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

Two months later I recommended it to my readers. In the following six months its shares rose 15 percent. On February 25, 2009 utility company, FPL Group (NYSE:FPL), made a similar announcement. I began looking into the company right away. This time it only took me two weeks to recommend the company to my readers. In the following four months its shares rose 33 percent.

On March 11 Coke (NYSE:KO) made the same announcement. On April 1st, 2009 I recommended it. In just three months it’s gone up nine percent.

These three companies are members of a class of companies I call the “Group of 88.” They all love to please their shareholders.

So, what is this Group of 88?

Many of the companies belonging to the Group of 88 you know: Not only Coke, but also companies like Johnson and Johnson (NYSE:JNJ), IBM, Verizon (NYSE:VZ), McDonalds (NYSE:MCD) and Starbucks (NASDAQ:SBUX).

Many of them you don’t know. You probably haven’t heard of companies like VSE Corporation (NASDAQ:VSEC), W.P. Carey & Company (NYSE:WPC) and National Fuel Gas Company (NYSE:NFG).

These companies come in all sizes and from all kinds of sectors. And, since the beginning of the year, they all have one thing in common. All of them have raised their dividend.

Increasing dividends has always been a surefire way to please shareholders. So why have dividend hikers increased in popularity?

•    They’re now in the minority. For the first time in decades more companies are cutting rather than raising dividends.
•    They’re the ultimate “show-me-the-cash” companies. Dividends can’t be faked or staged. They must be paid for by real cash earnings.
•    They’ve become the alternative safe-haven group of companies to triple-A rated companies. The rating agencies – S&P, Moody’s, and Fitch – had given triple-A status to junk assets that crashed the global economy. Their grades aren’t taken nearly as seriously anymore.

Many of these dividend-paying companies give you interest payments of 4, 5, 6 percent and more. Compare that with 2-year U.S. government bonds giving 2 percent interest … or 10-year bonds giving 3.66 percent interest … or Canadian 10-years giving 3.43 percent and Germany’s giving 3.5 percent.

This is the perfect time to invest in recent dividend hikers. Several have been raising dividends not just over, say, the past 10-20 quarters but over the past 10-20 years!  Think about it. Many of them have raised dividends during oil embargoes, dotcom busts, and stagflation. They’ve proven themselves many times over.

And by recently raising their dividends, they’re showing investors once again that they’re the companies you can trust … they’re the ones generating real cash earnings … and that they’re the ones which will make it through these treacherous times and lead the market back up on the other side of the recession.

Invest well,
Andy

Source: Investors Are Flocking to a New Group of Companies

This is a good analogy for the economy and markets. Our capitalist society is a beautiful thing that rewards entrepreneurs and intelligent risk takers and investors. But for the past few years, we’ve got ourselves into quite a tangle with the housing bubble and credit contagion.

And with such a big mess, it will be a while longer before we can straighten it all out and see an economic recovery. Here are the key areas to keep an eye on for clues as to when we’ll emerge on the other side…

An End To The Recession This Year? Don’t Bet On It…

A recent survey showed that the vast majority of economists believe we’ll come out of the recession in the second half of this year.

I’m not convinced. I think that’s a little too optimistic.

But regardless of my opinion, there are three crucial factors that will tell us that the economy is back on solid footing, regardless of the “technical” definition of recession.

Look To These Three Areas For Signs Of An Economic Recovery

~ Jobless Claims
Last week, the number of initial jobless claims fell to 631,000. While that’s certainly better than the 643,000 the week before, it’s still a horrendous number.

The national unemployment rate stands at 8.9% – and if you take into account the number of people who’ve given up looking for work, or those who are under-employed, that figure nearly doubles.

Speaking of the latter, while at Starbucks (Nasdaq: SBUX) last week, I heard the girl behind the counter tell a friend that she’s making one-third of what she made at her last job. At that rate, she’s probably just barely keeping her head above water, yet she isn’t counted in the official unemployment figures.

Stories like this are everywhere – people who’ve been able to keep their jobs, or stay employed somewhere, but needing to take a pay cut to do so.

