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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Microsoft profit rises 30%

By John Letzing

Microsoft Corp. MSFT +0.65% said Thursday its fiscal net income rose to $5.87 billion, or 69 cents a share, from $4.52 billion, or 51 cents a share in the same period last year. The Redmond, Wash.-based software firm said revenue for the period ended June 30 rose 8% to $17.4 billion. Analysts polled by FactSet Research had expected Microsoft to report earnings of 59 cents a share, and $17.2 billion in revenue for the quarter.

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The Global Physical Gold & Silver Reserves Race is the New Nuclear Arms Race

by smartknowledgeu

The USA-USSR nuclear arms race has been replaced by the East-West battle to accumulate physical gold and physical silver reserves. While Western Central Banks and their puppet bullion banks have distracted and goaded private citizens with the invention of fraudulent bogus paper gold and paper silver derivative products, including ETFs more recently, and paper futures contracts for a much longer period of time, they themselves have been making sure to avoid the very fraudulent paper products they have invented and have been diving headfirst into real physical precious metals.

As Central Banks continue to significantly devalue all major global currencies through excessive creation of new supply out of thin air in a digital world where “new money” is never even printed into paper/cotton form but only is created as digital bytes that are sent across international borders, the private families that are the majority shareholders in the world’s most powerful Central Banks have engaged in heavy buying of physical gold in particular, and to a lesser degree, physical silver. In 2010, Central Banks as a group, became net buyers of physical gold after two decades as net sellers. EU Central Bankers became net buyers of physical gold for the first time during the 1st Quarter 2011 since their introduction of the heavily flawed Euro into circulation in January of 2002.

As of April 2011, China was, according to “officially reported” statistics, the sixth-largest official holder of gold, with 1,054.1 tonness, according to World Gold Council estimates. The U.S. was still reported to possess the largest gold reserves at 8,133.5 tonnes. However, all of you know by now that I believe all “officially reported” statistics, whether the statistic is GDP, unemployment, inflation, or gold reserves, to be a charade and mockery of the truth. To this day I am highly skeptical of the US reported reserves of 8,133.5 tonnes, especially since these reserves have neither been independently audited nor independently tested to ensure that they meet good-for-delivery bar status since Dwight D. Eisenhower was the US President in the 1950s. As for China’s “officially reported” holdings of only 1,054.1 tonnes, anyone that takes these reported stats at face value as the truth is a fool for any number of logical reasons. One, China reported that its “official” gold holdings were a constant 600 tonnes from 2003 to 2009 and then reported that it had increased its holdings to more than 1,000 tonnes overnight in 2009. Since China lied about its gold reserve holdings for more than 6 years, one cannot and should not assume that their “officially” announced 1,054.1 tonne level was truthful. Since China made that announcement in 2009, their “official” gold reserve level has not increased at all.

Anyone that believes that China has not accumulated more gold, and lots of it, since that time, does not understand the Chinese government and Chinese bankers. Chinese bankers have been studying the best ways to invest in gold and silver for many years now in preparation for this global monetary war and they realize that one of the best ways to invest in PMs is to own the real thing. Furthermore, there are multiple mechanisms by which China could be secretly increasing their gold reserves out of the scrutiny of the public eye. In 2008, China replaced South Africa as the largest gold producer in the world, but nobody really knows exactly how much gold China produces or how many proven/ probable reserves or how much measured/indicated resources they own. Thus, China could be increasing gold reserves significantly on in-house production alone. Certainly we know that China is increasing its silver reserves through a policy of decreasing its domestic silver exports and increasing its foreign silver imports.

For example, last month, China’s General Administration of Customs reported that its net imports of silver nearly quadrupled year-over-year in 2010 to more than 3,500 metric tons. Also of important note is the fact that in 2010, China exported 1,575 metric tons of silver, 58% less than in 2009, and imported 5,159 metric tons of the metal, 15% more than in 2009. This is a huge change if one realizes that from 2005 to 2010 China transitioned from a net exporter of 2,900 metric tonnes of silver to a net importer of 3,500 metric tonnes.

From 2005 to 2010, China increased its gold holdings in its State Administration of Foreign Exchange (SAFE) more than tenfold from a very small starting point of USD $4.2 billion to USD $48.1 billion. However, China could be increasing gold (and silver) reserves significantly through purchases in its Sovereign Wealth Fund - purchases that are not made available for public inspection or consumption. For China to publicly announce their buildup of gold and silver reserves that would drive up the price of the very commodity they wished to accumulate more of would be akin to then-Chancellor of the Exchequer Gordon Brown’s foolish decision to pre-announce in 1999 that the UK would be selling half of its gold reserves.

