Friday, July 24, 2009

Rally Peters Out Over Sobering Earnings Data

We're had quite the rally in the past few weeks. I know this because both the front page of the Wall Street Journal and Financial Times trumpet the Dow's return to 9,000. So it was only fitting that three fairly significant companies had to report weak earnings right after the close and spoil the party. Microsoft posted a jarring 17% revenue decline and 29% drop in profits, citing falling global demand for PCs and servers. Furthermore, this fiscal year (the company just reported its fourth quarter) marked the first time that Microsoft faced a revenue decline for the full year. Better earnings released earlier from Apple, IBM, and Intel had sparked hopes for better results from Microsoft and the rest of the tech sector. While Amazon had a 14% increase in sales, its profit fell 10% to $142 million. Since the online retailer has always believed in "providing customers low prices, vast selection, and fast delivery," (a direct quote from Mr. Bezos) the company's shareholders have the stock priced at an earnings multiple of 60, hence the 8% shellacking in the stock price. AmEx's net profits fell 48% on an increase in charge-offs. The company said that consumer spending declined by 16% in the second quarter and charge-offs increased to 10% from 8.5% in the previous quarter. One bright spot was the fact that only 4.4% of customers were one month behind on their payments, which was an improvement from the prior quarter's 5.1%. Perhaps delinquencies have peaked? Maybe, but if the job market gets worse that seems unlikely.

Nevertheless, stocks are only off modestly compared to the recent powerful rally. Maybe we can finish the day with the Dow still above 9,000 and investors can have a nice, restful weekend? That's assuming that the FDIC takes the weekend off and decides not to seize Guaranty Financial or Corus Bank this Friday. But then again, what's another two bank failures, albeit fairly large and expensive ones, when you're already expecting 500?

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