It’s quite simple: The economy won’t be meaningfully better until those numbers come way down. At the very least, we need to see jobless claims under 500,000 before it looks like we’re even headed in the right direction.

But in the end, though, we want to see jobs created, not just fewer jobs eliminated. If people don’t have jobs, or don’t feel secure in their jobs, the economy isn’t going to get the injection of consumer spending (keep in mind that this accounts for about two-thirds of economic growth) that it needs to recover.

~ Housing Prices
As long as U.S. real estate prices are falling off a cliff, taking homeowners’ equity with them, consumers will feel poorer.

In March, for example, the average national home price collapsed by 18.7% from a year earlier. A CNBC story actually tried to put a positive spin on it by saying, “Some relief appeared to be in sight as, for the second month, prices did not slide at a record rate as they had been doing since 2007.”

Are you kidding me?! An 18.7% decline is relief? That’s like saying banging your head against a wall is “relief” after hitting yourself in the head with a Louisville Slugger.

Unlike the job market, we don’t necessarily need housing prices to rise to lift the economy… just to stabilize. If people have a sense that their largest asset is not going to decline in value, that should help ease anxiety. Until then, homeowners will be skittish.

And finally…

~ The Stock Market
The stock market is a forward-looking indicator and typically leads the economy by about six months.

Having climbed by 40% from the lows in March, it’s at a crucial juncture where it now needs to stay up. As I’ve said before, I don’t believe it will, but if it does manage to hold these gains and build a base, that would be a good indicator that things are turning around.

On the other hand, a decline to recent lows would suggest that the economists are wrong once again.

Good thing we don’t take our lead from economists. The best way to gauge the economy’s health right now is to look at these three simple, common sense data points. And so far, two of them are pointing in the wrong direction.

Marc Lichtenfeld

Source: When Will The Economy Recover? These Three Key Areas Will Tell You…

Even more so, considering that last week’s debut of Digital Globe (NYSE: DGI) – a provider of satellite imagery used in Google Maps and Microsoft Virtual Earth – garnered interest reminiscent of the IPO heydays in the late 1990s.

Heck, it broke into Google’s Hot Trends list, meaning it was one of the fastest-rising search terms in the world. (That’s no small feat considering it meant beating out pop culture search mainstays Britney Spears, Ashton Kutcher’s twitter record and Desperate Housewives spoilers to name a few).

However, I’ve learned hype seldom translates into profits in the IPO space. In fact, I revealed that I was skeptical about the Digital Globe IPO from the outset.

Sure enough, the aftermarket performance only confirmed my suspicions. Despite pricing above the projected range at $19, and rallying in the first few moments of trading, the stock is now in negative territory.

Nevertheless, the buzz is building about another tech IPO this week. But it, too, should be avoided. Let’s take a look at why. Then I’ll share my proven formula for sifting through the IPO hype to find sure-fire winners.

Tech IPOs: Cancel Your Reservations at OpenTable

On Thursday, the tech IPO, OpenTable (Nasdaq: OPEN) a provider of online reservation services for restaurants, will begin trading.

As a frequent user, I’ll concede it’s a convenient service. In a few keystrokes I can guarantee a table at my favorite sushi restaurant, instead of waiting on hold forever or getting an answering machine. And it’s free.

Don’t worry. This isn’t some dot-com company with a clever idea and no revenue stream. It makes money by charging restaurants one-time installation fees (avg. $1,200), monthly service fees (roughly $260) and $1 for every reservation.

A novel concept, for sure. That’s probably why so many investors want a piece of the deal.

Yesterday morning, underwriters increased the pricing range by 31% to $16 to $18. Such a big bump only happens when a deal is oversubscribed.

