Earnings vs SPX-Chicken or the Egg?

by the trader

Before we get too exited about the Markets potentially exploding to the upside. By Turner via DShort.

I took the S&P quarterly closes and overlaid the 3, 2, 1 yr averages of four-quarter earnings. I think it’s instructive in that “normalized” earnings should be somewhere around $65.00. The yellow portion is the forecasted earnings and S&P quarterly close (around 1200 is the best guess).

Here are a few takeaways:

• The $65.00 approximate 3-year average earnings coincides with the long-term historical y-o-y earnings growth.
• “Irrational Exuberance” and easy money post-1995 rapidly inflated the S&P 500 price without associated earnings growth.
• Dot Com burst – earnings continued up while market declined (from extended overvaluation).
• 2002: earnings (1 yr) turned up before market.
• 2007: earnings (1 yr) turned down with market.
• Increasing amplitude of fluctuations above and below mean display Fed Monetary policy distortions (getting worse, by the way).
• Earnings will either rapidly fall off next year or the market will skyrocket to stay ahead of forecasted earnings (I’ll take the under).

In the months ahead, this would be a chart to review to see the “forecast” back then and compare with what really happened.

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Sector Earnings Season Performance

by Bespoke Investment Group

Below we highlight the average one-day change on their report days for companies that have reported earnings this season by sector. We also include the average one-day change on earnings by sector for all earnings seasons going back to 2001. As shown, the average Telecom stock has declined 7.54% on its report day this season, which is the worst performance of any sector. The Energy sector has been the second worst with an average one-day change of -4.30%, followed by Materials (-3.83%) and Consumer Staples (-3.41%). Surprisingly, Financial sector stocks are holding up the best in response to their earnings reports this season. The average one-day change for Financial stocks on their report days has been -1.12%. It's pretty sad when the BEST performing sector is averaging a one-day decline of more than 1%.

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No Guidance Is Better Than Bad Guidance

by Bespoke Investment Group

When a company releases quarterly earnings figures, any guidance that is issued is analyzed just as closely as the EPS and revenue numbers. But companies aren't required to issue guidance, and it's interesting to track the percentage of companies that do so each earnings season. We can think of two obvious reasons why a company wouldn't issue guidance -- 1) if there is simply too much uncertainty about the business environment and 2) if expectations are poor and the company wants to wait it out to see if it can turn things around before its next release.

Below we highlight the percentage of companies that have issued no guidance on a quarterly basis since 2002. As shown, when the market was in bull market mode during the mid-2000s, a lot of times less than 50% of companies would issue no guidance. When the financial crisis began in late 2007, the percentage began to steadily increase each quarter until it peaked in the same quarter that the market bottomed in Q1 '09. As the current bull market has progressed, more and more companies have begun to issue guidance, but this earnings season we have seen a huge spike in companies that haven't issued any guidance once again. Since earnings season began on July 11th, 412 companies have released numbers, and 65.8% of them haven't issued any guidance. This is actually .2% above the peak reading of 65.6% seen at the depths of the financial crisis. For those looking for proof that uncertainty abounds in the business world right now, there you have it.

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Second-Quarter Earnings Prove "Glocal" Companies are the Best Investments

By Kerri Shannon

The second-quarter earnings season has delivered some healthy activity, but the true standouts are the big U.S. companies that have learned to profit from emerging markets.

These are what Money Morning Chief Investment Strategist Keith Fitz-Gerald refers to as "glocal" companies - firms that have a global and local presence. And they offer investors a way to profit from emerging-market growth, while also safeguarding against turbulence at home.

Indeed, as U.S. debt issues continue to weaken the U.S. dollar, "glocal" companies are profiting from increased exports, selling to markets like China and India and their growing middle class.

So, let's look at some of the most promising prospects.

Earnings Season Shows Boost in Profit from Emerging Markets

So far this season, earnings at companies in the Standard & Poor's 500 Index are the highest they've been in four years, according to S&P analyst Howard Silverblatt. About 75% of companies that have reported have exceeded analysts' expectations, and many raised earnings' forecasts for the rest of the year.

Earnings per share are up 19% from a year earlier for the 122 S&P companies that reported earnings as of July 22. And much of the increase is from companies with strong exposure to emerging markets.

McDonald's Corp. (NYSE: MCD), which gets about two-thirds of its revenue from overseas sales, reported that second-quarter earnings increased 15% to $1.4 billion. The company said overseas sales growth outperformed U.S. growth in the April-June quarter.