Also of important note are the following facts. China only recently deregulated gold in 2003 to allow gold prices in China to mirror international prices. The Shanghai Gold Exchange only opened in October of 2002. In late 2009, the Chinese started making gold and silver bullion easily accessible to its citizens through introducing physical sales of multiple size bars at its banks and China finally legalized ownership of 99.999% pure silver bullion. The Chinese typically have a tendency to buy PHYSICAL gold and PHYSICAL silver, not the fraudulent paper gold and paper silver derivatives invented by bankers to suppress the price of gold and silver. For the first time ever, Chinese citizens will be able to buy silver futures in Hong Kong this week and later in Shanghai; however, since the Chinese are fond of owning Physical metals, perhaps the majority of Chinese may settle these contracts with physical delivery. Furthermore, even when the option to buy gold and silver ETFs in China becomes a reality, the average Chinese citizen may shy away from these products due to his or her propensity for owning real gold and real silver.

For Asians in general, gold and silver have always been money. In Thailand, the word for money “ngen” is also the word for silver. In China, the word for bank combines the characters for “silver” and “movement”. In China not only is private demand strong AND relatively young, but even in India, private ownership of gold bullion bars was not legalized until 1990. Thus, the war between East and West over gold and silver will intensify in coming months and coming years. The objective of the East will be to release the gold and silver price from the clutches of Western price suppression schemes while the objective of the West will be to hoard gold in an attempt to prevent citizens of Western nations from owning the asset that will protect them the most from their currency devaluation schemes.

The current talk in the mainstream financial media about gold being a bubble at $1,600 an ounce and of silver having already reached its top of its long-term peak at $50 an ounce is simply rubbish. A bubble is never defined by high prices, the perception of high prices or even a decade long rise in prices. What defines a bubble is a meteoric rise in price that is not supported by fundamental reasons. For example, the US NASDAQ dot.com stock market was a bubble because dot.com stocks that had zero earnings were trading at impossible valuations and sometimes double and triple digit dollar values per share. However, the fundamental reasons that have driven gold from $250 to $1,600 and silver from $4 to its current $39-$40 range are even stronger today than they were at the beginning of this precious metals bull. Therefore, it is impossible for a bubble in gold and silver to exist at their current prices and at this current time.

About the author: JS Kim is the Managing Director of SmartKnowledgeU. SmartKnowledgeU now offers monthly subscriptions to our premium investment newsletter, the Crisis Investment Opportunities newsletter, an investment newsletter that has returned well over a cumulative 200% (on all opened and closed positions) since its launch in June 2007 to present day. Follow us on Twitter here.

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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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Goldman On The Just Commenced Europarliament Summit: "Decision Time"

by Tyler Durden

For what it's worth, and probably not much, here is Goldman's Francisco Garzarelli on why it is "Decision Time or bust" for Europe. With the just commenced summit, the market has very high expectations of a favorable outcome. Should the proposed resolution end up being disappointing, and it likely will upon a close read between the lines as it can not possibly be anything more than merely another can kicking exercise, look for the EUR to tumble after this final relief rally.

From Goldman Sachs

News that Germany and France have reached an entente on how to provide further help to Greece has buoyed Euro-zone government bond markets. One of the benchmarks on which investors will judge today’s announcements from the European Council will be the losses inflicted on private holders of Greek debt. Crucially, however, the market reaction will depend on the extent to which the Euro area members are willing to share in each other’s sovereign credit risk without strict conditionality.

Final discussions are underway in Brussels on a second multi-annual financial support package for Greece, and “measures to improve the Euro area’s systemic capacity to resist contagion risk” (Eurogroup statement, 11 July).

Last night, Germany and France, the major holders of Greek debt, reportedly reached a common position that will be presented to the European Council for broader discussion. A press conference will be held at the end of a working session starting 3pm Brussels time.

We laid out our thoughts on the main issues facing markets in a note published at the start of the week. Here we summarize what we expect to come out of the meeting, and how markets could react.

