Just because a company like Caterpillar crushes its estimates, it doesn’t mean the business is humming along. It just means they beat the estimate.

That said, at a time like this, it’s important to figure out why the earnings come in better than expected. Were sales higher than forecast? Did margins improve? Was it due to a lower tax rate? Lower general and administrative costs (layoffs)?

There are a number of reasons why a company might spring a surprise. Let’s take a look at a few that recently reported stronger than expected earnings and see if we can figure out why it happened…

Yahoo! (Or Not)

On Tuesday, Yahoo! (Nasdaq: YHOO) doubled up on analysts’ estimates, notching earnings per share of 16 cents, versus expectations of 8 cents. That was on a non-GAAP (Generally Accepted Accounting Practices) basis, though. Using GAAP, the company earned 10 cents per share – a penny more than in the same period last year.

Behind the flashy headline numbers, Yahoo actually experienced a 13% decline in sales. It offset that with a $120 million decrease in sales and marketing expenses and $50 million less in general and administrative expenses (most likely due to layoffs).

In addition, the company’s gross and operating margins were both lower than the corresponding earnings period in 2008. So while Yahoo did beat its estimates – and even earned more per share than it did last year – it was all due to cost-cutting and firing employees.

Starbucks Brews Up Earnings… But Are They Real?

Despite a revenue decline of 6.6% during its fiscal third quarter, as all-important same store sales dropped by 5%, Starbucks (Nasdaq: SBUX) was still able to post a profit of $151 million or 20 cents per share. That beat EPS estimates by a penny and compared to a loss of $6.7 million during the same period a year ago.

To its credit, management was able to shave operating costs at company-owned stores from 42.1% of revenue to 41.9%. But the big change to this quarter’s income statement was the roughly $175 million in cost-saving, mainly by closing stores.

It took $51.6 million in restructuring charges this quarter, versus $167.7 million a year ago.

Starbucks also had an additional $33 million benefit, due to lower interest expenses, higher interest income, plus other items when compared to last year.

But even though the company swung to profitability, a quick comparison of this quarter’s numbers versus the same data from a year earlier shows that the real story behind the profitability was because of savings from closed stores.

Still, that’s not necessarily a bad thing. Starbucks did need to cut back ( as long as they dont cut the one by my office). And if the company can show increased profitability from existing (and any new) stores in the future, then its cost-cutting moves will prove fruitful.

Right now, though, a look at Starbucks’ numbers tells us that its recovery is still early in its development. Too early, in my opinion, to make for an attractive investment.

Delta Air Lines: A Tale Of Lower Revenues And Poor Traders

Here’s another example of how the mainstream media can mislead.

Some outlets reported that Delta Air Lines’ (NYSE: DAL) revenue shot up by 27%. But some journalists didn’t take the company’s acquisition of Northwest into account. Their combined revenue actually fell by 23%.

In addition, while Delta did report better than expected numbers, losing 24 cents per share, 5 cents better than consensus estimates, it would have turned a profit if not for losses suffered when trying to hedge fuel costs.

So in Delta’s case, the airline was actually operating in the black, despite lower revenues. That was until some traders got involved and bet the wrong way on fuel prices.

I don’t love the airline business, but if Delta can show me another quarter where it manages its business efficiently, it could be an interesting recovery play. Assuming some oil traders don’t mess things up, of course.

Clearly, this is just a quick look at these companies’ earnings reports. But even then, it reveals more information than the headline numbers you see reported in the press. Unless you drill into those numbers, they can be pretty much meaningless.

Hoping your longs go up and your shorts go down.

Source:  A Trio Of Twisted Numbers… And How To Get Beyond The Fluff

The revised loss estimate, nearly double the previous forecast issued in December, reflects “the rapid deterioration of the global economic conditions,” Geneva-based IATA said in a statement.

The industry body had estimated in December the airlines would lose $2.5 billion in 2009. Airline capacity could shrink 6% as carriers shed jobs, eliminate routes and idle planes to survive shrinking passenger and cargo demand sparked by the global recession.

IATA based its revised estimates on a 1.9% contraction in global GDP, which is suffering the deepest recession in 70 years. The December forecast was based on a projected 0.9% drop.

“The state of the airline industry today is grim,” IATA Director General Giovanni Bisignani said in a press conference, Bloomberg News reported. “Demand has deteriorated much more rapidly with the economic slowdown than could have been anticipated even a few months ago. The industry is in intensive care.”
The deepening recession has pushed almost 40 airlines worldwide out of business and toppled previously profitable operators such as British Airways Plc (LON:BAY) and Cathay Pacific Airways Ltd. (ADR:CPCAY), into the loss column.

Losses in the fourth quarter of 2008 exceeded $4 billion, compared with the previous estimate of  $1 billion – even as oil prices dropped by more than 50% from their $147 peak in July.  Some airlines suffered from being locked-in to fuel hedging positions which kept them from fully taking advantage of cheaper crude, IATA said.

“The relief of lower fuel prices is overshadowed by falling demand and plummeting revenues,” Bisignani said.

And official numbers don’t really paint a clear picture of how bad things really are. Some airlines used hedging instruments that were marked to market because they’d have produced a cash loss if exercised, which would have jumped industry losses from an estimated $8.5 billion in 2008 to as much as $17 billion.
To make matters worse, IATA’s figures don’t include non-cash items such as a $6.9 billion goodwill write-off from the merger of Delta Air Lines Inc.(DAL) and Northwest Airlines Corp. Counting those items, the industry’s loss last year would have climbed to roughly $21 billion.

The numbers confirm the current downturn could be worse than the aftermath of the 2001 terrorist attacks, which put a major chill on air travel worldwide. Industry revenues fell about 7%, or $23 billion, from 2000 to 2002.

