Earnings - who knew?

Cross-posted at River Twice Research.

With a slew of major companies reporting earnings so far, it's clear that expectations were severely skewed to the negative. Once again, Wall Street analysts overshot - this time to the downside. The substantial margin expansion reported by Intel; the higher-than-anticipated profitability of IBM; and the blow-out quarters of Goldman Sachs and JP Morgan all stand in contrast to sentiment just a few weeks ago, which was grim and getting grimmer. So what happened?

First, the robust results of some of the banks so far is the result of trading revenue and changes in accounting rules rather than a sudden improvement in losses from bad loans. Still, income is income, and the more they generate, the easier it will be to absorb those losses from consumer, commercial and business loans that will continue to go sour for some time.

Second, the companies that have reported strength for the most part have significant portions of thier business outside the United States - IBM alone derives nearly 25% of its revenue from Asia and almost two-thirds from non-US operations. Intel has a similar exposure. Or take a company like Yum Brands, with its vibrant Kentucky Fried Chicken franchise in China. The market didn't love its recent report, with weak sales at Taco Bell in the US, but it is still expanding rapidly and at high-profit in China. In short, there are pockets of the global economy that are doing considerably better than the United States and parts of Europe, and those companies exposed to those regions have been benefiting.

Finally, while subsequent earnings of consumer companies may disappoint relative to what we've seen the past week, it's clear that companies operating globally have been able to escape the worst of the economic downturn at the expense of labor and jobs. They can go anywhere and to some extent shed anyone in order to maintain margins, and that means that they don't necessarily track the economic trends of any particular country and can often do substantially better than any national economy. That should be a lessen in both economics and investing: looking to economic data as an indicator of corporate profitability is a mistake, and that has been starkly evident in the earnings reports so far.

For a look at additional blogs and other writings of mine, feel free to visit River Twice Research.

Tags: companies, earnings, Economy, global economy, Goldman Sachs, Google, IBM, Intel, Wall Street (all tags)

Comments

5 Comments

China will certainly recover faster then us...

Part of this unemployment is NOT due to the short term effect of the bank meltdown, but the natural results of YEARS of off-shoring and corporations rewarded for short term stock gains at the loss of long term capital and research investment.

Basically, people, as compared to to Great Britain, we managed to end our empire in the course of less then a decade, as compared to their slow 100 year decline!

Hurray for Internet Time!

by WashStateBlue 2009-07-17 01:57PM | 0 recs
I certainly agree here

We are very likely to see double digit unemployment for the forseeable future.  

by Kent 2009-07-17 02:31PM | 0 recs
Other economies are financing opportunity

We're financing entitlements.

If you look at the Chinese stimulus plan, 75% is already spent and out the door. And it's being spent on real infrastructure projects: bridges, roads, etc. By contrast, Obama handed the Congress an $800 billion blank check---essentially, walk-around money for the appropriators. What we got back was a patchwork quilt: a little of this, a little of that. That's not real stimulus.

As for earnings, most of the good stories so far which beat the street estimates did so by good cost control. Top line revenues are still anemic, and it's important to remember: you can't cut your way to growth.

by BJJ Fighter 2009-07-17 04:52PM | 0 recs
Re: Other economies are financing opportunity

What we got back was a patchwork quilt: a little of this, a little of that. That's not real stimulus.

you do realize the big difference here is that China is a totalitarian state and can do whatever the fuck it wants and we needed to get 2 Republicans and a couple of Democrats who shit their pants at the thought of spending to vote for the stimulus.

by DTOzone 2009-07-17 07:27PM | 0 recs
That's not the question

Fiscal stimulus in the form of government spending rarely works; Japan tried it 4 times during their "lost decades", and look where it's gotten them: surpassed by China this week as the world's second largest economy.

That said, there would be at least some impact if the stimulus program had some critical mass, e.g., a Marshall Plan to rebuild the nation's infrastructure. Obama surely had the capital to take charge and propose his own stimulus plan; that's what leadership is all about. Instead, he turned it over to Nancy Pelosi.....not a smart move, even most Democrats would agree. Even many diarists on this site now conclude that she is an idiot.

Now, the same dynamic is unfolding in Health Care. Obama is taking the opposite tack from Hillary-care, which was to hand over a Health Care plan to the Congress and say "pass it". But his approach, which Mark Shields referred to tonight as "a thousand flowers" is leading to a health care initiative which is floundering due to a lack of leadership. Steny Hoyer said today that health care is now "back to the drawing board".

Many opportunities are being squandered. I fear for this great country.

by BJJ Fighter 2009-07-17 09:00PM | 0 recs

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