Stock investors will key next on earnings from tech giant Intel Corp.(Nasdaq: INTC) and banks including J.P. Morgan Chase & Co. (NYSE:JPM) for hints of what to expect in the third quarter — and how badly the recession hurt businesses in the second quarter.

The Standard & Poor’s 500 Index and Dow Jones Industrial Average delayed declined for the fourth straight week last week – the longest string of losses since stocks hit their low point in March – and investors are looking at the tech sector to squelch the ongoing decline. The Nasdaq Composite Index complost 2.47% in the week ended Friday.

Earnings reports this week from computer-chip giant Intel and several big banks – including JPMorgan Chase & Co. - could provide investors and economists some insights on where the U.S. economy appears to be headed. Earnings are expected to improve over the last quarter, even though they’ll still be down substantially on a year-over-year basis, Binky Chadha, chief U.S. equity strategist at Deutsche Bank AG (NYSE: DB), told MarketWatch.com,

“A necessary condition for the markets to go up from here is that earnings have to deliver, and we need a dissipation of the uncertainty about earnings,” Chadha said.

Year-over-year (annual) earnings comparisons are typically the financial yardstick that analysts use to assess whether the U.S. economy is growing or declining, meaning that “sequential” (quarter-to-quarter) earnings aren’t as crucial. This time around, however, the quarterly numbers may be viewed as important because they might give a better picture of the economy’s health.

During periods of extreme uncertainty, earnings estimates for companies tend to be widely dispersed – a function of investors not really knowing what to expect. That’s particularly true right now of banks and financial-services companies – and companies that derive most of their income from discretionary consumer spending.

And that makes sense, given that those are the two most uncertain portions of the U.S. economy – thanks to the ongoing global financial crisis and a jobless recovery that is badly crimping consumer confidence.

After mounting one of the strongest surges in history from their March lows, U.S. stocks have fallen back in recent weeks as investors dealt with a growing realization that the U.S. economy – and its counterparts abroad – won’t rebound with the speed or strength that had been widely expected. Further evidence of this came on July 2, when a U.S. payrolls report said the economy had lost more jobs than had been expected.

Against that backdrop, analysts and other investors are looking to the U.S. high-tech sector to pull the economy out its doldrums, Money Morning recently reported as part of its mid-year forecast series.

Thomson Reuters predicted that S&P 500 earnings will decline by 36% from last year’s levels, with financials (-53%) leading the way and techs (-24%) performing better than other sectors.  This should represent the eighth-straight quarterly decline, though analysts seem more concerned about the ensuing management comments on future operations, since that will shed some light on where the economy is headed.

When Intel reports tomorrow (Tuesday) analysts expect to see that /quotes/comstock/15*!intc/quotes/nls/intcsecond-quarter sales and earnings plunged, but some analysts believe demand may be returning to the battered market following a sharp slowdown in demand for high-tech goods. Internet-search juggernaut Google Inc. (Nasdaq: GOOG) will report on Thursday.

Other firms that report this week include Goldman Sachs Group Inc. (NYSE: GS), Bank of America Corp. (NYSE: BAC) and Citigroup Inc. (NYSE: C). JPMorgan reports Wednesday.

“The market is filled with folks who want to be optimistic, but simply cannot find enough genuine reasons to buy into the market,” Mike Gambale, an analyst at Informa Global Markets, told journalists. “We don’t expect impressive numbers across the board, but there will be some surprises, as there always are.”

[If you're new to the commodities-investing arena, and are uncertain about the landscape - or even if you're an "old hand" at natural-resource stocks, but want some insights into the new profit plays and new players - consider hiring a guide: Money Morning Contributing Editor Peter Krauth, a recognized expert in metals, mining and energy stocks, is also the editor of the Global Resource Alert trading service, which ferrets out companies poised to profit from the so-called "Secular Bull Market" in commodities. A former portfolio advisor, Krauth continues to work out of resource-rich Canada, which keeps him close to most of the companies he researches. Against the growing global financial malaise, Krauth says that commodities are among the most-profitable and least-risky investments available, and notes that this may well be the most powerful bull market for commodities we'll see in our lifetime. He makes a strong case. To read more about his strategies, and the sector plays he likes the most, Please click here. ] 

Market Matters

“New and improved” was the market mantra of the week. General Motors Corp. (OTC: GMGMQ) emerged from Chapter 11 bankruptcy protection after just over a month, eager to start anew as a “new and improved” automaker.