By comparison, revenues are expected to fall by $63 billion, or 12%, to $467 billion, the association said.  Passenger and cargo traffic are likely to drop by 5.7% and 13%, respectively in 2009.

On top of the global slowdown, the industry carries whopping debt loads of $170 billion, which puts further pressure on the balance sheet.

“Airlines are facing an unprecedented global crisis due to a deepening global recession,” the trade body said in its statement. “The sharp drop in passenger and cargo demand is reshaping the industry, with drastic change from capacity cuts, to consolidation talks and cost-reduction measures.”

Carriers in North America are expected to survive the downturn better than others because they have been able to reduce capacity fast enough to keep up with the drop in demand.

That should allow them to turn last year’s losses into a profit of about $100 million, IATA said. All other regions will operate in the red, including losses of $1.7 billion in the Asia-Pacific region and $1 billion in Europe.

The Swiss-based body said its latest forecast assumes the economy and air transport demand would hit bottom by mid-2009 and then start to recover, Reuters reported.

“We do expect better prospects toward the end of this year or the beginning of 2010,” Bisignani told a news conference at Geneva airport.

Source: Airline Losses Mount as Revenues Dive Below Post-911 Levels

More from Today’s Financial News:

After nearly a decade of getting kicked around by the nation’s investors, airlines are finally starting to get some positive attention. More importantly, the barrens of the friendly skies are finally starting to look like profitable ventures.

Notice, however, that I “starting” to “look” like profitable ventures. As of last quarter, the only major airline to post a profit was AMR Corp. (NYSE:AMR), the owner of American Airlines. And its earnings were a mere pittance of total revenues.

All the rest, companies like Southwest Airlines (NYSE:LUV), Delta Air Lines (NYSE:DAL), and United Airlines (NYSE:UAUA), all lost significant sums of money.

But the airline environment is drastically different than it was just a few months ago. For one thing, oil prices are significantly lower. Even better, it looks like folks are still willing to take to the sky even as the economy slows. Airline bookings have exceeded industry estimates.

Just as I said in an earlier article, the outlook may not be that bad for the nation’s economy.

Blazing the trail

While industry sentiment is on the rise, investors are looking at other airline industry news today.

I am sure you have already heard Northwest and Delta have finalized their merger deal. In a $2.6 billion all-stock acquisition, all of Northwest’s operations will be under the Delta umbrella by next spring.

The deal created the world’s largest airline, a veritable flying behemoth. With over 75,5000 employees, routes to 375 cities and 66 countries, Delta will be the industries dominant player.

That is, unless another super-airline emerges.

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You see, the real news from the Delta/Northwest merger is not that the combined company will create $2 billion in revenues and cost savings for Delta, with over $500 million in savings next year.

What investors are truly celebrating is the fact that such deals are possible. When federal regulators gave their nod, it proved to investors that mergers would be allowed and showed the synergistic qualities such moves could make.

Now investors in airlines like United, American, and Southwest are wondering what lies in store for them.

Everybody wants in

Across the Atlantic, Sir Richard Branson, the owner of Virgin Atlantic is digging through his contact list looking for an opportunity to strengthen his airline’s core business. Rumor has it, he may be close to a deal with a long-time rival, British Midland Airways.

All across the airline industry, share prices are soaring today. Investors are looking into the future and liking what they see.

That is good news for investors that bought shares last week. What about folks looking to invest today?

I say, do not fall into the airline trap. The gains will not continue.

The nation’s airline industry has been in trouble for nearly a decade. A slowing economy, fuel prices that remain historically high, and a customer base that absolutely hates the service they are receiving is far from good news.

Instead of investing in a risky, cyclical business like an airline, search out companies with strong histories of success that are selling at decade-low prices. For a list of four of my favorites, click here.

Source: Airline industry finds some wings

* Oil prices rallied off a 17-month low yesterday (Wednesday), soaring $5.12, or 8.16% to settle at $67.85 a barrel. Earlier in the day, crude jumped 9% to a session high $68.91 a barrel. Part of the reason for the oil’s rebound was the Energy Information Administration’s weekly report, which showed inventories rose 500,000 barrels last week, less than many analysts expected. Oil prices have fallen by 55% since peaking at $147 a barrel in mid-July.

* Hungary yesterday (Wednesday) secured a $25 billion aid package from the International Monetary Fund, the European Union and the World Bank, The Associated Press reported. According to the terms of the deal The IMF will provide a 17-month standby loan of $15.7 billion, the European Union will make $8.1 billion available, and World Bank will give $1.3 billion in an effort to keep Hungary’s economy from collapsing under the weight of the global financial crisis.

* Procter & Gamble Co. (PG) yesterday (Wednesday) announced a 9% increase in its fiscal first quarter sales. Net income rose to $3.3 billion, or $1.03 per share, up from $3.1 billion, or 92 cents a share, a year earlier, after double digit growth in emerging markets boosted total revenue to $22 billion.

* Qwest Communications International Inc. (Q) yesterday (Wednesday) that it would cut 1,200 jobs or 3% of its work force after third-quarter revenue fell 2% to $3.38 billion. The cuts will come before the end of the year and leave the company with 33,500 employees. Qwest earned $151 million, or 9 cents per share, in the quarter, down 93% from $2.06 billion, or $1.08 per share, a year ago. Though, the 2007 results were bolstered by a $2.1 billion tax benefit.

* The merger between Delta Air Lines Inc. (DAL) and Northwest Airlines Corp. (NWA) received antitrust clearance yesterday (Wednesday) from the U.S. Department of Justice. The approval paves the way for the merger, which will create the largest airline based on traffic, The Wall Street Journal reported.