General Electric Co.'s (NYSE: GE) second-quarter revenue jumped 21% to $3.8 billion, with a big boost from its operations in emerging markets. GE saw U.S. revenue from its core industrial businesses decrease by about 3.4%, while international industrial revenue climbed by 23%, accounting for about 59% of GE's total industrial revenue.

GE's Chief Financial Officer Keith Sherin said the company saw slow growth in the United States, but its international divisions enjoyed double-digit revenue growth last quarter, including a 91% jump in India and a 35% increase in China.

The growth helped GE get a record order backlog of $189 billion.

Air Products & Chemicals Inc. (NYSE: APD) expects to split profits this year between the Americas and Asia, but Chief Executive Officer Paul Huck said that split is starting to shift.

"We think that that number starts to tilt more toward Asia going forward," Huck told investors on a conference call last Friday.

Honeywell International Inc. (NYSE: HON) Chief Financial Officer David Anderson said high U.S. unemployment and sovereign debt concerns across the globe have made companies reevaluate their operations to profit from emerging markets.

Anderson said U.S. and European economic problems have led to a "muted or grinding subpar recovery."

"As a result, there is a need for both caution and flexibility in terms of your operating mind-set," he said.

Foreign demand - especially from China - also helped boost Caterpillar Inc.'s (NYSE: CAT) second-quarter profit by 44%. About 90% of Caterpillar's U.S.-made large mining trucks are exported. Sales were up 34% in Latin America and 41% in the Asian-Pacific region.

Getting in on Glocal Companies

One of the major offshoots of this global growth has been increased hiring abroad.

Indeed, many global companies are moving more and more of their operations overseas, focusing their hiring efforts on markets that have performed better than the United States. With a weak U.S. dollar, foreign sales are likely to continue outperforming those at home, meaning jobs are unlikely to return quickly.

"Any U.S. multinational corporation is going to benefit from a weaker dollar," Michael Yoshikami, chief executive at fund management firm YCMNET Advisors, told Reuters earlier this year. "The problem is that on a fundamental basis, there isn't a real driver for massive re-employment."

According to the U.S. Commerce Department, U.S. multinational corporations cut their domestic workforces by 2.9 million during the 2000s, and increased overseas workforces by 2.4 million.

Now that companies have increased efficiency in the United States, they've enjoyed better earnings and have little incentive to hire at home.

"We've driven all this cost out. Sales have come back, but people have not," said Greg Hayes, chief financial officer at United Technologies Corp. (NYSE: UTX). "It's the structural cost reductions that we have done over the past few years that have allowed us to see strong bottom-line results."

While many Americans criticize companies that take U.S. jobs overseas, you as investors can profit from the global shift.

"It doesn't take more than a quick glance to see that the capital flowing out of the United States and into other countries has been very beneficial for a lot of corporations," said Money Morning Contributing Editor Shah Gilani. "Those are the corporations whose shares you should be buying."

In addition to the U.S. multinationals listed above, another U.S.-based company expected to profit from increased overseas sales is Wal-Mart Stores Inc. (NYSE: WMT). Wal-Mart has successfully introduced its "everyday low prices" strategy to markets in Japan and Mexico, and is now moving on to markets like Brazil and Honduras.

The company credits the low-price approach to increasing international growth by 11.5% in the first quarter.

"The emergence of the middle class in countries like Brazil and China are such powerful drivers for Wal-Mart," Sarah Henry of Manulife Asset Management, which owns Wal-Mart shares among its $217 billion in assets under management, told MarketWatch.

Wal-Mart recently got approval to merge with South African retailer Massmart.

"We'll grow much more," Wal-Mart Chief Executive Mike Duke told MarketWatch. "There are many more growth opportunities in each country. South Africa is a great example. That can be the beginning of something great."

Money Morning's Keith Fitz-Gerald said exposure to Wal-Mart is good long-term because of the company's diversified revenue stream and multiple-product lines.

Wal-Mart will report second-quarter earnings in August.

Fitz-Gerald also alerted readers to another stock pick profiting from international cash flows, even as U.S. markets stagnate. To find out one of the best ways to profit from emerging markets, you can sign up for our affiliate newsletter, the Money Map Report.

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Second Quarter Earnings and Revenue Beat Rates

by Bespoke Investment group

Since last Monday when earnings season began, 345 US stocks have reported their quarterly numbers. As shown below, 70% of these companies have beaten earnings per share estimates, while 71% have beaten revenue estimates. Both of these numbers are high relative to prior quarters during the current bull market, but they also both typically pull back as earnings season progresses.