The Commodity Futures Trading Commission (CFTC) set its sights on “new and improved” trading regulations to limit excessive speculation within the energy and other commodities markets.  Some politicos are calling for a “new and improved” stimulus package to move the economy beyond the worst recession since the Great Depression.  A “new and improved” Public-Private Investment Program (PPIP) was scaled back dramatically as selected managers will begin purchasing toxic assets from ailing banks.  Unfortunately, as the week progressed, investors did not seem too keen on these “new and improved” developments.

Despite harsh protests by consumer groups and creditors, new GM reopened for business, “leaner and meaner” than ever.  A judge’s ruling allowed the once-bankrupt company to sell its performing assets to a new government-controlled entity (thanks to a $50 billion “investment” by taxpayers).

The government then shifted its attention to the regulatory world and announced plans to propose trading restrictions on certain commodities and increase the oversight over risky derivative products that have proven so detrimental to the financial markets.

The widely anticipated earnings season got started as Alcoa Inc. (NYSE: AA) reported another quarterly loss (with better-than-expected numbers) and oil giant Chevron Corp. (NYSE: CVX) warned that its results would be hindered by poor refinery operations and a weak dollar.

Investors have taken a more cautious approach heading into the new (but not improved) earnings season, particularly after last week’s pessimistic labor data.

Stocks fell throughout the week and fixed income again became beneficiary of safe-haven trades.  The tech-heavy Nasdaq now remains the only major domestic stock index “in the black” for the year.

Fickle energy traders suddenly turned bearish, as well, as the weak economic data implied that oil demand would be curtailed for the foreseeable future (or, at least, until 2013 according to Organization of the Petroleum Exporting Countries’ “2009 World Oil Outlook”).  Crude oil plunged beneath $59, or more than 10% during the week, on ongoing economic concerns,  although consumers ultimately may be recipients of cheaper gas prices.

Economically Speaking

Talk of a second stimulus surfaced this week, with several leaders – including U.S. Vice President Joe Biden and investing icon Warren Buffett – stating that the Obama administration’s $787 billion stimulus isn’t enough to jumpstart the U.S. economy.

On the other hand, Senate Majority Leader Harry Reid, D-Nev., believes the plan needs more time to work through the system as only 10% or so has even been distributed thus far.  Economists seem to agree with “Hank,” as the latest Wall Street Journal survey reported that over 80% of respondents feel that the country does not need a new round of stimulus in the current environment.  Still, the “Oracle of Omaha” painted an optimistic picture of the future by stating that the United States is “going  to come out of this better than ever, the best days of America lie ahead but not next week or next month.”

On the global front, the International Monetary Fund (IMF) revised – upward – its forecast of economic growth for 2010 and confirmed its belief that the developing economies in China and India will greatly contribute to the global rebound.

The May trade balance highlighted a slow week of data as the deficit declined to its lowest level since late 1999 and the weak labor market helped reduce consumer demand for foreign goods.

While initial claims for unemployment benefits fell to levels not seen since the beginning of the year, continuous claims (those folks who remain on the unemployment rolls for over a week) rose by another record amount.

In other words, no matter how one dissects the numbers, the labor picture looks dire and may not begin to improve for some time.  As such, the latest University of Michigan consumer sentiment reading dropped for the first time since February, another sign that the optimism of the past few months may be fading fast.

Weekly Economic Calendar

Source: Investors Looking to Tech to Pull U.S. Stocks – and the Economy – Out of Their Doldrums

Amazon remains the proverbial 800-pound gorilla in the online retailing space. And business is both healthy and growing. But the company is counting on a whole new series of technology-based ventures that will provide the real fuel that will put this stock into orbit. Let’s take a closer look.