* Average airfare for U.S. domestic flights increased 8.1% in the second quarter, the Bureau of Transportation Statistics announced yesterday (Wednesday). The average fare price of $352 is the highest in the 13-years the agency has been tracking the data, surpassing the previous record of $348 set in the first quarter of 2001, Bloomberg News reported.

* Shares of Comcast Corp. (CMCSA) slumped almost 9% yesterday (Wednesday) as the company announced it lost 147,000 cable subscribers in the third quarter due to weak economic conditions, Reuters reported. Comcast shares lost $1.68 each to close at $15.28.

* Shares of biotech firm Biogen Idec Inc. (BIIB) plunged more than 11% in after hours trading yesterday (Wednesday) after the company announced a participant in a drug trial for its multiple sclerosis drug Tysabri had been diagnosed with a life-threatening brain illness. The patient had received 14 infusions of the MS drug and was diagnosed with progressive multifocal leukoencephalopathy, or PML, Biogen said today in a regulatory filing, Bloomberg News reported.

Source: Global Investing Roundups Thursday, October 30th, 2008

Among the earnings season headlines: Bank of America Corp. (BAC) will be issuing its final earnings report of the pre-Countrywide Financial Corp. (CFC) merger era and investors hope that Wachovia Corp. (WB) follows in the recent footsteps of Citigroup Inc. (C) and JP Morgan’s Chase & Co. (JPM), the latter two of which both provided better-than-expected (though certainly negative) results.

Yahoo! Inc. (YHOO) gives its shareholder a bit more ammunition for the never-ending Microsoft Corp. (MSFT) buyout controversy, as Yahoo execs are clearly hoping against hope some decent numbers can save their skin (musings known by the acronym “WWID” – for “What Would Icahn Do?).

Amazon.com Inc. (AMZN) will shed some light onto the U.S. consumer spending/retail sector pictures; however, investors should remember that those Internal Revenue Service rebate checks have likely all been spent by now. The U.S. Federal Reserve stays in the limelight as the Beige Book provides the country one more look at the mindset of U.S. policymakers.

The energy-supply data will be analyzed more closely as investors hope that prices are headed down to more manageable levels. And, of course, the Freddie Mac (FRE)/Fannie Mae (FNM) saga merits continued close scrutiny. Anyone interested in some newly issued stock of these financially strapped companies? [For a related Money Morning story containing the latest developments in the Fannie/Freddie saga, please click here.]

Last week provided investors with a nice reprieve from the daily surge in oil prices, as well as an apparent rebound in the Dow Jones Industrial Average Index – out of bear-market territory. But at least with the stock-price rebound, there’s a real question about whether this represents the first leg of a new bull-market uptrend, or is just a bear-market “head fake” that will separate many investors from their money. [For a special weekend market bulletin, in which Money Morning Investment Director Keith Fitz-Gerald argues that last week’s reversal in trading trends was such a "head fake," please click here. The report is free of charge.]

The backdrop for such a “bear trap” was just about perfect as the week ended, for the overall investor-market mindset had shed the dire outlook of recent weeks and months. Bad earnings somehow didn’t seem so bad. Negative forecasts somehow didn’t seem so negative. Cautionary comments by the central bank didn’t translate automatically and immediately into marketplace fears. Weak economic releases somehow didn’t seem so weak. Investors departed for the weekend with a newfound confidence (or, as we fear, overconfidence). Again, this begs the question: Is this the start of a new, bullish trend, or is it just an aberration that will soon yield to a resumption of downward stock prices and rising food-and-energy costs?

Stay tuned…

Coming up in the week ahead: Leading Economic Indicators (Today/Monday), Fed Beige Book (Wednesday), Existing Home Sales (Thursday), Durable Goods Orders (Friday), New Home Sales (Friday).

Market Matters

Freddie Mac and Fannie Mae stayed in the headlines last week as U.S. Treasury Secretary Henry Paulson announced plans for a “non-bailout” government bailout, complete with improved borrowing terms and an expanded line of credit (and which required congressional approval, easier said than done). By week’s end, Freddie toyed with the idea of “going at it alone” (like any good private enterprise should) and opened discussions about raising capital by offering up to $10 billion in new stock. Given the company’s current “dire” financial position, any new shares must offer great incentives to potential investors. Currently, Freddie’s outstanding preferred stock yields in the neighborhood of 14%.

Meanwhile, the U.S. Securities and Exchange Commission (SEC) emerged from hibernation and offered a few regulatory ideas of its own. With “short interest” at all-time record levels, the SEC initiated actions aimed at limiting investors’ abilities to engage in short-selling strategies (which many observers have labeled as the “speculative excesses” that are responsible for everything from soaring energy prices to plummeting stock prices). Not be upstaged, the Federal Deposit Insurance Corp. (FDIC) took possession of IndyMac Bancorp Inc. (OTC: IDMC), another troubled institution engaged in “risky” mortgage lending, which opened again as a federally-owned institution. (So who’s next and just what will that cost the taxpayers?)

Bailouts and new regulations aside, the financial crisis still has a way to go – and possibly a very long way [To read my two-part report from last week about a Japan-style "Lost Decade" for the U.S. economy, including the investments you can make to sidestep this long malaise, please click here. Both reports are free of charge.]

