A Quick Earnings Scorecard and Market Comment

by Dan July 19, 2011 9:06 am • Commentary

Yesterday, as I pondered the week ahead, I wanted to place a higher priority on corporate earnings as opposed to the theatrics associated with our ineffectual elected officials in Washington and their inability to reach a necessary compromise.  Well, ultimately they will and while there may be some volatility associated with the political wheeling and dealing it will ultimately get resolved, and likely cause an uncomfortable short squeeze if you are short.

Which leads us to U.S. corporate earnings that will likely be the barometer for the underlying strength of our economy and the health of the recovery.  From the little earnings that we have had in over a week it is safe to say it has been a mixed bag.  Tech has been story specific and likely will continue to be so…….last week started off with some soft numbers and guidance from semi-equipment manufacturers, and ended with a big beat by GOOG that caused the stock to surge over 12%.  GOOG was sort of stock specific as expectations were very low, the company in a transition and competition and regulatory issues abound…..I guess this one set up like a coiled spring to the upside…..Last night’s beat and raise by IBM can’t come as a huge surprise, given the company’s recent performance and the stock’s recent price actions…….the stock is likely to consolidate here in the mid/high 170s before it will be able to make a sustained move forward…..

Now to the banks…..we are kind of getting a repeat of Q1 reporting season where the money-center banks presumably did better than expected only to have their stocks begin a swoon that would last right up until now.  I guess the biggest surprise would be out of GS this morning that missed dramatically lowered earnings estimates.  Investors have become accustomed to low quality earnings out of the likes of C and BAC, but an almost billion dollar revenue shortfall out of an investment bank that  seemed immune to many issues facing their competitors could be a slight cause for alarm as it relates to the sector.  Some commentators this morning are stating that the shortfall has less to do with future revenue opportunities as opposed to the company dramatically reducing their risk profile as a result of the volatility in almost every market they play.

Market is in a sort of no man’s land in my opinion, right in the middle of the 1250 – 1350 range in the SPX and depending upon the resolution of some debt and budget issues here and abroad, and the general direction of earnings guidance, this indecision will likely be resolved at some point this summer….In the meantime I think it makes sense to avoid disasters around single names into earnings…..no crime to be in cash and play a bit defensive…….at this point if you want to buy stocks for the balance of the year, look to add on pullbacks…..one thing I can assure you is that buying stocks like CMG, WYNN and NFLX when they are making all time highs and up on massive multi-week runs is not a long term winning strategy.   Lets look at NFLX for a minute.  I am not a fan of the company or their products, and generally think they will go the way of Blockbuster at some point in the next 10 years….but I think you would have to be nuts to short the stock.  I will continue to make tactical shorts with options in the name around events and their  competitive position. BUT for you traders out there who just think you are missing out on the next big big stock look to the chart below.

[caption id=”attachment_3320″ align=”aligncenter” width=”300″ caption=”1 Yr NFLX Chart Provided by [/caption]


The Stock is in a massive up-trend, and routinely consolidates, breaks out, pulls back after the spike and then does it all again……this is a short term trade-able pattern. But understand if you are buying the stock for this sort of strategy you ultimately run the risk of walking in some morning and having the stock down $50. My Point here is don’t buy stocks on run-away breakouts…..what goes up must come down, eventually, and stocks like this can be a bit of a shell game. $260 looks like a great level to play for a short term bounce, but remember everyone staring at the same chart and some times it is hard to nail the exact level, also remember that people use similar levels for stops and often times in names like this stops can be hard to employ especially with stocks that tend to gap.

Who the hell is buying WYNN here at $170 in the pre-market? Company had a big beat, but come on the now, the 30% rally in less than a month doesn’t capture all that bullishness? I don’t buy stocks like this, maybe, maybe on a pullback, but want to identify a catalyst that helps get the name to the next valuation level.