Just last Thursday, in yet another positive “surprise” that Wall Street missed predicting, Amazon annihilated analysts’ earnings estimates by announcing a big jump in fourth-quarter profits and told investors even better days are ahead.

Fourth-Quarter Fireworks

In a financial-crisis environment in which there is supposedly no financing available, in which massive job cuts and huge job worries are causing consumers to cut way back on their spending, in which all retailers – even vaunted discounter Wal-Mart Stores Inc. (NYSE: WMT) – face huge challenges, Amazon actually increased its sales and profits.

In fact, Amazon’s fourth-quarter net income rose a hefty 9%. And not only did its per-share earnings of 52 cents blast through the Wall Street consensus of 39 cents by a full 33%, the company actually boosted its first-quarter outlook, stating that it expected sales to be stronger than analysts were predicting.

For the fourth quarter, Amazon’s sales advanced 18%, beating analysts’ expectations by about 4%. Sales actually would have grown by 24%, were it not for the strengthening of the U.S. dollar.

International sales were even stronger, and now account for a full 45% of Amazon’s overall sales.  One notable category was electronics and general merchandize advanced 31%, and that category now accounts for 43% of worldwide sales.

One particularly noteworthy achievement was in the area of gross margins, which suffered almost no damage – in spite of a U.S. recession that’s forcing most retailers to discount heavily. Amazon’s gross margins barely budged, dropping from a fairly remarkable 20.6% to a still-enviable 20.1%.

Remember, this outlook and performance is taking place in a market environment where there’s very little “visibility” – meaning company executives have almost no ability to predict what the market will look like next month, let alone in the next quarter or for next year. That’s forced a lot of companies to discount heavily, and is a key reason that a large number of firms have stopped issuing “forward guidance.”

But not Amazon: It continues to provide guidance – and then to exceed those expectations.

How is the company making this happen? These results point to strong market-share gains for Amazon and to new lines of business being introduced, which are powering the stock higher.  But, before we go deeper into Amazon, let’s consider the economic backdrop, in order to fully appreciate magnitude of Amazon’s accomplishments.

Anatomy of a Meltdown

In my 25-year investment career, I have seen countrywide market meltdowns like the one we’re struggling through perhaps every two or three years.  The hallmark of these crises has been an implosion of the banking system, which has then brought the entire economy down, as well.

In an effort to provide some context – and perhaps some reassurance to U.S. investors – let me say that I’ve seen much worse than what we are seeing in the United States right now. For instance, there are actually cases where all of a country’s banking deposits are either frozen (Argentina 2002) or lost outright (Russia 1998).

In each of those cases, there were two constants:

• From a business standpoint, the strong got stronger as their weaker rivals foundered and failed, allowing them to pick up market share and sometimes to even buy those smaller or weaker rivals.
• From a stock-market-valuation standpoint, however, the strong were initially equally punished in terms of their market valuations as the broader equity markets blew up, meaning their valuations didn’t reflect the much-brighter outlooks for them as stronger market leaders. However, when the market outlook brightened, those stronger firms saw their valuations surge with a vengeance and soar to new heights.

The lesson from each of those crises – from Brazil and Argentina, to more than 10 countries in Asia and in Russia – was that every single country made it back.
This was even true for those countries shackled with inferior policy mixes.  Some might say that Japan – with its “lost decade” – never came back.  This would be an imprecise statement, since Japan’s gross domestic product (GDP) growth was above 2.0% for the two years prior to the crisis and unemployment for the last five years has been between 3.45 % and 4.5%
But what is true is that while even countries with inferior policy mixes eventually made it back, it took a lot longer for that to happen. The speed of their comebacks can be traced to the degree in which the policies implemented made them:

• Open-market oriented, especially with regards to foreign capital.
• A lower-taxation environment.
• Strongly fiscally disciplined – for the long term – because the governing body addressed such serious structural economic problems as imbalances in both the social security and health-care systems.
• Less constricted by regulation.
• More transparent, in both the private and public sectors, especially in cases where the public sector overhauls led to a more democratic governing process.
• More-consensus oriented, particularly when that consensus included support for all the changes I’ve listed here.