Last season, the earnings beat rate came in at its lowest level of the bull market. As of now, it appears as if the beat rate will be stronger this quarter, which is a good sign. The revenue beat rate wasn't all that bad last quarter, and it will be pretty impressive if we can see a quarter-over-quarter increase when all is said and done this season.

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How To Buy Stocks During Corporate Earnings Season

By: David_Grandey

IT’S EARNINGS SEASON
True to form with thrills (IBM, AAPL, VMW) and spills (RVBD, FTNT) earnings season is here in all its glory. So how do you go about buying a stock in the volatile climate? Let’s take a look at a couple of examples from the watch list in our newsletter — starting with an example of what not to buy, then an example of what we did buy and a stock that is setting up to be another good buy should conditions hold up.

What not to buy:

Here we have FTNT that was setting up nicely before earnings. It was pulling back off of its highs in an orderly manner and was above support and the 50-day. What we wanted to see after earnings was the stock finding support at the 50-day or the blue or green lines. If that occurred, we would have stepped up to the plate to buy it. However, as you can see, the stock crashed through multiple areas of support and therefore is no longer a buy candidate.

Now let’s take a look at what to buy:

Yesterday TSCO announced earnings and the stock went from 70.67 to the 65-66 range.

Why are we buying it on weakness? Because its uptrend is still intact as defined by the upward slopping green trendline. That’s what we wanted to see happen with FTNT.

Now let’s take a look at a stock that is setting up nicely:

We want to see NFLX tag the 50-day after earnings. If so, we’ll initiate a long side trade.
“Let your stocks tell you what to do by the action they exhibit”
“We trade what we see, not think, hear or fear”

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Corporate profits off to strong start for 2Q

By DAVE CARPENTER

So much for fears that U.S. companies might stall out in the economy's soft patch.

Corporate profits are coming in better than expected so far in second-quarter earnings season despite concerns about the potential for trouble ahead.

Strong showings from blue-chip companies such as Apple, Coca-Cola and McDonald's have put the quarter on track to set a new record for operating earnings.

"The corporate sector's in great shape," says Joseph LaVorgna, chief U.S. economist at Deutsche Bank. "The economy is a little healthier than we thought it was."

Aside from companies' continuing stubbornness about hiring more workers, the early results are good news for investors and anyone worried that the debt-limit standoff in Washington or the financial crisis in Europe could inflict serious damage.

Consumers' willingness to spend on fast food, electronic gadgets and other items has helped fuel better-than-expected quarterly results. Among the standouts:

• Apple Inc. more than doubled its profit to $7.31 billion on an 82 percent jump in revenue, further testimony to the runaway popularity of the iPhone and iPad.

• Coca-Cola Co. more than tripled net income to $5.77 billion as the world's largest drink maker increased its strength in emerging markets, such as Latin America, India and China, while sales held stable in the U.S. and Europe.

• Harley-Davidson Inc. more than doubled its profit to $191 million, posting an increase in U.S. motorcycle sales for the first time since 2006 and expanding its market share overseas.

• McDonald's Corp. increased net income 15 percent to $1.4 billion on a 16 percent jump in revenue, attracting more customers for its broadening menu and array of coffee drinks even as it raised prices.

Companies in several other industries also blew past Wall Street's expectations this week, including credit card issuer American Express Co., toy maker Hasbro Inc., oil services company Halliburton Co., computer company IBM Corp., chipmaker Intel Corp. and health insurer UnitedHealth Group Inc.

All told, 148 companies in the Standard & Poor's 500 index have reported earnings and 73 percent have beaten the expectations of Wall Street. That's somewhat ahead of the typical pace of two-thirds that surpass estimates.

Companies that had reported as of Friday had $24.52 per share in operating earnings — profits before subtracting interest and tax expenses — according to S&P senior index analyst Howard Silverblatt. The record of $24.06 per share was set in the second quarter of 2007.

Wall Street analysts forecast the next two quarters to be even better at $25.30 per share in the third quarter and $26.47 per share in the fourth. That's assuming the economy isn't dragged down by the deficit-reduction impasse or another problem.

Coming out of the recession, corporations first reported explosive earnings growth early last year. The pace has slowed, but it's still going. At the current rate, second-quarter earnings would be 17 percent better than a year ago.

It hasn't all been smooth going, as Caterpillar Inc.'s big earnings shortfall Friday underscored. The world's largest maker of construction and mining equipment took a hit because of the earthquake and tsunami disaster in Japan.

Other stumbles this week came from drugmaker Johnson & Johnson, appliance maker Whirlpool Corp. and big airline companies weighed down by higher fuel costs: AMR Corp. and US Airways Group Inc.

