some disappointment may be setting in.

Let's look at a quick example or two. After the close on Monday, IBM (NYSE:IBM) beat earnings estimates by $0.03 and increased their guidance for the coming quarter by a nickel. The result? The stock instantly traded lower. Texas Instruments (NYSE:TXN) met expectations (which had been guided up nicely on June 8th) and boom... the stock goes down 6%. What gives?

The problem is that companies such as IBM aren't supposed to simply beat expectations; they are supposed to surpass the consensus by a meaningful margin. While the $0.03 "beat" that IBM put up wasn't half bad, it also didn't produce much enthusiasm. And then there is the revenue number. Don't look now fans, but IBM, like a disturbingly large number of companies so far, "missed" on the top line. And in short, if this trend continues much longer, traders might start to expect less going forward.

The key here is that at this stage in the economic cycle, we'd like to see revenue numbers expanding robustly. This would tell us that business is good and it is only a matter of time before companies need to beef up their payrolls to keep up with demand. However, the opposite is also true. If the revenue growth doesn't materialize, then payrolls aren't going to expand. And since analysts had been hoping that corporate America would start adding jobs soon, well, disappointing revenue growth is NOT what stock market bulls are looking for at this stage of the game.

Turning to this morning... Stocks futures are moving down as more companies continue to miss revenue targets (this morning BK, JNJ, and GS all reported revenues below consensus). Thus, it appears that the lows of the recent correction will be tested in the early going.

On the economic front... Housing Starts fell 5% in June to an annualized rate of 549K, which was well below the consensus for 576K. Building Permits for May rose 2.1% to 586K. This was above the consensus of 567K and the May total of 574K.

Finally, consider raising your expectations. As Michelangelo said, the danger is not that your hopes are too high, but rather...

Pre-Game Indicators

Here are the important indicators we review each morning before the opening bell...

  • Major Foreign Markets:
    • Australia: +1.05%
    • Shanghai: +2.15%
    • Hong Kong: +0.86%
    • Japan: -1.15%
    • France: -1.16%
    • Germany: -1.25%
    • London: -0.71%


  • Crude Oil Futures: - $0.63 to $75.91
  • Gold: - $1.50 to $1180.40
  • Dollar: lower against Yen, higher vs Euro and Pound
  • 10-Year Bond Yield: Currently trading lower at 2.93%


  • Stocks Futures Ahead of Open in U.S. (relative to fair value):
    • S&P 500: -12.75
    • Dow Jones Industrial Average: -122
    • NASDAQ Composite: -28.78


Wall Street Research Summary


  • Wolverine (NYSE:WWW) - Argus
  • IntercontinentalExchange (NYSE:ICE) - BMO Capital
  • J Crew Group (JCG) - Cowen
  • Questar (NYSE:STR) - JPMorgan
  • PPG Industries (NYSE:PPG) - Morgan Stanley
  • ProLogis (NYSE:PLD) - RBC Capital
  • Schnitzer Steel (NASDAQ:SCHN) - UBS



  • Sherwin-Williams (NYSE:SHW) - BofA/Merrill, Morgan Stanley
  • PetMed Express (NASDAQ:PETS) - Piper Jaffray
  • Infosys (NASDAQ:INFY) - Societe Generale
  • Zions Bancorp (NASDAQ:ZION) - SunTrust Robinson Humphrey


    Yesterday's Earnings After The Bell



    IBM IBM $2.61 $2.58
    Texas Instruments TXN $0.62 $0.62
    Zions Bancorp ZION -$0.84 -$0.54

    Earnings Before The Bell



    Biogen Idec BIIB $1.31 $1.12
    Bank of New York Mellon BK $0.55 $0.55
    Peabody Energy BTU $0.69 $0.64
    Forest Labs FRX $0.95 $0.86
    Goldman Sachs GS $2.75 $2.00
    Harley-Davidson HOG $0.59 $0.42
    Illinois Tool ITW $0.83 $0.84
    Johnson & Johnson JNJ $1.21 $1.21
    Millicom MICC $1.23 $1.38
    Omnicom OMC $0.79 $0.77
    PepsiCo PEP $1.10 $1.09
    State Street STT $0.9. $0.87
    UnitedHealth UNH $0.99 $0.75
    Whirlpool WHR $2.82 $2.18

    * Report includes items that make comparisons to the consensus estimate questionable

    Long positions in stocks mentioned: WHR

    For more "top stock" portfolios and research, visit


    The opinions and forecasts expressed are those of David Moenning, founder of and may not actually come to pass. Mr. Moenning’s opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report and on our website is for informational purposes only. No part of the material presented in this report or on our websites is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed nor any Portfolio constitutes a solicitation to purchase or sell securities or any investment program. The opinions and forecasts expressed are those of the editors of TopStockPortfolios and may not actually come to pass. The opinions and viewpoints regarding the future of the markets should not be construed as recommendations of any specific security nor specific investment advice. Stocks should always consult an investment professional before making any investment.

    Any investment decisions must in all cases be made by the reader or by his or her investment adviser. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that the investment objectives outlined will actually come to pass. All opinions expressed herein are subject to change without notice. Neither the editor, employees, nor any of their affiliates shall have any liability for any loss sustained by anyone who has relied on the information provided.

    The analysis provided is based on both technical and fundamental research and is provided “as is” without warranty of any kind, either expressed or implied. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.

    The information contained in our websites and TopStockPortfolios publications is provided by Ridge Publishing Co. Inc. (Ridge). One of the principals of Ridge, Mr. David Moenning, is also President and majority shareholder of Heritage Capital Management, Inc. (NASDAQ:HCM) a Chicago-based money management firm. HCM is registered with the U.S. Securities and Exchange Commission as an investment adviser. HCM also serves as a sub-advisor to other investment advisory firms. Ridge is a publisher and has not registered as an investment adviser. Neither HCM nor Ridge is registered as a broker-dealer.

    Employees and affiliates of HCM and Ridge may at times have positions in the securities referred to and may make purchases or sales of these securities while publications are in circulation. Editors will indicate whether they or HCM has a position in stocks or other securities mentioned in any publication. The disclosures will be accurate as of the time of publication and may change thereafter without notice.

    Investments in equities carry an inherent element of risk including the potential for significant loss of principal. Past performance is not an indication of future results.

Disclosure: WHR