While we are not seeing an unequivocal embrace of these tried-and-true recipes by the newly installed Barack Obama administration, mainly because of a bias toward big government, we are seeing an open-minded attitude and some movement in this direction.  And we will have to monitor this closely, because history shows us repeatedly that there are no half measures when it comes to successful economic and financial reform – and because market investors know this and will therefore be watching closely.

Forewarned is Forearmed …and Other Axioms to Live By

This background is important, for we now know that we can expect to see some once-in-a-generation buying opportunities in companies that can navigate this slowdown and position themselves for a massive subsequent rebound.

We also have to remember that his rebound won’t be immediate. But when it does come, that rebound will be huge for the companies that have used this time to buttress their already-leading market position. They’ve capitalized on consolidations in their respective industries or market sectors, and have certainly grabbed market share away from their rivals. The maximum gains will be realized only if financial prudence prevails in the public sector.

Is that happening here in the U.S. market?

Well, we’re about to pass a huge stimulus – perhaps as much as $1 trillion or more, when all is said and done.

There’s an old axiom about government stimulus packages: When money is spent, the economy grows. The key, however, is at what cost and who pays for it. So the short-term “steroids” effect of the stimulus has to be measured against the long-term weight its costs will exert of future growth.  But, ahead of that steroids injection, investors need to invest in the beneficiaries.
A much-repeated market axiom states that  “no one buys at the bottom, and no one sells at the top.” Much like no one was – or will be – ringing a warning bell at the market bottom, no one was ringing a bell at the top a year and half ago.  And nobody will be letting you know which of these companies will be thriving and which will be vanishing – because the investors who understand all this are very busy accumulating them for themselves right now.

So it is no surprise that Wall Street missed by a mile on iconic companies that are thriving, including International Business Machines Corp. (NYSE: IBM), Apple Inc. (Nasdaq: AAPL), United States Steel (NYSE: X), PMC-Sierra Inc. (Nasdaq: PMCS), Level 3 Communications Inc. (Nasdaq: LVLT), 3M Corp. (NYSE: MMM), Colgate-Palmolive Co. (NYSE: CL), Automatic Data Processing Inc. (NYSE: ADP), United Parcel Service Inc. (NYSE: UPS), Merck & Co. Inc. (NYSE: MRK), and many others.  And Wall Street always seems to miss to the downside in its estimates in these superb companies.

In the same way, Wall Street missed it with Amazon.  You see, Amazon survived the dot-com bubble because, unlike most of the start-ups, Amazon actually had a strong-and-viable business model.  In addition, starting with founder and chairman, Jeffrey P. Bezos, and continuing down through the rest of the organization, Amazon has in place a superb management team that has continued to carefully refine and build upon the company’s original vision, and has continued to execute almost flawlessly.

It’s not just the great value, convenience and solid customer service that contribute to Amazon’s results – it’s also innovation.

Those “Killer Apps” – “Cloud Computing” and the Kindle

Amazon first revolutionized the bookstore business. Then it revolutionized overall retailing. Now it’s aiming at the book-publishing business with its super-lightweight electronic reading device – called the Kindle. The Kindle allows you to buy and download books in less than a minute – from almost anywhere – without the need to connect to a computer or any device. Lots of books are available.

This is all possible because you are using the fastest wireless standard and the service is included in the price of the book you downloaded. And Kindle can hold some 200 books, newspapers and blogs and has free wireless access to Wikipedia.  The newspapers and blogs are downloaded automatically and updated instantaneously.  Kindle recharges in less than two hours and you can also email your own Word documents and pictures.

With all these features, I am seriously considering buying one. Here’s why:

• It will eliminate the need to walk down my long driveway to grab my copy of The Wall Street Journal every morning.
• It will be much easier to read than in my PC.
• All my downloads will stored in Amazon’s servers, just in case I lose or damage my Kindle.
• And it will save me countless trips to the library to pick up books for myself, and for my avid-reader daughters.