In terms of earnings season, while Wells Fargo & Co. (WFC), JP Morgan Chase, and Citigroup announced weaker earnings (or losses) for the last quarter, their results actually beat Wall Street’s expectations. Merrill Lynch & Co. Inc. (MER) helped shore up its capital position by selling its 20% interest in Bloomberg LP for roughly $5 billion. The world’s largest brokerage firm also reported its fourth-straight quarterly loss and was downgraded by Moody’s Corp. (MCO) immediately after the release. Outside of financial-services companies, airlines – Continental Airlines Inc. (CAL), Delta Air Lines Inc. (DAL) and American Airlines Inc. parent AMR Corp. (AMR) – did as expected in this earnings season, and reported massive losses.

Google Inc. (GOOG) and Microsoft were among the earnings-season headlines, issuing disappointing forecasts, despite reporting quarters that saw earnings jump by more than 35%. Oil-services giant Schlumberger Ltd. (SLB) reaped the benefits of higher energy prices and manufacturer Honeywell International Inc. (HON) raised its forecast for the rest of the year.

Investors enthusiastically received the positive (yet negative) earnings news from the (depressed) financials and also reacted to a pullback in oil prices. Early in the week, the dollar dropped to a record low against the euro and oil continued its endless climb. After that, however, in four consecutive trading sessions, crude plunged by more than $15 a barrel to a market price of less than $130 – its lowest-such close in more than a month.

Excellent supply reports showed that oil-and-gas inventories actually rose last week as demand slowed, given the higher prices. Mid-week, investors took the opportunity to seek out some bargains as the Dow soared close to 500 points and experienced its best two-day percentage gain since October 2002. The other indexes lagged (thanks Google), though still ended the week in positive territory. Bonds tumbled as investors unwound previous flight-to-quality trades. The week came to a close with plenty of uncertainty, but also with the slightest glimmer of hope out in the market that the financial (and oil) madness may one day come to an end (although we here at Money Morning still believe that “end” is well down the road).

Economically Speaking

News from the economic front was not quite so positive last week as those inflationary fears we’ve been warning about for more than a year appear to finally be coming to fruition.

The June Producer Price Index (PPI) rose at its fastest pace in 27 years and wholesale prices now stand more than 9% higher than they were at this time last year. Likewise, the Consumer Price Index (CPI) jumped by 1.1% in June as energy prices skyrocketed by more than 6.5% during the month.

For those economists who choose to discount the energy statistics, core CPI experienced its worst showing since January and reflected escalating prices in airline tickets, among other areas. (Since ticket prices are directly tied to the price of jet fuel – a form of “energy price” – shouldn’t those optimistic economists factor travel out of the “core” equation as well?)

Retail sales rose by a slower-than-expected 0.1% in June, as weakness in auto sales overshadowed the consumers’ desires to spend those government rebate checks. In fact, many naysayers previously warned not to put too much stock in recent retail statistics as they are more reflective of that (temporary) economic stimulus than they are of any real motivation for consumers to shop.

U.S. Federal Reserve Chief Ben S. Bernanke was in the spotlight again last week (as he seems to be every week, these days), as he delivered his mid-year testimony to Congress and discussed the Fed’s ongoing challenges of stimulating a weak economy without prompting additional inflationary pressures. The central bank chair continued to walk a fine line between these two crises and the minutes from last month’s policymaking Federal Open Market Committee (FOMC) meeting revealed the difficult balance.

While many Fed-watchers expected the next move in rates to be higher, the continued economic weakness makes a rate escalation potentially deadly to the weak economy. For now, the central bank pretty clearly believes that the best move may just be no move at all. The Fed also announced some new rules aimed at protecting residential homebuyers against the “predatory” practices of those (now defunct) mortgage originators.

These days, lenders actually may be required to verify a potential borrower’s income to determine if he or she qualifies for a loan. (What a shame IndyMac never thought of that before.)

Weekly Economic Calendar

Source: New Bull Market or Bear-Market Trap? Investors Look to Earnings Season for Clues

• Wells Fargo Co. (WFC) stock jumped 32% after the nation’s fifth largest bank raised its dividend by 10%, from 31 cents a share to 34 cents. The company reported second-quarter profit fell 22% as more customers defaulted on loans, but the dividend hike was enough to answer any questions concerning the company’s stability.

• Light, sweet crude for August delivery fell $4.14 to settle at $134.60 a barrel on the New York Mercantile Exchange yesterday (Wednesday) after sinking as low as $132 earlier in the day. Over the past two days crude prices have dropped $10 a barrel.

• The National Association of Home Builders/Wells Fargo housing market index fell in July to a record low of 16, down from 18 in June, the Associated Press reported. The index has been on a downward trajectory since May, as tighter lending standards, rising mortgage defaults and fear about the housing market’s future have sidelined buyers.

• Russian energy giant OAO Gazprom accused Belarus underpaying for gas deliveries and threatened to go to court if the situation is not rectified, Thomson Financial reported. “If the Belarussian side continues to fail to honour its obligations to pay in full for Russian gas, Gazprom reserves the right to start court proceedings,” Gazprom said in a statement.

• Shares of Gannett Co. Inc. (GCI), the largest U.S. newspaper publisher, tumbled yesterday (Wednesday) after the publisher announced a 36% decline in second-quarter profits from the same period the year prior, Bloomberg News reported. Shares shed 78 cents, a decline of 4.5%, to close at $16.57.

• Struggling Sprint Nextel Corp. (S) is an attractive takeover target for Korea-based SK Telecom Co. Ltd. (ADR: SKM). The two mobile carriers are a good technological fit and Sprint is hurting for cash, while SK Telecom is looking to expand its presence in the United States, BusinessWeek reported.

• Executives from Time Warner Inc.’s (TWX) AOL unit met with Microsoft Corp. (MSFT) yesterday (Wednesday) to discuss a possible merger. Microsoft is seeking alternatives after Yahoo! Inc. (YHOO) shunned its buyout bid. While the two firms have been in ongoing discussions for some time now, the chances of reaching a deal remain less than certain, MarketWatch reported.