CEOs and chief financial executives also have been notably cautious in their comments about coming quarters, according to Quincy Krosby, financial market strategist with Prudential Financial.

"A little bit of uncertainty has crept into companies' guidance," Krosby says. ""You're hearing a lot of `It's challenging,' `It's difficult,' `We think we're going to do well but we're not sure.'" That hedging language, she says, has to do with the possibility for further trouble to develop from the ongoing economic and political dramas in Europe and Washington.

Yet the stock market itself hasn't shown much sign of concern. The S&P 500 rose 2.2 percent this week after having been down 2 percent during the previous two weeks.

That shows that investors aren't viewing companies' positive showings skeptically, says Rob Stein, founder and senior portfolio manager for Chicago-based Astor Asset Management.

"Earnings season has been at the higher end of expectations," he says. "More importantly, it's been well-received by the Street."

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AT&T revenue, net subscribers beat Street

by Sinead Carew

(Reuters) - AT&T Inc (T.N) posted a higher-than-expected 2.2 percent revenue increase for the second quarter as customer growth improved at the No. 2 U.S. mobile provider in the first full quarter after it lost exclusive U.S. rights to sell Apple Inc (AAPL.O) iPhone.

AT&T, which is seeking approval to buy T-Mobile USA for $39 billion, added 331,000 net subscribers in the quarter compared with the average expectation for 91,000 from seven analysts contacted by Reuters.

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Morgan Stanley swings to loss, but tops estimate

By Greg Morcroft

Morgan Stanley MS said on Thursday that it swung to a loss in its second quarter of $558 million, or 38 cents a share, compared to a profit of $1.58 billion, or $1.09 a share. Revenue at the firm in the second quarter was $9.28 billion compared to $7.96 billion a year ago. Analysts polled by FactSet Research had expected the company to lose 61 cents a share, on revenue of $8.04 billion.

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PepsiCo profit seen up on international growth

By Martinne Geller

PepsiCo Inc (PEP.N) is expected to report higher quarterly profit on Thursday, helped by growth in emerging markets.

The company sells variations of its Pepsi-Cola drinks, Frito-Lay snacks and Quaker oatmeal products in many countries around the world, which has helped insulate its results from a slowdown in North America.

Analysts on average are expecting the company to report second-quarter earnings of $1.21 per share on revenue of $16.4 billion, according to Thomson Reuters I/B/E/S.

Standard & Poor's Equity Research analyst Esther Kwon expects the same general trends for PepsiCo as those reported this week by rival Coca-Cola Co (KO.N), whose shares rose to a 12-year high after results beat expectations.

"North America is just bumping along. The real growth is driven by international," Kwon said in an interview. Even though Pepsi-Cola just dropped to the No. 3 brand of soft drink in the United States, behind Coca-Cola and Diet Coke, Kwon said "the real investment story is the ability for these companies to grow overseas."

She has a "buy" rating on Pepsi and a "strong buy" on Coke, which has a larger international footprint and stronger overall returns due to its concentration in beverages.

Analysts will be keen to hear PepsiCo's comments about raw material costs and U.S. price increases meant to offset some of the margin squeeze.

Consumer Edge Research analyst Bill Pecoriello said Coke's reiterated plan to raise prices by 3 to 4 percent in the rest of the year means that its net increases could be below those of Pepsi.

"PepsiCo will have to decide whether to settle for less pricing or meaningful share losses," Pecoriello wrote in a note.

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Nokia posts $523 million loss, lower sales in Q2

by Yahoo! News

Mobile phone maker Nokia Corp. on Thursday posted a loss of euro368 million ($523 million) as sales slumped in the second quarter amid "greater than expected" challenges.

The result was down from a profit of euro227 million in the same period last year.

Nokia said its revenue fell 7 percent to euro9.3 billion from euro10.0 billion the previous year. It shipped 88.5 million mobile devices in April through June, down from 111 million a year ago and 108.5 million in the previous quarter.

"The challenges we are facing during our strategic transformation manifested in a greater than expected way" during the quarter, CEO Stephen Elop said. "However, even within the quarter, I believe our actions to mitigate the impact of these challenges have started to have a positive impact on the underlying health of our business."

Nokia's share was up 4.6 percent at euro4.26 on the Helsinki Stock Exchange immediately after the report.

Nokia said it was accelerating its cost-cutting plan to exceed the previously targeted savings of euro1 billion in 2013. The reductions would be achieved through cuts in staff and oustourced professionals, facility costs "and various improvements in efficiencies," the company said.

