The earnings cycle is in full swing with Goldman, IBM, Intel and many others reporting earnings with mixed results. Japan has provided a common thread but it did not slow Intel and IBM.

Market Statistics

The markets declined after an opening gap thanks to worries over future bank earnings. Goldman Sachs reported this morning that Q1 profits declined -21%. Goldman shares dipped significantly on the news but recovered to close down only -$1.92 but it was the lowest close since October 15th. Net income declined to $2.74 billion. Analysts were negative on their earnings because 79% of the profits came from trading and investing for Goldman's own accounts. Analysts said this type of income is not repeatable because it depends on being on the right side of market moves and because regulators might add restrictions to the business model. We saw that effort in the recent financial reform bill and it is not over yet. The Basel reforms and the Dodd-Frank bill will control how much money and risk a bank can take and how much it can trade for its own account.

Earnings per share of $1.56 were significantly below the $5.59 earned in the comparison quarter but they were also well above the 81-cents analysts had expected. Analysts were disappointed with the limited profits from its main businesses of investment banking and asset management. Around midday Richard Bove cut his rating on Goldman to neutral from buy. Bove said in a note to investors saying the "advisory results were particularly disappointing." That is the revenue from providing advice on takeovers and acquisitions. The banks biggest source of revenue, trading fixed-income, currencies and commodities, declined -28% to $4.33 billion from $6.02 billion.

Goldman's earnings and share decline held the banking sector back with the BKX closing flat for the day. Citigroup reported less than exciting numbers on Monday and JPM disappointed last week. Not a good start for the financial earnings parade.

Goldman Chart

Banking Index

US Bank (USB) also reported earnings of 52-cents, a 56% increase over the comparison quarter. However, the majority of those earnings came from a -42% drop in loan loss reserves from $1.31 billion to $755 million. Net charge-offs fell -29% to $805 million. Despite bullish comments from the CEO on improving customer sentiment and expanding credit the stock declined to a four-month low. Banks are just not getting any respect this quarter.

Harley Davidson (HOG) reported earnings of 51-cents that missed analyst estimates of 53-cents. Revenue was inline at $1.06 billion. The problem for Harley was a blip in the supply chain from Japan. Harley said deliveries will decline to between 215,000 and 228,000 in 2011. This was down from their last estimate of 221,000 to 228,000 units. The company said numerous components including the electronics used on the bikes come from Japan and deliveries had been impacted negatively. Harley also said margins decline as well as market share. HOG shares declined more than 5% on the news.

Harley Davidson Chart

We have already seen the impact from Japan in several earnings reports including Ericsson, GM and Texas Instruments. The CEO from GM was interviewed this week and he said supply problems were impacting all automakers not just GM. Texas Instruments (TXN) reported earnings on Monday and said two plants were damaged in Japan and the company expected to take a hit on revenue and see expenses rise as a result. However, the stock lost only slightly less than 1% after TXN said they were seeing strong demand and the problem would only be temporary. This soothed the Japan worries slightly although Apple reports on Tuesday and they are the biggest worry for a Japan warning. TXN did say they were seeing unexpected weakness from a wireless customer. Analysts believe that customer is Nokia and they report earnings on Thursday.

The big earnings for the day came after the close when Intel and IBM reported. Intel blew away estimates with earnings of 56-cents compared to estimates of 46-cents. Revenue rose to $12.85 billion from $10.29 billion and well over the $11.59 billion analysts expected. Intel said that despite supply constraints from Japan on components they did not expect those delays to impact production or earnings. Intel predicted revenue in the current quarter to be in the range of $12.8 billion and $900 million over analyst expectations. Intel's gross margin was 61% in Q1.

Intel said the long awaited corporate upgrade cycle had kicked into high gear as well as the demand for servers to handle the explosion of Internet applications and cloud computing. IDC said sales of servers used to power the cloud would rise to $6.4 billion in 2014 for 1.3 million units from $3.8 billion for 600,000 units in 2010.

Analysts had worried that sales of Apple's iPad had weakened demand for PCs in the USA. Apparently it is only slowing sales of notebooks and not desktops. Intel is targeting this segment with a new product called Oak Trail and sold under its Atom brand. It is 60% smaller than its predecessor and will provide "all day" battery life for touch screen computers like tablets.

Intel Chart

IBM reported after the close with an earnings increase of +21% to $2.41 per share. Analysts were expecting $2.30 per share. Revenue was $24.6 billion and slightly over the $24 billion expected. IBM derives 11% of its business from Japan or more than $10 billion a year but IBM said there was little impact on its business from the tsunami. Most of IBM's contracts are long-term consulting and business services. IBM is not exposed to the retail sales sector. Revenue from China rose +33% and +53% from Russia.

This was a good report from IBM but there were some glitches. Revenue rose +8% but that drops to 5% after removing currency fluctuations. Earnings per share were also helped by a strong buyback program that reduced the number of shares outstanding at the end of the quarter. IBM is the poster child for manipulating their earnings through share buybacks.

IBM said earnings for 2011 should be in excess of $13.15 and well on their way to hit their target of $20 for 2015. However, contract signings declined -18%. The CEO said it was normal for contract signings to decline after a very strong fourth quarter. Revenue in the services division rose only +3%. Shares of IBM spiked over $5 to $170 in after hours before falling to $161 as the contract signing and currency news filtered out. Shares closed in after hours at $162.

