Massive Earnings Thursday

It appears that the pattern for the next few weeks is light earnings periods on Mondays, nearly non existent Fridays (except this week) and jam packed Tuesdays-Thursdays, especially the Thursdays.

Before we go forward let's look back at names we highlighted this week - we talked about the importance of Wells Fargo (WFC) in the entry before this one but the other two I am most interested in are CSX (CSX) [railroad] and Yum Brands (YUM) [restaurants] A company like CSX tells us a lot more about the domestic economy than 40 government reports combined.

As we've been saying for the past few quarters... well the AP headline says it all: CSX Profit Up 19% on Demand for Grains, Coal

• Freight railroad operator CSX Corp. said Tuesday its second-quarter earnings rose 19 percent on strong demand for coal, grain and metals
• The company also reaffirmed its full-year earnings prediction. The company is targeting a 2008 profit in the "upper end" of a range of $3.40 to $3.60 per share.
• CSX said continued robust markets for U.S. coal exports, grain, ethanol, metals and phosphates and fertilizers drove results. Strong pricing in these markets offset a 3 percent slip in total volume. (hmmm, all areas Rising Tide Growth is invested in either directly or as a proxy - good on ya)
• U.S. coal exports have been boosted this year by demand for coal from Europe, in particular for Appalachian coal.
• CSX Corp (CSX), the U.S. railroad, reported higher second-quarter net profit that met expectation on Tuesday as strong pricing offset a 3 percent decline in freight volumes. (this in my estimation reflects the problems in the US)
• But while freight volumes in CSX's coal and agricultural divisions rose 2 percent and 5 percent, respectively, most freight types saw declines in the quarter.
• Automotive shipments fell 23 percent, reflecting a weak year for the U.S. auto industry, while intermodal shipments were down 2 percent. Intermodal shipments rely on standardized containers that haul mostly consumer goods or finished products.

Yum Brands opening line in this report pretty much will summarize what you will see from multinational after multinational. The scary thing is "what if" international sales begin to fall off the cliff - Europe is already in danger, and last to fall is potentially Asia. But for now good enough to at least somewhat offset the dramatic paucity of good news in America.

• Fast-food company Yum Brands Inc. said Wednesday its second-quarter profit grew 4 percent as its overseas operations delivered hefty earnings that offset slumping U.S. profits dragged down by higher commodity costs.
• Yum said its systemwide U.S. same-store sales grew 2 percent compared to the year-ago period, but operating profit fell by double digits amid mounting commodity costs. Commodity costs in the U.S. escalated by $30 million in the quarter compared to a year ago, Yum said, and for the full year the company expects record commodity inflation exceeding $100 million.
• Same-store sales grew by 14 percent in mainland China and 4 percent in the international division. Yum said it added nearly 100 restaurants in China during the quarter and said the pace of new development in 2008 is ahead of last year's record pace. Yum predicted it will reach 3,000 units across 500 cities by year's end; it currently has 2,726 stores in China.
• "There's disappointment that despite the pretty good sales growth in China, the margins were weaker than expected and a lot of that is food cost inflation," Russo said. "It's certainly a sign of the times."
• Restaurant profit margins in China fell to 17.1 percent from 18.2 and in the United States to 12.4 percent from 15.3 percent.

We predicted this inflation would be coming last fall. It started showing up last quarter and as each quarter passes it will only be increasing. Uncle Ben has now assured us for nearly a year now that as he slashes rates and gives up the fight against inflation (which the Fed was citing as a concern as recently as July 2007) that there is nothing to worry about because a weakening US economy will eradicate inflation in America. So far so good, as even the government reports are now having a difficult time hiding inflation. What is amazing is almost every economist agreed with Ben last fall - inflation was not a real issue; that was something those simply alarmist bloggers who don't understand economics tried to scare you with. Ah yes, a whole generation of people who do not take a global view and their whole universe centers around the US of A. Nothing exists outside our borders.

• Prices for a quart of milk, a plane ticket and a host of other products rose in June at nearly the fastest pace in a generation -- yet another economic shock wave that alarmed analysts and took a bite out of the buying power of Americans.
• Consumer prices are up 5 percent over the last 12 months, the fastest one-year change since 1991. (hold on while I chuckle at that "5 percent")

Inflation is a tax on all things, producers and consumers. We say this every week. People were asking me last winter "where is this inflation you talk about". I said, just wait. The really bad thing is inflation is a lagging indicator meaning what we see today is not reflecting the full tidal wave coming from the energy and food costs. Inflation in things we need - deflation in things we want. What an interesting situation.

But never fear - the Federal Reserve does not fear a return to the 1970s because this time around unions are weak and workers are neutered - they cannot ask for the type of wage increases they did in the 70s - which led to a wage-price spiral. That's great news! For the Fed. For you? Not so much.