Why The OpenTable Tech IPO Will Be A Dud

Don’t be so quick to book a seat at this tech IPO, though…

• We all know the restaurant industry relies on the consumer to thrive. In such an abysmal spending environment, OpenTable’s growth initiatives will certainly be hampered.
• Speaking of growth, it’s limited. OpenTable already counts 9,500 of the 30,000 reservation-taking restaurants in North America as customers.
• The best IPO returns come from companies with endless growth potential… Think Starbucks (Nasdaq: SBUX), Chipotle Mexican Grill (NYSE: CMG), or Wal-Mart (NYSE: WMT) in their infancy.
• Plus, barriers to entry for new competitors are low. And consumers can switch allegiance with a click of the mouse, meaning market share can erode before any efforts to combat it can be concocted.
• Making matters worse, the company’s struggled with profitability, reporting operating losses in four out of the last five years.
• If that wasn’t enough, the valuation is completely out of whack. At the midpoint of the proposed pricing range, shares would be valued at 6.4 times 2008 sales. The average company in the S&P 500 only trades at 1.8 times sales. Even more glaring, OpenTable’s initial price-to-earnings ratio would be a whopping 106!

Even the village idiot knows that’s frothy.

Don’t overlook what insiders are doing either. They’re cashing out 1.4 million shares, equal to almost 50% of the total offering. On average, insiders cash out less than 30%. Seems like they’re tipping their hand about the company’s shaky growth prospects.

We’ll be getting our answers regarding OpenTable shortly. Regardless of whether it soars or dives, the fact that it successfully debuts will usher in more IPOs in coming months.

Three Steps to IPO Success in Any Market

Here are three key steps that I would insist on before buying IPOs in any market:

• Profitability. Sounds obvious, but most companies that flop in the aftermarket lack earnings. Insist on at least two years of profitable operations.
• Long-Term Growth Potential. The reason IPOs can be so darn profitable is because they represent the opportunity to invest in the infancy of a company’s growth cycle. Accordingly, focus on companies with verifiable long-term growth potential. Stick to companies with a market potential that points to a decade or more of heady growth.
• $50 Million or More in Annual Revenues. Research out of the University of Florida confirms revenues are a good predictor of stock performance. The key threshold is $50 million for the 12 months prior to an IPO. Companies below that level underperformed the stock market by a margin of 15% for the next three years. Those above it outperformed.

One more thing, IPOs are just like any other investment. Ultimately, fundamentals win out in determining share prices. So, after confirming the three characteristics above, take some time to dig into the underlying business. The stronger the fundamentals, the greater the profit potential.

Good investing,

Louis Basenese

Source: Tech IPOs Are Back… But Don’t Buy This One

Tim Geithner unveiled his new bank resuscitation machinery on Tuesday. He said it cost $2 trillion. Investors looked on…and saw the same old second-hand, worn-out rescue equipment the Bush team had used. The key tool is a pump that injects money into the banks, in the hope that if the bankers have a little more change lying around, they’ll be emboldened to lend it to someone.

But the banks aren’t going to lend…and neither is anyone else…as long as the value of the collateral is a) falling and/or b) unknown. This is a panic…at least that’s what it would have been called until 1929.

Yesterday, (Wednesday) the Dow rose 50 points…a weak bounce, after such a big drop on Tuesday. Gold rose $30 (with a ways to go). And oil slipped to only $35. Who would have thought? No one working at The Daily Reckoning! We knew oil had gotten ahead of itself…but we imagined that that price would fall only to $70-$90 a barrel. It would be a correction, we reasoned, in a bull market. Instead, oil seems to have repudiated the whole ‘Peak Oil’ argument.

News this morning is that “US lawmakers agree on $789 billion stimulus plan,” according to Bloomberg. But that doesn’t seem to have reassured investors very much.

It’s a panic because people fear that the money they sent out to work for them may not be coming home again. As soon as the panic hit, they immediately got on the phone and tried to find it…trace its footsteps…wondering…worrying. Much of it will never come home. And even when it does make it home, it comes in the door with its clothes torn and bruises on its face.

“What happened to you?” the owners ask.

“Credit meltdown,” it replies. “Everyone’s getting beaten up.”

Naturally, the owners don’t want to send out any more of their cash until things settle down.

When will that be? When debt is down to a more tolerable level. That means one of two things: either debt goes down…or incomes go up.