Nokia rose to the top position in the cell phone business in the late 1990s when it overtook Motorola. Although it struggled in the U.S., it dominated almost everywhere else, primarily through mass sales of low- and mid-priced mobile phones.

Now, Nokia is being squeezed in the low end market by Asian manufacturers like ZTE and in the high end by the makers of smartphones like the iPhone and Blackberry devices. Its global market share dropped below 30 percent earlier this year for the first time in more than a decade.

Nokia's share price has dropped nearly 50 percent this year, falling below euro4 this month.

The Espoo, Finland-based company hopes to regain momentum through a linkup with Microsoft, whose Windows Phone operating system will replace Nokia's Symbian software. Symbian has been losing ground to Google's popular Android platform. Nokia expects to launch its first Windows phones later this year.

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Triple Plays Down

by Bespoke Investment Group

An earnings report "triple play" occurs when a company beats earnings estimates, beats revenue estimates, and raises guidance. Triple plays are rare, and that's why we like the stocks that report them so much. A company that beats bottom and top line estimates and also raises guidance is a company that we want to look into more as a potential long opportunity.

So far this earnings season, there have been just six "triple plays" -- EDU, VMW, PII, IBM, ISRG, and CTAS. This represents just 4.6% of the total number of companies that have reported this season. Below we highlight the percentage of stocks that have reported "triple plays" on a quarterly basis going back to Q4 '01. As shown, the 4.6% reading seen so far this quarter would be the lowest quarterly reading since the bull market began if it holds. There's still plenty of time left for companies to pick it up, however, so we're not too concerned about the drop off yet.

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Intel net edges up 2%

By Benjamin Pimentel

Intel Corp. INTC  on Wednesday reported a second-quarter profit of $2.95 billion, or 54 cents a share, compared with a profit of $2.89 billion, or 51 cents a share, for the year-earlier period. Revenue was $13 billion, up from $10.8 billion. 

Adjusted income was 59 cents a share. Analysts had expected the company to report earnings of 51 cents a share on revenue of $12.8 billion, according to a consensus survey by FactSet Research.

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American Express posts higher quarterly earnings

by Dan Wilchins

American Express Co (AXP.N) said second quarter earnings rose, as customers spent more on their cards and the company's processing revenue rose.

The New York-based company posted quarterly earnings for common shareholders of $1.32 billion, or $1.10 a share, compared with $1.00 billion, or 84 cents a share, in the same quarter last year.

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Qualcomm posts higher quarterly profit

by Sinead Carew

Wireless chip maker Qualcomm Inc (QCOM.O) posted an increase in fiscal third-quarter profit and revenue helped by strong demand for smartphones.

But its shares fell 1.7 percent in late trading, even as the company raised its profit and revenue estimate for the full year citing smartphone growth and an acquisition.

Qualcomm's profit rose to $1.035 billion, or 61 cents per share for its fiscal third quarter ended in June 26, from $767 million, or 47 cents per share, in the same quarter the year before. Revenue rose to $3.62 billion from $2.7 billion. Wall Street analysts had expected revenue of $3.59 billion, according to Thomson Reuters I/B/E/S.

On May 24 Qualcomm said it completed its acquisition of another wireless chip maker, Atheros Communications.

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EBay profit falls, as revenue rises 25%

By John Letzing

EBay Inc. EBAY said Wednesday that its second-quarter net income fell to $283 million, or 22 cents a share, from $412 million, or 31 cents a share in the same period last year. The online retailer said revenue for the period ended June 30 rose 25% to $2.76 billion. Excluding one-time items, eBay said earnings for the quarter were 48 cents a share. Analysts polled by FactSet Research had expected eBay to report earnings excluding items of 46 cents a share, and $2.61 billion in revenue.

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United Technologies 2Q profit up 19 percent

By STEPHEN SINGER

United Technologies Corp. posted a 19 percent jump in its second-quarter profit on Wednesday, citing strong orders for its heating and cooling building systems and exports that got a lift from a weaker dollar.

The results from the Hartford company that owns Carrier heating and cooling, Otis elevator, jet engine manufacturer Pratt & Whitney and other businesses beat Wall Street estimates.

The company also raised its outlook for the full year.

Its shares rose $1.28, or 1.4 percent to $90.10 in premarket trading.

Chief Executive Louis Chenevert said in a statement that he was particularly pleased that orders are strong at the commercial construction segments, which points to future strength because the work is planned years in advance.

