Consumer Credit Card Debt Levels (JPM, BAC, V, MA)

How is the consumer supposed to recover and drive the 70% of GDP s/he accounts for when s/he is buried under a metaphorical mountain of credit card debt?

The Market Ticker blog has a great post about how consumers are struggling under a mountain of credit card debt, and the disastrous effects this will have on the V-shaped recovery the market seems to have already predicted.

While I disagree with the high interest rates on which the author, Karl Denninger, bases his calculations, even if you divide his figures in half you still come up with a problem.  And certainly you would be counting your lucky stars if you were one of those people paying only 10-15% on your credit card.

Banks such as JP Morgan Chase (JPM) and Bank of America (BAC) have been increasing their consumer loan loss provisions as they predict more trouble ahead in that sector.  Credit Card giants Visa (V) and Mastercard (MA) could see trouble if consumer sentiment shifts and people start using their cards less. Perhaps the market should take those warnings into consideration as it ponders which direction to choose after making new 52 week highs.

=AH

Disclosure: Long JPM, no other positions in stocks mentioned

Earnings Preview 10/22/09: (MMM, AXP, T, MCD, MRK, GE, PFE)

Here comes another big day!

Before Market Hours:
3M Company (MMM): 3M Company is a diversified conglomerate like General Electric (GE), but without the added risk of a capital arm that almost fells the company.  3M seems well managed but it is still hard to get a clear picture of the company because of all the different business segments. Wall St. Analysts are looking for Q3 earnings of $1.17 per share on $5.75 billion in revenues and $1.06 EPS on $5.55 billion in revenue for Q4.
YTD: +33% One Month: +3%

AT&T (T): The Telecommunications giant is expected to post EPS of $0.5 on revenues of $30.88 bn, a decrease of about a percent over the year ago quarter. There are a couple things at play here, but traders will be looking closely at the top line as a proxy for consumer and business spending.  Decline in the land-line sector is well-documented, but analysts will be looking for continued signs the company is reducing its exposure, and in the wireless sphere AAPL’s earnings have created high hopes that iPhone revenue will contribute strongly to the bottom line.  The expectations are reasonable for this reporting period, so traders and investors alike will be looking for the company to beat EPS and especially Revenue estimates.
YTD: -9%     One Month:- 3.5%

McDonalds (MCD): The world biggest fast food chain is expected to post earnings of $1.11 EPS on $6.1 billion of  revenue according to consensus estimates by Thompson Reuters. Q4 estimates are pegged at $.99 EPS on $5.89 billion. Key items for investors to watch will be 1.) same store sales growth which slightly dissapointed last quarter, 2.) Growth trends for McCafe and 3.) currency impacts. Effective corporate tax rate could also be interesting to watch. McDonalds has so far lagged the market over much of the year along with other defensive stocks but I think investors may begin to warm to them as the market continues its high-wire balancing act.
YTD: -6%     One Month: +4%

Merck (MRK): Merck is the last big pharma/drug stock to report. I don’t feel that the bar has been set particularly low or high in this sector by previous reports so this should be good to watch, especially after the cautious tone that Pfizer (PFE) was echoing in their report. Thompson Reuters estimates for Q3 are currently for $0.82 EPS on $6 billion in revenues with Q4 estimates coming in at $0.84 EPS on $6.16 billion in revenues. Fiscal 2009 ending in December is expected to be $3.23 EPS and $23.44 billion in revenues.
YTD: +8.5% One Month: +3.5%

After Market Hours
American Express (AXP): The banking giant is expected to produce EPS of $0.37 on Revenue of $5.91 bn, a $17.5% decline from a year ago. Probably the most important earnings of the day, at least for the overall market, traders will be looking for, and hoping that, AXP blows out its earnings. Enough at least to justify the strong recovery the stock has put on so far this year. Recent rumblings have suggested that the company will post strong numbers on the back of a recovery in spending from higher-net-worth individuals, but the street will look at the numbers across American Express’ clientele to try to gauge the mood of the average shopper before this important holiday season. Management’s discussion of the new CARD law, and its effects on industry profitability, will be interesting although my guess is that it is already priced in to the stock.
YTD: 93.5%     One Month: 6.5%

-Lucid Markets Team

Disclosure: Collectively long T, MCD, GE, ABT and JNJ

The Half-Way Point: Earnings Season Observations (SPY, QQQQ, DIA)

So far this earnings season, 77% of companies have posted EPS numbers in excess of their estimates.  This is extremely high from a historical perspective, and shows just how much the street analysts have underestimated the recovery in the market.

As we have said before, however, this earnings season is all about revenue.  It is much easier for a company to post good EPS numbers as they slash costs by cutting staff and capital expenditure.  Much harder to manufacture is revenue numbers, and this earnings season is separating the former from the latter. This helps explain why, despite the high percentage of EPS beats, the average stock has actually declined 0.72% on its reporting day (Source: The Bespoke Investment Group, found here).

I noticed this trend during last quarters reporting season.  The companies that reported first all benefited from EPS expectations that had not been adjusted up enough to match the cost cutting that was being implemented.  During first few weeks, the majority of companies beat expectations, and their stocks took large leaps on those days that they posted.  The euphoria spread to their respective industry peers, and by the midway point the market was feeling pretty good.  However, while formal expectations didn’t increase drastically, whisper numbers for the later-reporting companies did until finally they were too high.  So when those companies actually reported, they fell short and the stock dropped.

I have no insight as to whether this will happen this earnings season, but I would say it is a definite possibility, especially in industries like health care and technology where the vast majority of companies have seen large jumps in share price as they handily beat expectations.

-AH

Disclosure: Long T and MSFT.