This is a depression, not a recession (we know you are getting tired of hearing it; but it’s an important distinction). Private debt rose from only about 2% of disposable income in 1945 to about 15% in 2006. That huge, long trend has come to an end. People realize that went too far. They haven’t enough income…or collateral…to support that kind of debt. What’s more, incomes are falling…and so is the value of the collateral. This puts almost all businesses in danger…and millions of households too. And it threatens all credits that depended on incomes and collateral at boom-time levels too – almost the last five years’ worth of loans, private equity buyouts, house sales, credit card debt, home equity lines, stock prices, property prices – you name it. Smart money. Dumb money. All kinds of money. Like those geniuses who bought Sam Zell’s real estate empire at the top of the market. Practically every one of them is now in trouble. Rents are down – not enough to cover the operating costs and debt service. And what about Sam himself? He put a big chunk of his money into publishing. And now his flagship newspapers are going broke too. Ad revenue is down and shows no sign of recovering – ever.

The problem in a panic is that no one is quite sure who’s solvent and who isn’t. Can GM (NYSE:GM) survive? Starbucks (NASDAQ:SBUX)all? The family next door?

No one knows. So, few lenders or investors are eager to let their money out of the house.

What should be done? So glad you asked: The cure for a depression is a depression. The situation won’t return to “normal” until this crisis has been able to do its work…and this period of price discovery has been allowed to follow its course.

Back in the ’90s, when Americans still believed in capitalism, they sent a steady stream of advisors and kibitzers to Japan. The world’s second largest economy was in a stall and seemed in no hurry to get out of it. Its largest banks were “zombies,” said the Americans; they were propped up by the Japanese government in order to avoid losses and embarrassment. If the Japanese wanted to get things moving again they should let those banks fail…let the free market do its work…let the chips fall where they may. Then, capitalists, entrepreneurs and scrappy businessmen could pick them up and build with them.

The Japanese didn’t take the advice. To this day, 19 years after the beginning of Japan’s long, soft, on-again, off-again depression, the economy is still in a slump…and expecting negative growth again this year. All together, Japanese investors are said to have lost a sum equal to 300% of the nation’s annual GDP…the equivalent to a loss of about $45 trillion in the United States.

Years ago, we predicted – in these daily reckonings – that when the crisis came in the United States, Americans wouldn’t take their own advice. Alas, we were right. Instead, they are keeping the zombies alive, just like the Japanese did. And the zombies are sucking the blood out of the economy.

And poor Barack. Our guess is that Paul Volker has spelled the nuts and bolts of the situation out for him. But Obama, surrounded by a fluff of advisors with their dog-eared copies of Keynes’ General Theory of Employment, Interest and Money, doesn’t know who to believe…or who to trust. So, he goes with the flow. It would take a strong man, with strong convictions about economics to resist a gaggle of Ph.D. economists and experts telling him that he risks ‘catastrophe’ if he doesn’t act quickly. Poor Barack may be a decent fellow…but he is a decent fellow in a bad trade. He doesn’t know it, but the flow leads nowhere.

*** The bankers got our sympathy this week.

‘Tramps and thieves,’ is what everyone says of them. ‘Stupid banker’ is said to be redundant.

“Do you have a different moral compass?” asked John Mann, member of Parliament, of Sir Fred Goodwin, recently retired from banking. It was a low question. “Different to what?” Sir Fred should have answered. But there was no fight in any of them. The poor bankers are playing along, of course. They’re apologizing to politicians for all the harm they’ve done.

‘Yes, we wrecked Western civilization, but we’ve said were sorry, all right? Now, can we have the money?’

The banks are essential to our economy; at least, that’s what everyone says. So the politicians are giving them money – as much as $2 trillion more, according to the Geithner plan – so they’ll stay in business.

“Son of TARP,” the Financial Times calls it.

Why do the banks need money? Because they don’t have any. If you add up their assets and subtract their liabilities, you end up with a hole. Maybe that hole is only $200 billion debt. Maybe it is trillions deep. Nobody really knows.

