US 3Q EARNINGS – THE BANKS WERE GOOD! WHAT ABOUT THE REST? By david Buik of Cantor Index

David Buik, Cantor Index

The start of this year’s 3^rd quarter earnings season was predictable – an average effort from Alcoa, which saw global aluminium production fall.  Though this mining titan’s figures were marginally better than expected, which stopped the Street of Dreams reacting adversely, it was followed by a slew of banking results which could only be described, by recent standards, as gargantuan.  

JP Morgan Chase, despite the antics of the ‘whale’s’ high jinks in derivative trading in London – resulting in a loss of $3 to $5 billion, posted record numbers, thanks to a massive improvement in the US housing market.  This improvement was attributable to the FED ladling on masses more quantitative easing by agreeing facilities to buy in billions of dollars of mortgages and the banks’ enthusiasm to refinance existing mortgages for their customers. Wells Fargo’s effort was even more impressive, but the market’s expectations were very high; so profit takers strode in to the ring. Who can blame them?  These banks have seen their share prices rally by between 25-35% in the last year.  

In fairness the US has implemented the Dodd/Frank plus the Volcker recommendations rather more hastily and effectively than their European peers. Similarly, Citigroup, Goldman Sachs, Bank of America Merrill, Morgan Stanley and others posted numbers equally impressive. It looked as though the market was worrying about the quality of the 3^rd quarter earnings unnecessarily.  

Then, there were signs of anxiety from a number of key bellwether stocks – IBM, GE and Microsoft.  Their interim results fell short of revenue expectations, creating a sour mood in the first main week of the 3^rd quarter reporting period. Next cumuli nimbus clouds gathered over San Francisco when Google’s results were presented before the market closed on Wednesday, courtesy of a ‘fat finger.’ Regardless of this blunder, Larry Page and Sergei Brin would have presented numbers illustrating a 20% drop in profits for the quarter. The market immediately reacted badly to this regrettable presentation and the shares fell by 8.4% after hours – about $20 billion in value wiped out, generally acknowledged as the largest fall in any one session by a single company in living memory. 

Apart from the manner of the presentation, it had not escaped investors’ notice that advertising on websites has dropped measurably. Also, Google is a barometer of global economic activity, which continues to fall.  The world’s largest search engine titan now has real competition from Baidu in China and don’t be surprised to see some resurgence from Yahoo! Google has yet to get to real grips with China. 

Next week there are a slew of defence stocks such as Boeing, Raytheon, Lockheed Martin and Northrop Grumman stepping up to the plate.  Will drops in global defence budgets damage their share prices, or is this threat already priced it? I guess we’ll see shortly… 

We also hear from the likes of Facebook and, perhaps the most important of all – Apple, the most influential public quoted company in the US and now valued at over $600 billion.  Will the miraculous sales of iPhone 5, which may have exceeded 10 million units, be sufficient?  Then of course Honeywell, Dow Chemicals and Procter & Gamble have yet to post their numbers plus Exxon Mobil and Chevron the following week. All may have not necessarily have passed muster. 

The pace of earnings reports will accelerate next week, with 8 Dow components and 155 S&P 500 companies scheduled to release results. Just 38 percent of S&P 500 companies beat expectations on revenue in the past week, compared with 41 percent since the start of the reporting period, and well below the 62 percent long-term average.  A pragmatic approach to earnings is required.  The US is performing tolerably, but the rest of the world seems to be heading in to reverse! This affects profitability!