Written by Admin | Oct 23, 2009 4:00:00 AM
If you own Amazon, you're one happy camper. Unfortunately, I'm not one of them.
The stock is up a whopping 25% after announcing great earnings, which included news that the Kindle (a product that they own and manufacture) was their biggest selling product in both units and dollars. This news gives the company a new Apple-like angle to it, as a manufacturer rather than just a low cost retailer that is giving the mighty Wal Mart a run for its money.
Aside from Amazon, it has been a big week for other earnings as well. But as a general observation, I would say the reaction of stocks like Amazon and Apple has been atypical. Many companies that we actively follow have demonstrated strong results relative to expectations both as a function of leaner operations and - unlike previous quarters - some areas of revenue improvement. In most cases, analysts estimates have increased based on improved guidance. In spite of this generally positive fundamental news, more stocks seemed to have responded negatively the first day following their earnings releases. For investors, does this mean anything?
The quick answer is that I don't know. I've long resisted making changes to the portfolio during earnings season as it tends to be a very emotional time driven by technical trading considerations that often don't sustain themselves longer term. One stock I'm thinking of in particular traded down ten percent the first day after their earnings release. Today, three days later, it is trading back above its pre earnings price level. I'm not sure why this is the case, but it is an example of why I'm careful around earnings season.
Consistent with this pattern on an individual stock basis is the observation that the S&P 500 has hit 1100 on several occasions in the past few weeks but has each time failed to break convincingly above this important level of resistance. My best guess is that the index will break through sometime before year end as earnings season winds down and folks conclude that the economic recovery remains intact. (The 1200 level would seem reasonable to me as an end of year resting point, or about where the markets were before Lehman Brothers went under roughly one year ago.)
A few other tidbits from the week that was:
1.) Brazil's leaders proposed a 2% tax on foreign investments into stocks and bonds in its country to slow down the speculative mass of money flowing its way.
2.) The decline in the dollar hasn't been kind to Brazil's residents and many others around the world. In terms of the Brazilian Real, the 25% gain in the S&P 500 this year would actually translate into an an eight percent loss for Brazilian investors in the index because of Real strength/dollar weakness.
3.) About mid week, I noticed that the S&P 500 was up nearly 65% from its lows last March. My guess is very few people would have guessed they could make sixty five percent on their money six months ago, but that is exactly what has happened. What an important lesson!
4.) Starwood Hotels indicated that revenues per available room continued to decline at a significant pace, but at a declining rate this quarter, which is expected to slow still further in the future. While 2010 is still up in the air, they are seeing improved bookings in China and big markets like New York city. As business profits improve, companies will likely feel more comfortable booking events once again.
Stay tuned, even more earnings next week.