"More encouragingly, order rates remain strong and in line with expectations across most of the segments including our longer cycle commercial construction-related businesses," he said.

The company reported its net income rose to $1.32 billion, or $1.45 per share, for the April-June quarter, from $1.11 billion, or $1.20 a share, a year ago.

It was the sixth consecutive quarter of double-digit profit increases.

Revenue rose 9 percent to $15.08 billion from $13.8 billion a year ago. Orders increased at Otis, Pratt & Whitney and aerospace parts maker Hamilton Sundstrand.

Analysts expected earnings of $1.41 a share on revenue of $14.61 billion

United Technologies raised its 2011 outlook to between $5.35 per share and $5.45, up from $5.25 to $5.40. 

It also raised its revenue estimate for the year to $58 billion from $57 billion.

Analysts expected full-year earnings of $5.43 a share on revenue of $57.7 billion.

Each of United Technologies' six businesses reported revenue gains in the latest quarter, with Otis at the head, posting a 12 percent rise to $3.19 billion.

Commercial spare part orders at Pratt & Whitney's large engine business grew 23 percent and orders rose at Hamilton Sundstrand by 25 percent.

New equipment orders at Otis were up 23 percent, which included favorable foreign exchange of 8 percentage points. Commercial equipment orders at Carrier grew 13 percent, including favorable foreign exchange of 4 points.

When the U.S. currency is weaker, revenue that companies get in foreign currencies translates into more dollars. About 60 percent of United Technologies' $54.3 billion in revenue last year was from sales outside the United States.

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by ReggieMiddleton

Apple reported blowout numbers and a record quarter yesterday. Not one, that's right, not one Wall Street analyst got it right! As a matter of fact, not only did no one get it right, they were all wrong to the downside - every single one! Doesn't that sound fishy after 11 previous quarters of analysts missing the mark to the downside? In a descriptive post yesterday, I detailed how I beat the street on Google's earnings, step-by-step by "thinking more like an entrepeneur and less like a Wall Street analyst". In said missive, not only did I illustrate in relatively fine detail how the Street totally missed the massive value that Google is building, I also outlined in similar detail the voluntary game that the Street is playing with Apple and earnings guidance. Yes, it's a game, and an obvious one at that. Despite being so obvious, retail investors and institutions alike are playing along. Let me excerpt a few choice lines from said post:

Since I started covering mobile technology on BoomBustBlog, things have pretty much occurred precsiely as we anticipated - with Google, Microsoft, and Research and Motion (a 6x to 7x gain on select puts) following their prescribed paths...

• • Blackberries Getting Blacked Out, Imitate Amateur Base Jumpers Sans Parachute!: Google’s Android Market has more than 150,000, compared with more than 25,000 in BlackBerry App World. RIM fell $6.17, or 11 percent, to $50.43 in late trading yesterday, after closing at $56.59 on the ... Friday, 29 April 2011
  • BoomBustBlog Research Performs a RIM Job!: ...is innovating and growing, at the same time compressing marigns. They also fail to understand the business model that Google has innovatively adopted to push Android through vendors and 3rd party distributors ... Friday, 17 June 2011

Next up is Apple, whom we predicted our analysis would reach frutition in the 4 to 6 quarters. Apple reports today, and we fully suspect a blow quarter that (again, just like the last 12 quarters) surprise the unsurprisingly inept analyst estimates that somehow could not get it right for nearly 2 years straight see above). We also expect indications of our margin compression thesis to start peeping their little eyes out of the footnotes, of course to be totally ignored by the cheerleading sell side of Wall Street and pop tech and financial media, as the Apple lovefest marches on.

Hmmm! That was awfully prescient wasn't it? No! It wasn't. It was simply blatantly honest. Here is a further excerpt from a previous post describes in complete detailt the Analyst/Apple earnings game...

Yes, we are more optimistic on Apples' earnings than the sell side (reference page 16 in subscription document Apple - Competition and Cost Structure) Look to my writings from last summer to determine the common sense reasons why: How Google is Looking to Cut Apple’s Margin and How the Sell Side of Wall Street Will Enable This Without Sheeple Investor’s Having a Clue.

Page 16 of the aforementioned document (which was released several months ago) pegged an uncannily accurate estimate of iPhone sales at 77 million for the year. Being that Apple sold ~20.3 million for the most recent quarter and said quarter was a company record, I think it's fair to say that we have a realistic grasp on Apple.