But nobody seems to want to find out, either.

At this stage in a financial crisis, the markets should be doing some serious price discovery. Values have been put in doubt. Everyone wants to know what things are worth before they lend, invest or buy. But instead of allowing the price system to work, the feds are on the case…jiggling one price…squeezing another…propping up one zombie company…running an extension cord out from the Fed to a local bank so it can keep the lights on.

*** ‘Son of TARP’? Wait a minute. What did original TARP produce? We recall its inventor Hank Paulson promising that it would be a good deal for the taxpayer. He was buying bank assets at such low prices the taxpayers were going to make a profit, remember that? We got a laugh out of it then. Now we get another laugh. Comes word last week from the Congressional Oversight Panel that assets bought by TARP are now worth $78 billion less than they paid for them.

*** Joblessness… For every company that is adding to payrolls, three are cutting them. In manufacturing, according to David Rosenberg of Merrill Lynch, there are 14 people laid off for every one that is hired. And a total of 3.6 million people have lost their jobs since Dec. ’07…half of them in the last three months.

*** Smoot & Hawley are back in business all over the world. Smoot was spotted in France early this week, when Sarkozy gave its automakers $12 billion…but on condition they shut their plants in OTHER countries, not in France.

Then, the U.S. trade deficit fell to its lowest level in six years – reflecting Americans’ inability to continue living in the style to which they had become accustomed. Meanwhile, at the other end of the shipping lane, China’s exports plunged 17.5% in January.

And now Mr. Hawley is writing from Alaska, asking federal regulators to kick Virgin America out of its airspace. Alaska Airlines says Virgin has no right to fly in the United States because it is not a U.S.-owned company.

*** Unemployment in the United States is pushing 8%. But that’s nothing; in Zimbabwe it’s said to be 94%. If that’s true, practically no one is working. Must be more to the story. What about all the people who are preparing Robert Mugabe’s 85th birthday bash? He’s ordered 2000 bottles of Moet & Chandon champagne…8,000 lobsters…500 bottles of Johnny Walker whiskey…3,000 ducks. Hey, why not? Have a little fun. Someone has to have a little fun in Zimbabwe. The rest of the population is starving…or so it says in the paper.

*** Gold is sparkling…maybe too much. “Bullion sales hit record in rush to safety,” says a headline from Tuesday’s Financial Times:

“Investors are buying record amounts of gold bars and coins, shunning risky assets for the relative safety of bullion amid renewed fears about the health of the global financial system.”

Health of the global financial system? Don’t worry about it; that system is dying. And word is beginning to get out. There’s no other reason for them to be buying gold. Oil is going down. Deflation is taking hold. Jewelry sales are off. Why would anyone want gold? Only if they thought the system was in trouble. They fear there may be more bubbles…more blow-ups…and more panic. But when the dust clears, the last things still standing will be gold.

The U.S. Mint, for example sold 92,000 ounces of its American Eagle coins last month. That’s four times as much as it sold a year ago…and more than it sold in the whole first half of 2008.

It bothers us contrarians – a bit. We don’t like to see a crowd gathered around…admiring our favorite refuge. Still, the crowds are pretty thin, compared to what they will be when the bull market in gold really takes over. Then, your neighbors will be talking about gold…and telling you how much money they made in gold. That’s still ahead…when gold goes over $1,000…over $1,500…over $2,000.

Everyone ought to own gold coins. Few people do. Most people never even think about it. Sure, some people are talking about the yellow metal. People are buying coins in record quantities. But gold is still regarded as a little kooky…a little marginal.

What is interesting now is the movement in the gold shares; they’re going up. And this week, we got a recommendation for a gold share from colleague Chris Mayer. We liked the idea so much, we bought some of the stock for the children’s account. Probably not too much downside in the stock, we reasoned. And if the price of gold goes above $1,000 again, this share could really fly.

“The economics of gold stocks have never looked better to me,” writes Chris. “Gold trades for around $900 an ounce and the average cost to produce it is around $450 an ounce or so. You don’t have to know much about economics to know that’s a nice combination.”

