Earnings and the Dollar
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Earnings season really gets moving this week as we hear from heavyweights Bank of America (NYSE:BAC), IBM (NYSE:IBM) Apple (Nasdaq:AAPL), Goldman (NYSE:GS), Yahoo (Nasdaq:YHOO), Johnson & Johnson (NYSE:JNJ), Morgan Stanley (NYSE:MS), Wells Fargo (NYSE:WFC), and eBay (Nasdaq:EBAY).

Citigroup (NYSE:C) reported this morning, and its earnings news was similar to JP Morgan's (NYSE:JPM): both companies beat expectations by a few pennies a share, but much of the improvement was due to smaller loan loss reserves, rather than strong improvement in operations.

Citi reduced loan loss reserves by $1.99 billion in the Third Quarter. Net income was $2.17 billion. Clearly, improvement in loan quality is largely responsible for Citi's turnaround.

Some investors may not be impressed with Citi's earnings. And it's true that for Citi, its earnings were more a function of less bad news (in the form of bad loans) than they were the result of growth for the business.

For me, Citi's earnings are another milepost on the road to de-leveraging. And that's a good thing. Also, Citi may be only 2 or 3 quarters from declaring a dividend again.

I expect we'll hear similar earnings news from Bank of America (NYSE:BAC) tomorrow morning.

Bank of America has been knocked below tangible asset value of approximately $12.60 after a hedge fund released a report suggesting that BofA could be facing as much as $70 billion in losses as a result of the foreclosure problems.

In my opinion, this report is just an attempt to drive the stock lower.

As we've discussed, stocks have been moving higher the Fed's promise/threat to do more quantitative easing and the subsequent weakening dollar. But now, earnings may become the driver between now and when the FOMC meets November 2-3.

Let's not forget that the economy slowed at the end of the second quarter. As a result, analysts lowered earnings estimates. But so far, headline earnings have beaten expectations. The only significant exception has been GE (NYSE:GE).

I see no reason that trend won't continue. And with the U.S. dollar starting to show some signs that it might bounce, a positive trend for earnings would be timely.

If Apple (Nasdaq:AAPL) had been added to the Dow Industrials, that index would be over 12,000 right now. That sounds like a big missed opportunity for the Dow Jones Company.

But let's not forget that the Dow is the least significant index. Investors pay attention to it because it's a big number, that's about it.

And speaking of Apple, it reports 3Q earnings after the bell today.

Of course, I'd like to hear your thoughts. I'll even print them. Write me here: ianwyatt@wyattresearch.com





Posted 10-18-2010 3:31 PM by Ian Wyatt