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It's earnings, Stupid

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by Peter Switzer

Bill Clinton once reminded us about the importance of the economy in his famous “it’s the economy, Stupid” remark. And it is, but he could have added, “it’s company earnings too, Dopey!”

You don’t have to be an academic economist to understand the link between the economy and company earnings. Simply, if an economy is in recession and unemployment has risen from five per cent to 10 per cent, then profits of a high end retailer should fall and so should its share price.

However, there are timing issues as we see in the US right now, where unemployment is 10 per cent. Share prices are rising and it’s on the strength of two things — the pace of economic growth generally and the earnings outlook of the respective companies.

After the bell

That’s why my interest this morning was not just focused on the US economic data, which was new jobless claims and durable goods orders, but it was more on the earnings reports of Microsoft and Amazon.

The market watchers told us that the Dow was slugged down one per cent on a rising dollar and disappointing economic numbers. But all the good news came after the market closed.

On top of great earnings reports from Microsoft and Amazon, the US Senate was smart enough to give Ben Bernanke, the Fed Chairman, another shot at the job of running US monetary policy.

Read the data

On the economic front, jobless claims dropped by 8,000 last week but the fall was less than what was expected. However, it is a fall and anyway the expectations are created by economists whose recent record has been so bad, why place any hope in them maybe getting a weekly economic number right?

Meanwhile, orders for durable goods such as refrigerators and cars rose by 0.3 per cent in December and reinforces the view that the US economy is on the mend.

Positive outlook for Amazon

But let’s take a look at the more important information on Amazon.

Amazon.com beat Wall Street expectations and the company gave a very positive sales outlook for the current quarter. The Seattle-based online retailer came in with fourth quarter earnings of 85 US cents a share and this compares favourably with the 52 US cents it earned in the same period last year.

And have a look at the sales uplift: they rose to US$9.52 billion for the quarter compared to US$6.70 billion in the same quarter a year ago.

This is the story of a company on a big comeback. While it’s in the ‘now' area of online, it’s also a good indicator of a US consumer who is opening up the purse strings.

Strong earnings for Microsoft

Now for Microsoft. Its earnings were up a whopping 60 per cent with sales of personal computers making a big difference to the result.

Microsoft's earnings are closely tied to computer sales through its Windows operating system and the Office suite of business software.

The company’s net income for the December quarter rose to US$6.7 billion and it made 74 US cents per share, while expectations from Wall Street’s experts were only 59 US cents a share.

Revenue boomed 13 per cent to $US19 billion, making these great numbers for the company, as well as for the US economy.

Onward and upward

Adding these to the Amazon result, it all keeps me in the camp of optimists who believe, even with a pullback or even a correction or two over 2010, overall the market should be onward and upward!

For advice you can trust, contact Switzer Financial Services.

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Published on: Friday, January 29, 2010