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Monday, July 20, 2009

And it isn't just me who thinks earnings are a suckers play

from MarketTicker
And Again, More Black Shoots (Earnings)
The "30%er" club continues to gain members on earnings reports this morning.

Eaton, down 32%

Halliburton, down 22%

Johnson Controls down 29.3%

Weathorford down 10.5% (heh, an outperformer!)

All revenue numbers y/o/y.

Folks, where is the good news in here? Yes, earnings were beats by a few pennies, but again, this is all happening on the basis of massive labor cost contraction, which in turn feeds back into the economy in the coming quarters in the form of weaker demand!

Johnson Controls is a lesson in what I have repeatedly said: a 30% decline in revenues can wipe the floor with your earnings numbers. In this case their earnings were down 63% from previous year numbers; again, this happens due to business fixed costs that you can't shed quickly (if at all.)

Never mind Eaton, which had its profit fall 92% (!) on a 32% revenue fall. In fact they were lucky to eek out a profit at all ($31 million); last year this was $337 million in the second quarter.

Of course the market crooners will point to these as "beats" and suggest you buy, with some of these firms getting a nice pop premarket.

Uh huh. I want to buy a company that is seeing its net operating margin destroyed on the back of 30% year-over-year revenue declines?

The evidence continues to mount that unreasonable and unsustainable credit expansion was in fact responsible for an about 20-30% of revenues in America (you can extrapolate that to GDP) and that the economy is indeed on track to contract toward that metric on balance, despite attempts to keep it from happening.

The belief that this disruption will be transient or is "over" is, in my opinion, nothing other than pure fancy.

Invest accordingly.

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