Wednesday, July 18, 2007

Markets Pare Gains on Profit Weakness

Earnings continued to roll out on Wednesday, with the following highlighting a heavy day of releases:

  • CIT Group (CIT): Second-quarter loss after paying preferred dividends of $134.5 million, of 70 cents per share was reported, compared with a profit of $236 million, or $1.16 per share, in the year-ago period. The results include a charge of $495.3 million, or $2.58 per share, from the planned exit of its home lending business, making CIT yet another casualty of the subprime mortgage industry implosion. Analysts expected 1.35. The stock dropped 6.26 (11.29%) on the news.

  • eBay (EBAY): Reported earnings of $375.8 million, or 27 cents per share, compared with earnings of $250 million, or 17 cents a share, for the same period last year. Analysts expected 0.32

  • Gannett (GCI): Excluding a $73.8 million gain from the sale of several newspapers and earnings from discontinued operations in both periods, Gannett earned $289.9 million from continuing operations in the quarter, down 4.8 percent from $304.5 million in the same period a year earlier. Per-share earnings on the same basis came in at $1.24 versus $1.28 in the same period a year ago. Analysts expected 1.21

  • Pfizer (PFE): Excluding items, adjusted profit fell 20 percent to $2.94 billion, or 42 cents per share, from $3.66 billion, or 50 cents per share, a year ago. Analysts expected 0.50

  • Piper Jaffray (PJC): Second-quarter net income was $9.3 million, or 52 cents per share, compared with earnings of $4.1 million, or 21 cents per share, in the second quarter of 2006. Analysts expected 0.74. Shares were off 3.69 (6.72%).

  • Southwest Airlines (LUV): Earned $278 million, or 36 cents per share in the April-June quarter, compared with $333 million, or 40 cents per share, a year earlier. After adjusting for fuel-hedging transactions, Southwest said it would have earned 25 cents per share. Analysts expected 0.22

  • United Technologies (UTX): Earnings per share for the quarter that ended June 30 were $1.16. Analysts expected 1.15

Most of the big names offered disappointing results, and it took a toll on the overall market.

Dow 13,918.22 -53.33; NASDAQ 2,699.49 -12.80; S&P 500 1,546.17 -3.20; NYSE Composite 10,148.28 -22.08

The results thus far for companies reporting 2nd-quarter earnings have been mixed with some major misses, not a positive trend for a market that's just made new highs. Add to the sour mood of today, Fed Chairman Ben Bernanke's remarks that the sub-prime lending ordeal is likely to worsen, though the US economy is in good overall shape. He has his doubters, however, and signs of a significant slowdown are everywhere.

Today's trade was also somewhat deceptive. All of the indices were down more than twice their closing losses. Some serious tape-painting occurred in the last hour of trading.

Declining issues once again overwhelmed advancers, by nearly a 2-1 margin. New lows surpassed new highs for the first time in weeks, 375-229. This is a definite sell signal that's been building for weeks.

Oil continued to weigh on the market as well, with the price of crude for August delivery gaining another $1.03 on the NY Merc, to close at $75.03.

Gold moved up to $673.70, a gain of $7.80, while silver added 27 cents to close out at 13.29. There's a growing number of commodity specialists who believe the precious metals are due for another run-up on inflation concerns, though both are near historic highs and have been stuck in trenches for more than 18 months.

There may have been consolidation in these commodities as positions have been unraveled, though most of the speculators are calling for doubling or even tripling in price over the next 2-3 years. Those predictions have been around for years, and, following the movements of the metals, they are highly cyclical and they seem to be on the downside of their most recent bullish cycle.

On the other hand, the gold cycle is very long, and neither gold nor silver has yet to show signs of breaking the long term uptrend. With inflation running rampant, they are not the worst investments, but stocks have performed much better over the last year and a half. These should be only held in large quantity if the potential for a complete market crash is high, and that's certainly not the case at present.

Watch out for the remainder of this week. Any more profit disappointments may just cause outright flight from equities for the summer.

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