• As prices rose last month, take-home pay took a hit. Adjusting for inflation, weekly wages fell 0.9 percent in June, the third straight monthly decline and the biggest drop in almost four years.

Translation - prices are increasing in things you need. But your wages are falling in real terms - so you are getting poorer at an accelerating rate. But leadership loves this because eventually you will become so poor you won't be able to afford things. And then corporations will be unable to force higher prices through the system so they will be forced to lower them. Which means their profits will go from pressured to collapsing. Which will be good for the stock market how? ;) This is called the "nuclear solution" in my view. Make Americans so poor in real terms that they cannot pay for anything - that will solve the inflation riddle :) Instead of say, raising rates and giving savers a life boat... nope, that would hurt the banks and we cannot have that.

Anyhow I digress - the situation is so bothersome and as long time readers know, I've warned about this for a year, so to see it playing out is just sad. Let's look at tomorrow's slate of earnings

A whole lot of banks report - again the bar has been set so low if most just say "we plan on keeping our doors open another 3 months" we could see rallies in some of these. Best of breed of tomorrow's group is JPMorgan (JPM). Merrill Lynch (MER) also reports and that one could go either way - not in very good shape but so beaten down anything can happen.

Fund holding Blackrock (BLK) - this one has been impacted more by the potential selling of a stake by Merrill Lynch (MER) than anything else these past few weeks

Credit card company Capital One Financial (COF) - always like to see how defaults are acting in this economy. Hint - they'll be higher as the US consumer spins into the abyss (see real wages falling above) But! This is exactly the type of heavily shorted company that can rally on "better than expected" i.e. we expected putrid and we got awful! Buy those shares!

Evergreen Solar (ESLR) - we decided we need to begin to take these guys seriously after $2 Billion worth of orders came through in the past month. Doubtful anything serious is happening now, but they might have some raised guidance for 2009 (I'd hope so with the scale of orders being announced) The whole solar sector tends to trade together so this could impact the group.
Sunpower (SPWR) also reports and this is a more stable company that has performed - but richly valued. Usually reports a solid number.

Gilead Sciences (GILD) - I really don't do biotech but this is the one star performer of the past few years.

Google (GOOG) - You know the story - a market mover

Harley Davidson (HOG) - I've ripped on this story as a consumer discretionary and been correct all the way down (and down, and down). However, one could actually now construct a bullish thesis that as some Americans become to poor to drive cars, they move to motorcyles - much better mileage ;) Yes, I'm halfway serious. Scooter sales are completely off the chart, but obviously a much cheaper entity than Harleys.

International Business Machines (IBM) - I expect "good" things like last time around when IBM pulled a fast one on the Street. CNBC was literally crying with joy while something like 70% of their "profit" was currency. This is not a US story anymore - they have huge overseas sales. We'll take a look at how much of the good news is nothing more than the United States of Subprime Peso devolving into a real Peso.

Microsoft (MSFT) - not that interesting to me but I guess some people still pay attention. As I say every quarter - if they spin off Xbox give me a call, I'd like to buy that division. The "value guys" can have the rest.

Former holding New Oriental Education (EDU) - we sold out the last of this position a month ago as a defensive measure since there is potential for some earnings guidance that is weaker than the market expected. But it did pop a nice 9% today and crossed over both the 50 and 200 day moving averages. Interesting. Still like it a lot for the long run.

Nokia (NOK) - my gosh what Apple (AAPL) and Research in Motion (RIMM) has done to this once darling. Still a quality company and I could see them making a rebound sometime in the next 12 months. This was supposedly one of those "safe" stocks... ouch.

Nucor (NUE) - steel. I'm going to be looking close at their margins - remember input costs are increasing at a rapid clip; and the first batch of customers are finally pushing back on price increases. Can Nucor pass these costs along? Reliance Steel (RS) also reports.

PMC Sierra (PMCS) - oops I thought this was 1999/2000 when this stock mattered. (2000 price - $250. Current $7. Lessons learned - priceless)

United Technology (UTX) - just one of those large solid industrial companies with their hands in everything

That leaves Friday which gives us Citigroup (C) - see Merrill Lynch comments above, and Honeywell (HON) - see United Technology comments above.

Also on the docket Manpower (MAN) a stealth international, weak dollar play as we discovered last quarter, Overstock.com (OSTK) - perhaps a pooring of America beneficiery for those who cannot afford high brow Amazon.com (ahem), and Schlumberger (SLB) which if oil falls another $5, it won't matter what they report as hedge funds flee en masse anything 6 degrees of oil. Because that's just how they do it.