• Delta Air Lines Inc. (DAL) stock jumped over 25% yesterday (Wednesday) despite announcing a $1 billion quarterly loss. The Atlanta-based carrier was profitable before special charges, Reuters reported, causing shares to gain $1.24 to close at $5.91.

Source:  Global Investing Roundups Thursday, July 17th, 2008

The airline industry has been battered by the surge in oil prices. Major companies have already cut services, raised fees, and announced job losses. And share prices have collapsed since the start of the year: United Airlines (UAUA) is down a whopping 84.6%, Delta Airlines (DAL) 64.8%, Continental (CAL) 48.7% and Northwest (NWA) 58.9%.

So why invest now? Eric says a correction in crude oil prices is inevitable; and when fuel goes down, airline stocks will fly again…

Why the World’s Worst Business Is Now One of the Best Buying Opportunities on the Planet

by Eric Roseman

Skyrocketing energy prices are making the headlines almost daily since last spring. Over the last 12 months, crude oil prices have more than doubled and gas prices are heading to US$5 per gallon.

Meanwhile, out in the financial markets, investors are blindly buying energy stocks. Commodity fund managers are lunging after crude oil and natural gas futures. A full-blown mania now surrounds the energy pits.

In just about every facet of global business and consumer livelihood, high energy prices are wreaking havoc. Prices are rising, if not soaring, for most goods across the world. Oil’s ubiquitous role is forcing consumers and companies alike to boost spending, reducing discretionary income and slicing corporate profits.

Oil’s “Unstoppable” Prices Are Yesterday’s News

But surging oil is yesterday’s news. Demand destruction is underway. There will be a point when high prices finally force consumers to use less oil products, buy less gas and other distillate fuels. Granted it doesn’t seem like it, but consumers are already buying less gas since April.

What Goes Up WILL Come Down: Oil’s Path This Year

Since March 31st, crude oil prices have soared more than 35% — an astonishing rally in a short period of time. At some point, a correction looms. That’s when some sectors suffering from expensive oil will post some spectacular gains. That includes my absolute favorite contrarian play right now: Airlines.

The Worst Business in the World

Yes, I know the airline industry is arguably the worst business in the world right now.

Soaring jet fuel prices, expensive labor costs and rising airport user fees are forcing carriers worldwide to cut routes, reduce capacity, and shed labor. Many analysts forecast several big carriers, mostly in the United States, will probably collapse this year if jet fuel prices remain at these elevated levels.

In fact, you could say airline stocks have been a one-way ticket to the poorhouse lately. That’s certainly been the case over the last 18 months as input costs have surged, mainly because of a 100%-plus rally for jet fuel.

Airline stocks also earn the dubious ranking as the worst performing sector of the market over the last 12 months — even worse than the financials!

Since June 2007, the AMEX XAL Airline Index of global carriers has collapsed a formidable 62%. Over the same period, jet fuel prices have doubled. Airlines have cut capacity. Also, executives in the business are warning that we’re facing the worst economic climate for the industry since 9/11. In short, these are dark times for airline executives, employees and passengers.

Notice: It’s the Exact Opposite of Oil in the Airline Sector

How Many Airlines Do You Know that Are Raising Dividends?

Historically, I’ve avoided the airline sector like the plague. I’ve only turned bullish on this sector a handful of times in my 16-year investment career.

But at these bombed-out levels and ultra-low valuations the airlines are just too contrarian to ignore. Plus, I see a major catalyst coming for rapid price appreciation in the airlines on the heels of lower oil prices in the months to come.

I’m now buying one of the best-managed airlines in the world. This blue-chip company just raised its dividend again recently. The stock now pays an effective 8% per annum in one of the world’s strongest currencies. That yield is almost twice the rate paid by 10-year bonds in the United States and Europe.

This stock is also trading at a 52-week low, still earning profits and has most of its jet fuel hedged at about US$75 per barrel. How many airlines do you know that are still making money, yet alone raising dividend payments?

The way I see it, if oil prices suffer a 20% correction or more, which is highly likely after a nonstop blistering rally since last summer, industries leveraged to the price of oil or in this case, jet fuel, will rocket higher.

Since the advent of the sub-prime debacle in July 2007, every segment of the commodity bull market has suffered a correction — except the energy complex. The rally has literally been unstoppable so far.

Go Against the Herd for the Best Profits By Christmas

All secular bull markets face corrections — even oil. These corrections tend to be brutal. So you can expect oil prices to post a savage correction. When that happens, the industries that have been handcuffed by high oil prices will post major reversals — including the best-managed airlines.

Plus, global governments are now throwing everything they can at high oil prices, including the Saudis, so the odds of a brief respite are growing more likely by the day.

If oil prices decline, as I expect them to, then input costs for all carriers will decline markedly, if even for just several months. There is certainly enough room to juice this speculation for at least a quick 35% to 50% profit, possibly more. Plus, add some dividends into the picture, profitable earnings, and a big bear market rally and you should hit a home-run in airlines before December.

Sometimes, it pays to look the other way behind the trail of a blazing bull market in energy prices. In this case, some airlines will reward investors with big profits over the next 6-12 months. I’m betting on it.

Source: Why the World’s Worst Business Is Now One of the Best Buying Opportunities on the Planet

• Continental Airlines Inc. (CAL) became the latest airline to announce reduced flight service and jobs cuts yesterday (Thursday). Continental will eliminate 3,000 jobs and 16% of its flight capacity, The New York Times reported. The cost cutting efforts follow similar moves from UAL Corp.’s (UAUA) United Airlines, Northwest Airlines Corp. (NWA) and Delta Air Lines Inc. (DAL).

