Earnings Reports For Third Quarter Are Lukewarm
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It's earnings season and the reports for the 3rd quarter so far are lukewarm, however, investors are showing continued faith in the market.
The Dow Industrial Average rallied 77.96 points on Friday, to 14093.08, up 0.2% on the week. One of the Dow's strongest components was up 6.63% on Friday and that was none other than General Motors which closed at 42.64.
A quick look at the charts showed me that GM hasn't been in the 40's since 2004. Apparently, GM is seeing strong sales in key overseas markets.
Although the market is at what seems to be a lofty level, stock prices are relatively cheap based on earnings. The most common yardstick used to gauge a stock is its price relative to its earnings. The S&P 500 index is now trading at 15 times the expected earnings of its component companies over the next 12 months. This compares to a price of 20 times earnings during the index's record run in 2000.
In March of 2004 the S&P plummeted to less than 14 times earnings while earnings were rising. This meant investors were effectively paying less for each dollar of earnings. Since that time the market has performed well and the averages are back to what could be considered historically normal. Of course it is the future that counts. The market always looks ahead.
Earnings is the first number investors want to see. But just the earnings per share is not enough. You want to know how those earnings were achieved. Ideally, increased earnings were achieved because more widgets were sold or more hours were billed. If the earnings were achieved because some assets were sold or some other extraordinary event occurred, then the picture is quite different.
The same goes for revenues. You want to see them growing because the company has improved its efficiency or captured additional market share. If revenues increased simply because prices were lowered without a commensurate increase in efficiency, that is not a good sign.
Another thing to look at is the number of shares outstanding. If they are going down, it means the company is buying back some of its stock. It they're increasing, it means more stock was sold during the quarter, either to management or in a secondary offering. Ever increasing shares can be dilutive to earnings, and that is always a bad thing unless earnings are growing faster than the new shares are being sold.
Meanwhile, the global credit crunch continues. This is due to the mortgage debacle here in this country and abroad. Some action designed to stave off what Citigroup and others see as a threat to the financial markets world-wide is taking place. Some of the big banks got together in Washington with the Treasury Department and discussed pooling resources to put together $100 billion to back shaky mortgages.
This would go a long way in avoiding the danger of dozens of huge bank-affiliated funds being forced to unload billions of dollars in mortgage-backed securities and other assets in a fire sale. Some would say let the fire sale happen. The hedge funds and banks were irresponsible in letting this happen in the first place.
The fear however, is that if banks need to write down more assets or, even worse, take assets onto their books, that could lead to a credit crunch affecting the economy broadly. It could make it tough for homeowners and businesses to get loans.
So let's hope the corporate earnings are O.K.-to-good and that the economy doesn't take a hit because of the loose lending practices the financial institutions followed over the recent boom. Let's hope those we have put in control will be responsive and not reactive.
I invite your questions.
Or Contact Jerry Cole at:
509 Center Ave, Suite #102, Bay City, MI
(989) 892-5055
(The opinions expressed are solely those of the author and not Gen worth Financial Securities Corporation.)509 Center Ave, Suite #102, Bay City, MI
(989) 892-5055
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Jerry Cole - Retirement, Investment |
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