• An increase in the EUR110bn package for Greece has been agreed. The baseline assumption is that it will be in the region of EUR100bn-EUR115bn, covering financing needs through mid-2014 (and allowing a buffer in the event of slippages). We expect funds (EUR20-30bn) to be earmarked to prop up the Greek banks, after third-party diagnostics of their balance sheets have been carried out (as in Ireland). The Euro-zone portion of the second package (assumed to be in the region of EUR70bn, net of EUR15bn-worth of privatization receipts and EUR30bn from PSI – see below) will likely be funded by the EFSF, rather than bilateral loans. Margins will likely be reduced from the 200-300bp over 3-mth Euribor today. The same terms would be extended to Ireland and Portugal. It is unclear if the IMF will contribute to this second package. For reference, the Fund’s current exposure is EUR30bn on SBA terms, of which EUR18bn have been disbursed. On the central assumption, the Euro-zone will have committed EUR150bn to Greece, of which EUR47bn have already been disbursed. Assuming the remainder of Greek bilateral loans are rolled into the EFSF, the latter would have committed up to EUR146bn to the three program countries out of a lending capacity of EUR440bn. The portion of this total amount backed by AAA countries still available (originally EUR255bn) would then be EUR109bn.
• Greece would still have a high debt burden, but liabilities would be more affordable and spread over a longer time horizon. The country’s new creditors would continue to have a large influence on the government’s cash flows, and this may increase the chances of front-loaded structural reforms being carried out (see the IMF’s 4th Review for details). The market float of Greek bonds (ex-bills) would also continue to decline, and by end-2013 it should have fallen to around 35% (net of ECB holdings). Similarly, the share of Greek bank funding via the ECB would increase to 30% of total liabilities, before declining as the banks' aggregate balance sheet shrinks. We have dubbed these dynamics ‘managed deleveraging’. If these magnitudes are confirmed, European policymakers will have made a clear choice – this time around, capital debt restructurings would be heavily piloted by the official sector. From 2013, sovereign debt instruments carrying Collective Action Clauses and homogeneous legal support should make crisis management more efficient.
• To provide political support for this process, private-sector involvement (PSI) remains a possibility, as a Franco-German ‘common position’ would also suggest. As we have written before, we do not expect this to change materially the debt dynamics (which will be primarily influenced by growth prospects). However, alongside privatization proceeds, PSI would reduce the bill for tax-payers by an estimated EUR30bn. We have long favoured purchases of Greek bonds by the EFSF, as such purchases could put a floor under recovery values, allowing investors to exit positions, and achieve a mild form of ‘bail-in’. Purchases could be carried out once or staggered over time. Voluntary maturity extensions, our central expectation for several months, could also be on the menu. PSI is likely to trigger ‘selective default’, at least temporarily, but the ECB could compromise on its collateral policy.

Secondary market purchases by the EFSF of Greek bonds would be an effective way to achieve PSI, in our view, but they ultimately still represent a form of liability management within a framework of conditionality on the country’s cash flows. Given the extension of sovereign tensions to larger high-rated sovereigns, namely Italy and Spain, the most crucial parts of today’s announcements will involve mechanisms to address systemic risk. These would need to be unconditional, ex ante risk-sharing solutions available to all EMU countries. The ‘wish list’ includes the introduction of ‘flexible credit lines’, such as those the IMF made available to Poland in 2009. Or, more ambitiously, secondary market purchases of government bonds outside program countries by a joint Debt Management entity (initially the EFSF). Eurozone-wide schemes to provide funding guarantees to banks (against a fee) that have passed stress tests would go a long way towards separating sovereign and financial risk. We expect steps in this broad direction to be taken and this will be the main benchmark against which to judge the outcome of today’s summit. Even if details are not completely fleshed out (there will be much discussion on the size of the facilities, accountability, etc.), any hint at such initiatives would be an important breakthrough. Any institution delivering unconditional risk-sharing would need deeper Euro-zone fiscal governance as a counterpart (the Pact for the Euro represents a step in this direction).

We said at the start of the week that Euro-zone bond markets would be volatile, caught between attractive valuations and expectations of a deal, and the uncertainties surrounding PSI. On light flows, some of the sell-off has reversed over the past 48 hours. If our baseline case above plays out, we would expect more upside and almost all of the widening in intra-EMU spreads seen since Moody’s downgrade of Portugal could be corrected.

We doubt we will see more upside than that, at least for a while. It will take some time for the new policies to be articulated and implemented, and all decisions taken today will need to be put before national Parliaments, probably at the start of September. Moreover, concerns over the pace of global growth remain in the background weighing on weaker borrowers. Last but not least, investors have been heavily affected by recent events and thus may want to reduce risk in a recovering market.

A more sustained tightening of spreads awaits fresh inflows into the Euro-zone fixed income markets from investors outside the single currency area, primarily in Asia. This requires greater clarity on the Euro-zone’s evolving fiscal governance.

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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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