• France Telecom SA (ADR: FTE) announced yesterday (Thursday) that it was pursuing a $42 billion bid for Sweden’s TeliaSonera AB (PINK: TLSNF), The Associated Press reported. TeliaSonera dismissed the initial offer as too low, but France Telecom reported it has the backing of the French government and could up its bid.

• The Mortgage Bankers Association (MBA) announced yesterday (Thursday) that both the percentage of loans in foreclosures, as well as the number of foreclosure starts, climbed to levels not seen since 1979, MarketWatch reported. For one- to four-unit properties, 2.47% of all mortgages outstanding were in foreclosure, up from 2.04% in the fourth quarter, according to the MBA’s latest National Delinquency Survey. At the end of first quarter 2007, only 1.28% of such homes were in foreclosure.

• The number of U.S. citizens filing first time unemployment claims fell last week, the Department of Labor said yesterday (Thursday). Initial jobless claims decreased by 18,000 to 357,000 in the week that ended May 31, the lowest level in more than a month, due in part to the Memorial Day holiday, Bloomberg News reported.

• Stocks in China fell to a six-week low Thursday (yesterday) on speculation that the government would tighten prices to curb inflation. The move that would shave profits from the country’s commodity titans. The CSI 300 Index, which tracks 300 stocks traded in Shanghai and Shenzhen, fell 1 percent to close at 3,512.14, the lowest since April 23, Bloomberg reported.

• The U.S. government announced yesterday (Thursday), via the Department of Justice, that it is suing Honeywell International Inc. (HON) for selling material used in bulletproof vests that it alleges was defective, The Associated Press reported. According to the DOJ, Honeywell had scientific data that showed the ballistic material, known as Zylon, “degraded quickly over time, especially in hot and humid conditions,” leaving the vests unfit for use. The department also alleges that Honeywell failed to notify the government or the vest manufacturer, Armor Holdings Inc., of the defect.

• E.I. Du Pont De Nemours & Co. (DD), commonly known as DuPont, said yesterday (Thursday) that it is targeting a 40% increase in soybean and corn yields over the next 10 years through its Pioneer Hi-Bred unit, according to Thomson Financial. The company expects DuPont Agriculture & Nutrition segment sales to grow by 6% to 8% and earnings by more than 15% on average between 2007 and 2010.

• Swiss pharmaceutical maker Novartis AG (ADR: NVS) spent nearly $1.3 million lobbying the U.S. government in the first quarter on drug and health care issues, according to a recent disclosure form, The Associated Press reported. Novartis lobbied on bills designed to ensure the government has a sufficient stockpile of influenza vaccine in case of an outbreak.

Source: Global Investing Roundups: Friday, June 6th, 2008

Continental’s management ended months of speculation by announcing that a merger with troubled United would do more harm than good, even with the intense pressure airlines are under due to record high oil prices and the competitive threat posed by the recent deal between Delta Air Lines Inc. (DAL) and Northwest Airlines Corp. (NWA).

“The risks of a merger at this time outweigh the potential rewards,” Chief Executive Officer Larry Kellner said in a letter. “While some would prefer to see Continental pursue a merger, we strongly believe we have made the right decision.”

As for the niche carrier Eos, in grounding itself it joins Skybus Airlines, Aloha Airgroup Inc.’s Aloha Airlines and ATA Airlines Inc., which have already ceased operations, as well as U.S. charter operator Champion Airlines, which announced plans to stop flying at the end of May.

Frontier Airlines Holdings Inc. (FRNT) also has filed for bankruptcy protection, but at this time plans to keep flying.

The Eos downfall was “no surprise,” Calyon Securities airline analyst Ray Neidl told The Associated Press. “We saw it happen with other smaller, undercapitalized airlines. Basically, there are too many airlines. We’re in a period of consolidation. The weaker guys, [facing] $120-a-barrel oil, are finally succumbing.”

With jet fuel the single largest expense for carriers, merging to capitalize on economies of scale makes sense. And as the world’s new largest carrier, the Delta/Northwest merger now has the competitive advantage.

But while Continental still might be able to go it alone – even against a stronger potential rival – United is in a much weaker financial position and needs a partner. The carrier wasted no time in turning its attentions to U.S. Airways Group Inc. (LCC).

“Consolidation is under way – ensuring you have the right partner is everything,” United Airlines Chief Executive Glenn Tilton said in a statement. “We will pursue all options to ensure a strong, sustainable future for our airline.”

While talks with U.S. Airways are not yet at the advanced stage United had reached with Continental, management is doing its best to accelerate discussions, hoping to finalize any deal before the end of the year – and before there’s a possible change in the political party in the White House.

When it comes to mega-mergers – and industry consolidations in which there might be a perceived decline in competition – the Bush administration is seen as being more of a proponent for deals that require Justice Department approval in order to proceed.

Analysts say that U.S. Airways and United could mesh well due to similar pay structures and complementary fleets. In addition, United and U.S. Airways are both members of the Star global marketing alliance.

Bigger is Better

Atlanta-based Delta announced it would buy the Eagan, Minn.-based Northwest for $3.63 billion, all in stock, creating a single carrier with a combined enterprise value of $17.7 billion.

Delta Chief Executive Richard Anderson will be chief executive officer of the combined company. Delta Chairman Daniel A. Carp will become chairman of the new Board of Directors.

The carriers decided to go ahead with a merger despite being their respective pilot’s unions being unable to come to agreement. Delta’s 7,000 pilots endorsed the deal by supporting a new labor agreement that includes an equity stake.

