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Welcome to Earnings Season, the summer 2012 edition.  This time around, analysts seemed far less optimistic than in prior quarters as Alcoa took its rightful place on-the-clock.  In fact, estimates show that earnings for S&P 500 companies are expected to fall 2.1% in the quarter which would translate into the worst corporate performance since 2009.  Materials and energy companies are primed to lead the decline as manufacturing has weakened on decreased demand from the likes of Europe and oil prices plummeted during the period.  Over 40 companies, including some biggees like Ford and Texas Instruments, revised their prior projections downward.  Facebook would be making its earnings debut (after a lackluster start as a publicly-traded company) and JP Morgan would be forced to again explain its “hedging” strategies. 

And the answer is…As expected, Alcoa posted a quarterly loss as aluminum prices have been on the decline and uncertainties across the globe have impacted ongoing operations.  JP Morgan’s profits fell by 8.7% as the trading “mishap” (too benign a word?) actually cost the firm far more than previously reported (what’s a few more billion between friends?).  Still, the overall results were better than expected.  CEO Jamie Dimon pledged to go after millions in executive compensation from those one-time “geniuses” responsible.  Meanwhile, fellow financial behemoth Wells Fargo took advantage of the lowest mortgage rates (ever?) as quarterly profits surged 17% at the fourth-largest bank in the country.  In other news, after a long delay, Apple is finally set to release its latest iPad in the fast growing marketplace of China where prior launches have not gone as smoothly as hoped.   And Peregrine Financial became the latest institution to erupt in scandal as regulators seek out about $215 million in misappropriated customer funds. 

In the transaction world, travel-search engine Kayak Software is headed for IPO (next week?) and expects to raise over $70 million.  Insurance provider WellPoint is acquiring fellow managed healthcare company Amerigroup for over $4 billion.  Campbell Soup is expected to buy Bolthouse Farms for $1.5 billion and raise its stakes in the beverage biz.  Salesforce.com snapped up start-up GoInstant in an attempt to improve its customer-service efforts.  AMR (American Airlines) may now be on the selling blocks as it prepares to exit bankruptcy and US Airways continues to have significant interest (and rumors have Delta entering the picture). 

Stocks struggled for much of the week as continued unease in Europe and concerns about earnings season pushed the major indexes to a six-session losing streak as many investors again sought the safe-haven of treasuries.  Late in the week, better-than-expected results from financials (including an already damaged JP Morgan) brought back some bargain-seekers in a big way, though the overall mood remains cautious at best.  By week’s end, the indexes ended at much the same places as they began.  Oil prices continued their steady climb as newly imposed Iranian sanctions threatened to impact future supplies and the Fed alluded to the possibility of new stimulus at some point in the not-so-distant future.  One week of earnings down…more to come. 

Economic Calendar

Nothing comes easy in Europe these days.  Spain announced new austerity to the tune of about $80 billion and projected little to no growth for 2013.  Even with the fresh $37 billion commitment to the banking sector from euro-zone finance ministers, some analysts believe that the fourth largest economy in Europe is still on course for bailout mode.  Italy expects to avoid a full-fledged rescue of its own, but may need to periodically “tap” into that stability fund as its borrowing costs move to higher levels.  Meanwhile, Germany’s highest court may be reviewing the constitutionality of the bailout fund, another unneeded impediment that could delay prospects for recovery in the euro-zone for the foreseeable future.  Across the globe, China continues to struggle with economic weakness of its own as its GDP ONLY rose 7.6% in the second quarter (still the envy of the rest of the developed and emerging world).  Trade continued to slow as the country feels the ill-effects of Europe’s woes and “contagion” threatens global growth. 

Closer to home, the economic news was lackluster at best as a gauge of consumer sentiment dropped to its lowest level of the year on ongoing labor (and Europe) concerns.  Though jobless claims offered their best showing since March 2008, analysts attributed the drop to seasonal aspects as major automakers didn’t slow down factory production as they often do in the summer months (shouldn’t that be perceived as good news for manufacturing?).  Wholesale prices rose ever-so-slightly in June for the first time in four months, though inflation does not appear to be a major concern in the least. 

The minutes from the latest Fed policy meeting showed a lack of consensus in the midst.  Some members seem ready to act now to help increase prospects for recovery amid the weakening jobs market, while others maintain a “wait and see” attitude as the economy continues to plug along at a moderate clip.  They agreed that the global “challenges” are worsening and the debt crisis in Europe is no longer contained to simply a regional dilemma.  Additionally, they believed that the unemployment rate is higher than hoped and the slowdown experienced since the early-year strength has been “more substantial” than most had predicted.   Some like SF Fed Prez John Williams are already leaning toward another round of bond buying (Quantitative Easing). 

On the Horizon…A hectic week on the economic calendar brings housing to the forefront as investors get another close-up look at a sector recovery in progress (or not).  The consumer is also on display as retail sales depicts just how great an effect the slowing labor market is having on individuals’ buying patterns.  The Fed Beige Book lends new insight (and speculation) about the need for (and timing of) future stimulus moves.  Citigroup and Bank of America follow JP Morgan and Wells Fargo to the earnings stage, while bellwethers GE and Intel also report.  And, of course, Spain, Italy, Germany, and China are never too far from the headlines. 

The information set forth was obtained from sources which we believe reliable but we do not guarantee its accuracy or completeness. Neither the information nor any opinion expressed constitutes a solicitation by us of the purchase or sale of any securities.  Past performance is not a guarantee of future performance.

(c) Brounes & Associates

www.ronbrounes.com

             
 

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