The US second quarter reporting season is now delivering bad news in increasing quantities, forcing the usually optimistic and sunny American investors to take stock of what lies ahead for them and the market for the next six months to a year.
And, it ain’t pretty.
Technology (Apple and Texas Instruments), banks and financials (Amex) and an increasing number of lower level groups are all reporting solid second quarter earnings: some are down, (Royal Caribbean Cruises); others are quite strong (Apple and Microsoft).
Overnight Caterpillar revealed a solid earnings gain, thanks to the commodities boom in Australia, China and Canada.
A group of regional banksreported profit slumps in the June quarter.
But in most cases it’s the outlook that’s knocking investors. For the first time in years US stock investors are facing an unpleasant truth: earnings momentum for the next year will be down.
And it will be years before banks and other majors report earnings as solid as in the sunny, easy credit days of 2006.
One off results, like that from Wal-Mart, will help prove this assertion because of its unique position as retailer to America’s battered middle and lower classes. (Costco, another retailer aiming at this segment, will also do well).
But when the impact of the one-off tax rebate disappears next month, even these well managed and performing giants, will come under pressure. Already Mervyns, a small privately-owned department store chain is in trouble and approaching bankruptcy.
Yesterday we saw a new American credit crisis shown in all its gory detail.
Consumer-related debt is the next black spot for US banks and financial groups even though the crisis caused by tumbling house prices, the subprime mortgage mess, leveraged corporate debts gone bad and other toxic waste has not eased.
It’s been swelling slowly now for six months and hit this week with some force, and not even those rosy tinted folk on Wall Street could avoid the message.
Quarterly results from American Express and Bank of America show the growth of the problem; although the Bank of America management remains optimistic the problem won’t get too bad, we should remember they also believed the subprime mess and falling US house prices wouldn’t last for long.
Last Friday it was lowered forecasts from Microsoft and Google, which hit the market and yesterday’s news confirms the problems have taken root in the tech sector, and where the tech sector meets mainstream America via Microsoft and Google.
Bank of America revealed a 41% drop in quarterly earnings, but that old refrain ‘it could have been worse’ reverberated through Wall Street dealing rooms and the market jumped, only to run into a rising oil price which regained the $US131 a barrel mark, and knocked the market into the red.
Apple lifted earnings 31%, but forecast lower sales in the next quarter, even with the new Iphone; while Texas Instruments found that mobile phone makers weren’t ordering computer chips as quickly as they did in previous quarters: a sign perhaps of slowing sales and rising stocks of phones. Last week’s poor results from Sony Ericsson confirmed that idea.
But it was the nitty gritty of the Bank of America result, and the entire Amex report that dismayed Wall Street.
Amex delivered some ugly news. Earnings off 38% because bad debts surged by an amount not forecast by the credit card giant.
The company missed second quarter profit estimates and withdrew its 2008 earnings guidance, saying the economic environment “has weakened significantly” since it issued its year’s projections in January – “particularly during the month of June”.
"Fallout from a weaker U.S. economy accelerated during June with consumer confidence dropping, unemployment rates moving sharply higher and home prices declining at the fastest rate in decades," said Ken, Chenault, chairman and CEO said in a statement accompanying the profit announcement.
"Consumer spending slowed during the latter part of the quarter and credit indicators deteriorated beyond our expectations.
"In light of the weakening economy, we are no longer tracking to our prior forecast of 4-6 percent earnings per share growth. That outlook was based on business and economic conditions in line with, or moderately worse than, January 2008. The environment has weakened significantly since then, particularly during the month of June.
"The scope of the economic fallout was evident even among our longer term, superprime Cardmembers," Mr. Chenault said. "Newer Cardmembers — whose write-off levels are typically higher than the total portfolio — are also feeling the impact,” he said.
American Express was profitable: it made $US653 million in the quarter, but that was down near 40% from $US1.06 billion made in the second quarter of 2007.
That saw the company abandon that earlier forecast of 4%-6% earnings growth for the year.
Amex’s comments were gloomier than earlier in the day from Bank of America chief Ken Lewis, who said repeatedly he views the economic slowdown and the bank’s possible credit losses as “manageable”.
Well, he would say that: after all, his bank has just bought Countrywide Financial Services, one of the major issuers of subprime dodgy mortgages, for $US2 billion in shares a deal that will be financed by tax write-offs.
Bank of America’s profit fell 41% to $US3.41 billion, from the $US5.76 billion earned a year ago.
Sales rose 3.5% to $US20.32 billion; that was better than analysts had expected, but no one had expected the