While Northwest’s 5,000 pilots will be asked to join a contract before the deal closes, the union is expected to oppose deal after the unions could not agree on how to assign pilot seniority – a key determinant of shifts, pay scale and what airplanes they fly – in the new organization.

It is expected that the Delta/Northwest merger will be approved later this year.

But if the central bank does pare short-term interest rates, it’s likely to be the last such move in awhile; the Fed will take a break and give its rate cuts a chance to work their way through the U.S. economic system.

Despite an active-economic-calendar schedule this week – which includes a report on first-quarter gross-domestic product, and several other statistics that could confirm that the U.S. economy is entrenched in a recession – the Fed’s machinations should dominate this week’s headlines, given that the central bank’s interest-rate-setting arm is set to meet Tuesday and Wednesday.

Any announcements about interest rates will be made at 2:15 p.m. Wednesday. Experts also say that whatever the Fed says about its expectations will be just as important as what it actually does to the benchmark Federal Funds rate.

“I don’t think there’s any question that they’ll cut [a quarter-percentage point] off the rate,” David Rosenberg, chief economist for Merrill Lynch & Co. Inc. (MER), told The International Herald Tribune. “The real question is what they say about the future. It won’t be an ‘all clear’ signal. But they’ll find a way to tell the markets that they’ve done enough for now, simply put.”
Not everyone agrees.

“There is no reason why the Fed should be cutting rates right now,” Richard Yamarone, director of economic research at Argus Research Corp., told MarketWatch.com.

Yamarone may be thinking back to some of the public comments certain of the central bankers themselves have been making.

Back on April 18, Fed officials hinted that they would be reluctant to cut the benchmark Federal Funds rate yet again, given that the slumping U.S. economy also faced a major inflationary threat. Indeed, Philadelphia Fed President Charles Plosser warned against believing that interest-rate cuts were “the solution to most, if not all, economic ills.”

Plosser is one of the Fed’s major anti-inflation hawks At the time, Plosser was merely the latest in a string of policy-makers to warn about the rising risks of inflation, essentially suggesting that another rate cut would probably be a very tough sell.

In a speech at Drexel University’s LeBow College of Business in Philadelphia, Plosser said real interest rates were now at “an accommodative level, meaning borrowing costs were low enough to start boosting the U.S. economy’s growth rate back toward its normal historical norm, Reuters reported.

The futures market is projecting a Fed Funds rate of 1.75% by the end of this year. Here’s a look at the futures market’s month-by-month expectations for short-term borrowing costs for the remainder of 2008:

• April: 2.17%.
• May: 1.89%.
• June: 1.85%
• July 1.79%.
• August 2008: 1.76%.
• September 2008: 1.76%.
• October 2008: 1.77%.
• December 2008: 1.73%.

The worries about inflation that Plosser and other inflation hawks have are very real. And those concerns don’t exist solely on our side of the Atlantic. The low U.S. rates are contributing to a weakness in the greenback that’s sent the American currency to record lows against most other key world currencies. That’s fueling a massive run-up in the cost of energy and food-related imports – and that’s inflationary for U.S. buyers.

But it’s made U.S. exports very competitive abroad, acting almost as a big discount for foreign buyers of such wares as Boeing Co. (BA) jetliners. In fact, just last week Boeing surprised Wall Street with record earnings and announced a record order backlog. And pan-European arch-rival Airbus SAS., was forced to announce a price increase on several  of its commercial airliners – because of rising steel prices and because of the falling dollar.

French Economy Minister Christine Lagarde yesterday (Sunday) that the gap between the U.S. and Eurozone interest rates was way too large, and called for a change in rate policies on one side of the Atlantic, or the other.

“We are in a delicate situation where we have, on the one hand, an American Federal (Reserve) which has a policy of very low rates and a European Central Bank which has maintained high interest rates,” Lagarde told LCI Television and RTL Radio, the global wire service Reuters reported. “The differential in interest between the two, it seems to me, is a little too big at the moment.”

Paris has long been a vocal critic of what French President Nicolas Sarkozy has termed the ECB’s overly narrow focus on fighting inflation – and has previously been criticized by Germany for meddling in the business of the “independent” central bank.

With Eurozone inflation running at about 3.6% – its highest rate since the measure for that portion of the European market began in 1997, the European Central Bank (ECB) has left its key refinancing interest rate unchanged at 4.0%, despite some very definite signs that Eurozone growth is slowing.

By comparison, the key U.S. interest rate is at 2.25%, though it may be heading lower this week, and inflation is “officially” said to be at right about 4% – though such experts as Money Morning Contributing Editor Martin Hutchinson believe the actual U.S. inflation rate is actually much higher.

Although the FOMC meeting is likely to top the economic the economic news of the week this week, the GDP report will come in a fairly close second and will be nearly as closely watched by some experts. The reason: Many eternal pessimists are expecting the report to show negative growth during that three-month period.

Why is that important? Simple: According to the National Bureau of Economic Research (NBER), two consecutive quarters of negative growth constitutes a recession.

Most folks “feel” like the U.S. economy is already in a recession. An official designation by the NBER – which usually comes well after the fact – would simply make it official.

In the meantime, some of these other reports this week could help serve as an interim and unofficial “confirmation” of that dour diagnosis of the U.S. economy:

• The health of the manufacturing sector will get a solid assessment via Thursday’s release of the much-watched ISM survey and Friday’s report on factory orders.
• The all-important U.S. labor markets will get significant scrutiny via Thursday’s report on initial jobless claims and Friday’s reports on the U.S. unemployment rate and on non-farm payroll data.
• We’ll get a bit more insight into the psyche of the American consumer with Tuesday’s report on consumer confidence for the month of April and Thursday’s report on personal income and spending for the month of March.
• And we’ll get an overview of Corporate America’s health, as U.S. energy giants Exxon Mobil Corp. (XOM) and Chevron Corp. (CVX) reveal how their profit reports have been boosted by record energy prices [likely also prompting new calls for Congressional investigations into allegations of price gouging].  Starbucks Corp. (SBUX) will follow up recent warning with an actual announcement, while Office Depot Inc. (ODP) and Radio Shack Corp. (RSH) will give investors a look inside the world of retail.