I syndicate my free content to several other sites, the vast majority of which are rife with Apple fanatics. These fanatics are literally incapable of parsing the logic of the preceding statement and the leading paragraph to this post. I have been more optimistic on Apple's nearer term accounting numbers than virtually the entire sell side, and have been proven accurate. As a matter of fact, this is actually a null feat that is absolutely nothing to brag or boast about since you simply have to look at the history of Apple's performance, guidance and analyst forecasts to see a needlessly consistent trend of error on the part of the sell side. Honestly, an elementary school student could have figured it out. I have also been correct on the underperformance and overvaluation of RIMM and the undervaluation and over performance of Google. Again, not a feat of superior intellect, but a much more mundane accomplishment of following the facts without bias and not having ulterior motives in producing analysis. In this case, an elementary school student may not have been able to do it, but I'm damn sure an astute high schooler could piece it together. In closing I will repost (for the 4th time) the earnings guidance snippet and challenge readers to possibility that we may have a very valid point.

In the meantime, sheeple-like investors are being hoodwinked by quarter after quarter of Apple blow out earnings. Don't get me wrong. I feel and fully acknowledge that Apple is executing on all 8 cylinders of a 6 cylinder engine, but it still has its real world limitations. Apple will start to bump up against these limitation over the next 4 quarters, and the signs of this bump are already apparent. Of course, the signs are being handily masked by the games that Apple management and the sell side analysts of Wall Street play, with the "Sheeple" retail and the lazier component of the institutional investors being put out to take the eventual bullet.

Riddle me this - If Apple can consistently beat the estimates of your favorite analysts quarter after quarter, after quarter - for 11 quarters straight, shouldn't you fire said analysts for incompetency in lieu of celebrating Apple's ability to surprise? After all, it is no longer a surprise after the 11th consecutive occurrence, is it? I would be surprised if my readers were surprised by an Apple surprise. Seriously! Apple management consistently lowballs guidance to such an extent that it can easily manage, no - actually create outperformance. This has has a very positive effect on their valuation. Of course, I do not blame Apple management for this, of they are charged with maximizing shareholder return. The analytical community and the (sheeple) investors which they serve is another matter though. Subscribers can download the data that shows the blatant game being played between Apple and the Sell Side here: Apple Earnings Guidance Analysis. Those who need to subscribe can do so here.

Below, I drilled down on the date and used a percentage difference view to illustrate the improvement in P/E stemming from the earnings beats.

In our analysis of Apple, we are using real world assumptions of future performance derived from backing in to the low balling this company is prone to. If you look at its history carefully you can gauge what management is comfortable with, hence what they may be capable of on the margin. Using these more realistic numbers, it is much more likely Apple will deliver a miss in the upcoming quarters in its battle with the Android! The following is the reason why...

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Caution, Earnings Ahead

by Tom Aspray

Taking a position ahead of earnings, even if they are better than expected, can be high risk, but assessing the technical outlook for Nasdaq 100 stocks like Apple (AAPL), SanDisk (SNDK), eBay (EBAY), and Yahoo (YHOO) can provide an edge.

Monday was a rough day for the stock market, as the S&P 500 again dropped below the 1300 level and tested the 61.8% support before rebounding into the close. The short-term Advance/Decline (A/D) indicators like the McClellan Oscillator are back to oversold levels last seen at the June lows.

Because the S&P 500 has a large number of financial stocks, it was hit harder than the other major averages. The Dow Industrials and Nasdaq 100 are both still holding above their 50% support levels.

This is a big week for earnings, and in yesterday’s column, I featured a list of the Nasdaq 100’s 20 most overbought stocks. The relationship of a stock’s price to its weekly Starc bands can help you decide what action, if any, is appropriate just before or after earnings are released.

One of the most overbought stocks was Apple, Inc. (AAPL), which added another 2.4% on Monday to close at $373.80, above the weekly Starc+ band at $371.07. Apple will report earnings after the close today (July 19).

I had been concerned earlier in the month that the stock might be losing its leadership role, but the new weekly closing high has erased those concerns.

The forecasts for Apple’s earnings are widely optimistic, and the bullish consensus makes me a bit nervous because no matter how good the earnings are, it seems like someone will always end up being disappointed.

I was also surprised to learn that one major firm recommended buying call options ahead of Apple’s earnings. Though they may be right this time, buying calls when a stock is above its weekly Starc+ band generally does not work out well.

eBay Inc. (EBAY), Yahoo Inc. (YHOO), and SanDisk Corp. (SNDK) are also reporting earnings this week, and even they are not on the most overbought list, the Starc bands and volume analysis may help us become better prepared for the market’s reaction to these upcoming earnings.

