Sunday, July 26, 2009

Economical Leading Sectors Scaled back Inventory by Q2 2009

As the second quarter earning season rise to the full swing, US stock markets cheered at the unusual positive earning surprises. Yet, I am cautiously optimistic about the earning numbers. By July 25th, 183 S&P500 firms have released earning. Nearly 75% beat their expectations. This is probably the highest number since 1994 when Reuters started tracking earning numbers. Leading the pack are GS and Intel. Driven by large risk taking and trading expertise in fixed income market, GS beat the expectation by a large margin. It earned $5.71 per share in second quarter, $2.06 more than the expectation. Intel issued the positive outlook for 2010, calling the bottom the PC market. Two sectors, consumer durable and seminconductor, usually lead in the economic recovery. Both sectors have fantastic numbers. Yet a closer look at the number won't give us confidence that economy is recovering into high gear. In consumer durable sector, seven out of eight firms beat the earning expectations. Yet top line growth is grim. Only two of eight firms beat revenue expectations by low margin: one is Black & Deck that tops revenue expectation by 0.16% and the other is Fortune Brands Inc that beat expectation by 1.59%. It implies that most consumer durable companies beat earning expectataions by cutting expense, especialy laying off employees. Yet consumers still tightened their purse strings and balk at large items. As consumers contribute two thirds of GDP, it is hard to imagine a recovery without strong individual consumption. Numbers from semiconductor sector seem more optimistic. six out of ten firms beat earning expectations. But eight firms beat revenue expectations. Leading by Intel and AMD, most semiconductors beat revenue expectations by a relative large margin, 10.07% for Intel and 4.84% for AMD. Yet, the two's inventory number tells us that the two companies have not set the stage for a strong economic recovery. Intel's inventory continue to slide in Q2 2009. Its inentory level by Q2 2009 was 2.8 bil, 240 mill lower than Q1 2009 and 940 mil lower than Q4 2008. Admittedly the pace of decline is shrinking. Second derivative is postive yet first derivative is still negative. AMD's inventory in Q2 2009 was $494 mil, $46 mil lower from Q1 2009 and $63 mil lower from Q42008. These two are not expections. Texas Instrument and Linear Technology also lowered their inventory level in Q2 2009. If these companies received large order from clients or they are confident the economy is poised for a strong recovery, they wiil at least increase their inventory level. Yet their inventoy numbers in the whole sector disappointed me. After scrutinizing the numbers of the two leading sectors, I have to say that economy is getting better yet I have not seen clear signs of a strong recovery.

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