Market Matters

Two weeks ago, investors disregarded any semblance of bad news (and lately, there has been plenty) and instead took the stock indices to their highest levels in months. Last week, investors allowed the earnings releases to guide their trading activities while awaiting the Fed’s interest-rate decision and commentary.

So just what did the recent earnings reports say about the current state of Corporate America?

Financialscontinue to stoke the negativity (no surprise there) with Bank of America Corp. (BAC), investment banker Credit Suisse Group (CS), and bond insurer Ambac Financial Group Inc. (ABK) reporting more disappointing results.  Drugmakers, on the other hand, enjoyed a nice quarter with Merck & Co. Inc. (MRK) and Novartis AG (NVS) beating expectations.  While a sluggish economy can’t keep folks out of McDonald’s Corp. (MCD) (as least in its international markets), it does seem to be impacting coffee intake as Starbucks warned that this week’s results (and those for all of 2008) will miss earlier projections.  Of course, dire times lead to more nervous smoking (and higher cigarette sales) as happy Philip Morris International Inc. (PM) shareholders found out this quarter.  While cost-conscious folks stayed home and watched more DVDs, Netflix Inc. (NFLX) warned that future subscriber growth may be limited.

Both Delta Air Lines Inc. (DAL) and Northwest Airlines Corp. (NWA) posted sizable losses on skyrocketing fuel costs, leading some analysts to question the wisdom behind the proposed merger. While the world’s largest shipper, United Parcel Service Inc. (UPS), experienced a jump in profits, management expressed concern about the quarters to follow, since consumers just don’t seem quite as interested in finding out “what Brown can do for you.”  Even techs, which previously had been a savings grace for the market, turned pessimistic this week.  Apple Inc. (AAPL) and Texas Instruments Inc. (TXN) reported decent earnings, but warned about their respective outlooks.

Likewise, high-tech bellwether Microsoft Corp. (MSFT) disappointed with its profit numbers, while investors wait with trepidation to see what becomes of Microsoft’s bid for Yahoo! Inc., (YHOO). Meanwhile, Yahoo beat “The Street’s” expectations. However, the three-week deadline that Microsoft gave Yahoo to come to an agreement on its unsolicited bid passed Saturday without any announcement from either side, leading to the possibility that the battle for Yahoo is about to turn hostile, MarketWatch.com reported.

ConocoPhillips (COP) showed that record energy prices are not hurting everyone, as the No. 3 U.S. oil company reported a 17% increase in profits.

Transactions typically imply growing confidence in corporate boardrooms as management finds the value in certain acquisition targets.  Last week, News Corp. (NWS.A) moved closer to buying Newsday and giving Rupert Murdock greater control over the New York press.

Insurance giant Liberty Mutual Holding Co. Inc. agreed to buy SAFECO Corp. (SAF) in a $6.2 billion deal that will create the 5th-largest property and casualty firm.  Triarc Cos. Inc. (TRY) soon may be adding those terrific “hot-and-juicy” square burgers and addictive Frosty drinks to its Arby’s roast-beef-sandwich menus as it looks to acquire Wendy’s International (WEN) in a deal valued at $2.34 billion. And, of course, there’s still the Microsoft-Yahoo proposal.

With a mixed week on the earnings front, stocks traded relatively flat as investors took some profits from last week’s newfound bullish sentiment, while still searching for a bargain or two.

Economically Speaking

For many Fed-watchers, the prospect for another rate cut has been a foregone conclusion.  After all, central bank Chairman Ben S. Bernanke and clan have let their creative juices flow [not to be confused with the creative juices of those Wendy’s hamburgers] over the past few months; the Fed has tried everything from the aggressive rate-cutting campaign to liquidity injections to arranging the buyout of The Bear Stearns Cos. Inc. (BSC) by JPMorgan Chase & Co. Inc. (JPM).

Suddenly, some great prognosticators believe the Fed may be “seven and done” as they drop the Federal Funds rate again (by a minimal quarter of a percentage point this time around) – before going on a “summer hiatus” to give their earlier work the time to take effect.

With oil prices hovering around the (once unheard of) $120/barrel level, some policymakers are sure to claim that inflation should be considered as critical a concern as the sluggish housing market to the U.S. economy’s health. Indeed, comments such as those of Philly Fed President Plosser make it clear that inflation is already becoming an increasingly important consideration.

Additionally, the European Central Bank seems content to keep its lending rate at 4%, so further Fed actions will continue to have devastating impact on the value of the dollar.

The economic calendar was relatively light last week as analysts rested up for this week’s vast array of important data. After a surprising climb (better known now as an aberration) in February, existing home sales plunged again in March, while new homes sales fell to their lowest level in more than 16 years.

Furthermore, the median price of a new home dropped by more than 13% last month, the largest such decline in almost four decades.

Durable goods orders fell in March, as well, although once the volatile transportation sector was removed from the equation, the results did not look half bad.

We hope that investors and analysts got plenty of rest over the weekend to get ready for the bustle of economic reports due throughout this week. Talk of recession should resume with the release of the first-quarter GDP, which many eternal pessimists believe will show negative growth during that three-month stretch.

Weekly Economic Calendar