However, I’m going to wait until after Monday (Feb. 9), because Amazon has invited the news media to an event it has planned for the Morgan Library & Museum in New York City. The scuttlebutt is that Amazon could be announcing the “Kindle 2.0.”

By saving trees (reducing the need for paper) and eliminating the costs for printing, storage and delivery, publishers can reduce their costs considerably and pass part of those savings on to the consumer.  Therefore, the typical book will cost you $10 or less.  And you can even get some steals, like all sixteen novels by Charles Dickens in a single file, with an active table of contents – all for only 99 cents!

It’s incredible.  No wonder Kindle is expanding sales and margins for Amazon.

But Amazon’s “miracle” performance is not due just to the Kindle.  Amazon has jumped in on the fast-growing trend of “cloud computing.”  Now that the Internet has become ultra-fast, and is getting even faster – thanks to such hyper-fast, high-speed fiber-optic networks as the Verizon Communications Inc. (NYSE: VZ) FiOS broadband system – the balance has shifted towards centralized computing.

What this means is that with a relatively cheap computer and fast Internet access, one can perform most of the computational activities in the servers of somebody else.  So, somebody else will host the applications, store the data and perform the computation – for a fee, as it is accessed via the Internet.

Therefore, the need to maintain the storage and back it up, to keep your systems up to date and even to help prevent viruses is essentially transferred to the supplier of the service. This is especially important for individual users and small- and medium-businesses, which look to minimize all these costs.  But it is also very useful for some large enterprises in services where Amazon’s scale and expertise can deliver superior cost-savings and reliability.

Amazon aims to be a major player in this realm. Indeed, some analysts believe this could one day be the “real” Amazon business, with books and other retail goods serving only to bring folks in the door.

Amazon already provides storage, virtual private servers, elastic cloud computing, which gives developers a resizable capacity, content delivery and a number of other functions through its fast-growing cloud-computing activities.

This cloud-computing trend has also been embraced by Google Inc. (Nasdaq: GOOG), though Google Apps, and Yahoo! Inc. (Nasdaq: YHOO), which has forced Microsoft Corp. (Nasdaq: MSFT), which is built on the premise of distributed computing, to hedge by planning to offer a cloud computing operating system.  The new operating system will enable net books (barebones notebooks), PDAs and other smartphones to take full advantage of sophisticated computing capabilities and massive storage located in the “cloud.”

Clearly, cloud computing will be an explosive business, especially in Amazon’s focus areas of storage, content distributions and scalable computational capacity.

So, with book sales, electronics and its international efforts already strong and accelerating, and the probability of a Kindle 2.0 announcement now imminent, we need to jump on Amazon, while planning to keep the stock for several years.

Rocking With Retailing

Is this consistent with a sound investment strategy for retailing stocks in the current weak-economy market environment?

I recently saw a noted short-seller, who runs a very successful hedge fund (and you have to be good to be still alive), who indicated that for the first time in a long time, he saw opportunities to make money both on the long and on the short side.  This is encouraging, since for the year and a half prior to last November, the opportunities on the long side have been overwhelmed by the financial meltdown and massive de-leveraging.

In addition, this hedge fund manager was asking a renowned investor in retail stocks what opportunities he saw for shorting these stocks.  The reply: You have to be very careful – even in retailers, which were experiencing big problems – because, in his opinion, valuations had fallen way too much.

I agree with both assessments. At this point, there are good opportunities to buy, and in retail you want to go with the winners.

For all the reasons we’ve detailed to you, Amazon is that “winner,” the strong company with a rock-solid business model that delivers value to customers, that innovates, that has a clear focus on expansion, and that is producing results even in one of the worst economic periods since the Great Depression.

Recommendation:  Buy Amazon.com Inc. (Nasdaq: AMZN) before Monday’s product announcement and ahead of the rollouts of the stimulus packages planned by both the United States and China (**).

Source: Buy, Sell or Hold: Amazon Stock is Positioned as a Long-Term Winner