IBM Chart

Yahoo (YHOO) also released earnings of 17-cents and a -28% decline from the comparison quarter. Revenue fell -24% to $1.21 billion. After subtracting traffic acquisition costs that fell to $1.06 billion and only $10 million over estimates. Earnings per share beat estimates by a penny. Yahoo's trash mouth CEO, Carol Bartz, blamed the lackluster performance on Microsoft saying the decline in revenue was due to a problem in Microsoft's paid search program called AdCenter. Bartz is known for her use of profanity in business meetings and interviews. I suspect she is starting to feel the heat for her inability to revive the struggling company. Traders were not impressed with the earnings and YHOO only gained a few cents in late trading. The stock has been dead money since October and will probably continue to be a laggard.

Yahoo Chart

VMWare (VMW) posted earnings after the close with earnings of 48-cents and well above estimates at 42-cents. License revenues rose +34% and the services division revenues rose +32%. VMW predicted Q2 revenue of $870 million and well over analyst estimates for $845.1 million. The cloud is obviously alive and well and growing robustly. VMW shares spiked +$10 in after hours.

VMWare Chart

Other companies reporting earnings today included BTU, FRX and JNJ. Key reports due out on Wednesday are AAPL, AXP, EMC, QCOM, UTX and WFC.

Earnings Calendar

On the economic front the only material report was the New Residential Construction for March. The headline number rose to 549,000 starts from 479,000 in February. Those numbers are annualized. The +7.2% spike is seasonal to some extent but still an improvement. Permits rose to 594,000 in March from 534,000 in February so starts in April should also be strong. However, overall housing starts are still 13.4% below the same period in 2010. Single-family starts are still lagging with multifamily starts making up the majority of the gains. With so many prior homeowners forced to convert to renter status after their homes were foreclosed and with home loans so hard to get today the pace of new home sales will continue to be slow. There are still more than two million homes in the foreclosure process. Housing Starts Chart

This week is the anniversary of the Macondo well disaster in the Gulf. Well operator BP was forced to put up $20 billion to compensate Gulf residents for losses due to the oil spill. A report out this week said 180,000 claims have been paid for a total of $3.8 billion. BP claims the payments have been too generous and claimants believe they are too small. The administrator of the Gulf Coast Claims Facility (GCCF), Kenneth Feinberg, said the final total will be quite a bit higher. BP said many of the claims don't reflect reality with some asking for $10 to $20 billion in damages. Feinberg has to wade through the hundreds of thousands of claims, many from people just looking to collect some free money, and decide which are real and which are fraudulent. Feinberg said more than 70% of the initial claims have been settled. Most opted for the "quick pay" option where they accept a cash payment without having to prove any loss and then agree not to sue. Feinberg said the "proof of loss" forms have run the gamut from ridiculous to the bizarre. One was a letter from a mother saying her daughter lost money as a result of the spill.

Crude prices rebounded into the close as the May WTI futures contract expired today. The contract closed at $108 after bouncing off $105.50 overnight. Brent is trading at $121.

WTI Chart

The rest of the week will continue to focus on earnings but volume should collapse after about noon on Wednesday as traders head out the three day weekend. The markets are closed on Friday.

After some high profile earnings it appears Japan is not going to be a big factor in this earnings cycle. Those companies that have been impacted are working through the problem and the impact does not appear to be material. It will still be interesting to see what Apple says on Wednesday.

The S&P dipped to 1304 this morning after trading down to 1295 on Monday. In theory this should be a decent rebound from support but we still need to see a move over 1325 before we can have any confidence in the move. Every dip has been bought but the dips continue to press lower. That is not a positive trend. Volume declined again and is back to 6.5 billion shares and a clear lack of conviction by either side.

Remember the focus is going to quickly shift away from earnings and onto the FOMC meeting and press conference next week. While nobody really expects the Fed to make any changes there is always the possibility for a new phrase in the statement or something out of the blue that nobody expects. With Bernanke holding a press conference after the announcement ANYTHING is possible.

Obviously he does not want to tank the market he has spent billions pumping up. However, eventually the gravy train for investors will have to shift away from a diet of treasury purchases and back onto real corporate earnings and improving economic activity. With gasoline prices at $3.82 and GDP estimates now in the +1.4% to 1.7% range for Q2 there is little chance the Fed will do anything but still a risk.

I remain neutral on the S&P at this level until after the FOMC meeting.

S&P-500 Chart

The Dow chart is similar to the S&P with another lower low on Monday and a lower high today. The trend is down until proven different. The 30/50-day averages are currently support but we are in a news driven market cycle and we need to wait for confirmation of a new trend.

Dow Chart

The Nasdaq should get a boost from Intel on Wednesday but it will still be at the mercy of Apple's earnings. I don't think anyone believes Apple's earnings will be bad but they are worried over the guidance because of Japan. I see any further dip on Apple as a buying opportunity but that does not mean the dip won't knock a few points off the Nasdaq if it occurs.

The last four candles on the chart may be green but they still represent a continued downward trend. Until that trend reverses and moves back over 2765 I would be cautious buying tech stocks.

Nasdaq Chart

The lack of a rebound in the Russell is troubling. It is the weakest chart of the broader indexes and appears to be threatening a breakdown below 820. The lack of buying is evidence of fund manager concerns about market direction as we move through this critical earnings and FOMC period.

Russell Chart

I would continue to be cautious on Wednesday. Futures are up tonight thanks to Intel and IBM but we get another round of reports on Thursday and with each report there is one less unknown to keep traders interested. Sell the news takes on an entirely new meeting during earnings season when the markets are near their highs.

Be aware, Skynet was scheduled to go operational today, April 19th, 2011. (Movie reference and only a few people will know what it means.)

Enter passively, exit aggressively until conditions change.

Jim Brown

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