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Chart Analysis: Apple, Inc. (AAPL) broke out of its trading range with the close above $352, line a. The width of the trading range was $42, so the potential long-term upside targets are in the $390-$394 area.

• There is initial support now at $356-$362 with stronger support at $348-$352
• The relative performance, or RS analysis, had been moving sideways for the past several months, but broke through resistance (line b) last week
• The ability of the RS to hold above the April lows was positive, and the weekly uptrend, line c, is intact
• Weekly on-balance volume (OBV) failed to make new highs in 2011, line d, and then violated support ( line e) in mid-April, confirming the negative divergence
• The OBV has moved back above its weighted moving average (WMA) but it is well below its previous highs. This is not a pattern that you would typically see in a stock that was expected to gain another 20%-30%

SanDisk Corp. (SNDK) will release earnings on Thursday, July 21. The stock closed a bit lower on Monday at $40.50. It is just below the mid-range of the weekly Starc bands, with the Starc+ at $48.30 and Starc- at $34.97.

• The daily downtrend (line f) and the daily Starc+ band are in the $44.10-$44.20 area with the 2011 highs at $53.60
• The daily RS line has been in a well-established downtrend (line h) all year
• The RS violated support, line i, in June, signaling that it was going to be weaker than the S&P 500
• The daily OBV has been holding up better than prices, suggesting that the selling has not been too heavy on the decline
• The daily chart has support at $39.12 (line g), which is just above the daily Starc- band at $38.59

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eBay Inc. (EBAY) has earnings due out on Wednesday (July 20) and the weekly chart shows a broad trading range, lines a and b, that has been in effect since last November.

• EBAY closed Monday at $32.70. Last week’s high was $34.07 and the weekly Starc+ band is at $34.97
• The weekly OBV broke support, line d, in June, while prices did not. The OBV is well below its declining weighted moving average, which is negative
• First good support on the weekly chart is in the $29.80-$30.20 area with the last swing low at $28.27. The weekly Starc- band is at $27.07

Yahoo Inc. (YHOO) has had a recent pattern of disappointing earnings, so the numbers after the close on Tuesday will be widely watched. Even though the earnings expectations were low, the stock has dropped 9.5% since peaking on July 7 at $15.95.

• The weekly Starc- band and strong weekly chart support, line f, are in the $13.05 area. Once below this level, the next support is at $10.80-$11.75
• The weekly OBV has been below its weighted moving average for the past nine weeks, but it was strong at the early-May highs
• There is first resistance now at $15.95 and then at $16.90 with the weekly Starc+ band at $17.10. The Starc+ band was tested in May before YHOO reversed to the downside

What It Means: Clearly, this week is a big one for earnings, and given the recent selling in the stock market, weaker-than-expected earnings could add even more selling pressure. Unless you are in a strongly trending bull market, taking positions ahead of an earnings report is a bad idea, in my opinion, as the risk/reward is not favorable.

How to Profit: As for these individual stocks, I would not get caught up in the earnings euphoria over Apple, 

Inc. (AAPL), be it expected or actual earnings. Those who are long and nervous could hedge their positions on a further sharp rally, as option premiums are likely to reach unsustainable levels.

SanDisk Corp. (SNDK) looks technically weak and vulnerable to a disappointing earnings report.

eBay Inc. (EBAY) is trading close enough to its weekly Starc+ band to make it vulnerable at current levels. Given its weak volume pattern, the stock could easily drop 3%-5%.

Yahoo Inc. (YHOO) has been acting weaker than the market, so it will take a very strong earnings report to turn it around. Look for a drop to the $13.05 -$13.35 area.

Microsoft (MSFT) also reports on Thursday, and with the stock trading near trend line and Starc band resistance, it looks ready for a pullback. For more on MSFT, see 4 Most Overbought Dow Stocks.

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Apple reports surge in third quarter earnings

By Dan Gallagher

Apple Inc. reported a surge in third-fiscal quarter earnings on Tuesday afternoon, solidly beating Wall Street's estimates. For the quarter ended June 25, Apple AAPL  reported net income of $7.31 billion, or $7.79 per share, compared to net income of $3.25 billion, or $3.51 per share, for the same period the previous year. Revenue surged 82% to $28.6 billion for the quarter. Analysts had been expecting earnings of $5.80 per share on revenue of $24.9 billion, according to consensus forecasts from Thomson Reuters. For the quarter ending Sept. 30, Apple said it expects revenue of $25 billion and earnings per share of $5.50. Analysts were expecting revenue of $27.7 billion with earnings of $6.42 per share for the period.

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