Chris continues, “A gold stock you can warm up to even if you don’t think gold will go to the moon. And it has one of the stronger balance sheets in the business. Shares go for just under $7 per hare as I write. They are worth nearly twice the price at current gold prices…trades at 7 times cash flow…should trade for at least $12 per share.”

Source: The Economic Panic of 2009

• A team of economists estimate that China’s January exports likely fell 14% from a year earlier, which would be the biggest monthly decline in a decade, Bloomberg reported. With demand from the United States and Europe waning, “the implications for China’s industrial sector are severe because exports account for close to 20 percent of industrial output,” Isaac Meng, a senior economist at BNP Paribas SA in Beijing, told Bloomberg.

• Sales for appliance maker Whirlpool Corp. (WHR) fell 76% for the quarter, and the company said earnings would continue falling in 2009. Its debt ratings have also been downgraded to a notch about “junk” status, Reuters reported.

• Coffee giant Starbucks Corp. (SBUX) will begin an all-day value meal, pairing its beverages with two new sandwiches starting March 3, MarketWatch reported. “Our customers need to know that we are listening to them by making Starbucks an affordable everyday option,” Michelle Gass, executive vice president of marketing, said in a release.

• Venezuelan President Hugo Chavez said his country’s economy hasn’t been touched by the global economic crisis, despite the country’s second-biggest bank said GDP will expand 0.4% in 2009, down from 4.9% last year. Chavez is campaigning to amend the constitution so that he can seek another presidential term in 2012, Bloomberg reported.

• Defaults on prime-jumbo hybrid adjustable-rate mortgages could double in coming months according to JP Morgan Chase & Co. (JPM) analysts. The share of prime-jumbo mortgages at least 60 days late climbed 0.71% to 5.29% in the month covered by January bond reports.  Losses on so-called hybrid adjustable-rate mortgages backing 2006 and 2007 prime-jumbo securities will reach 8 to 10%, the analysts told Bloomberg.

• Satyam Computer Services Ltd. (ADR: SAY) will decide on a long-term action plan by next week, including a possible sale of the company, its chairman said, as the fraud-marred outsourcer struggles for survival.  Satyam was hit by massive fraud in India’s biggest corporate scandal as it disclosed that profits had been overstated for years.  Its founder and former chairman Ramalinga Raju resigned last month, Reuters reported.

Source: Global Investment News Briefs Tuesday, February 10th, 2009

The question, raised in a new Reuters piece, is certainly a good one – and a fair one.

As the United States suffers through perhaps its worst financial crisis ever – a crisis caused by the combination of rampant greed and some ill-conceived financial engineering – Wall Street’s reputation has been badly tarnished, perhaps forever.

Moving forward, two results will be a tightening of financial regulation and an increase in government control of the financial markets. We’ll also end up with a federal government that more closely controls – and in some cases owns stakes in – banks and other financial institutions, a move that some regard as de facto nationalization.

Like a super hero arriving to save the day, in steps Washington, “home to a popular president and a Congress whose mood matches that of a public angry at Wall Street for losing people’s retirement savings while doling out executive bonuses and raking in billions from taxpayer-funded bailouts,” Reuters writer Daniel Trotta wrote.

“I was in London with Mayor (Michael) Bloomberg in October and we were complaining to them about the action shifting to Washington and the executives in London said they were just as worried about it shifting to Brussels,” Kathryn Wylde, president of the pro-business non-profit Partnership for New York City, told the journalist. “Private financial markets have collapsed and the government is absolutely in charge.”

Thanks to the ongoing financial crisis, an off shift has been taking place. Wall Street, was once revered as a creator of profits that was ruled over by the so-called “Masters of the Universe.” But no more.

In December, the jobless rate moved to its highest level in 16 years – and that’s certain to get worse, if last week’s “Monday Massacre” of corporate layoffs is any indication. Correct or not, most Americans directly link those troubles on Main Street to the missteps made on Wall Street. And it certainly can’t help that we’re all reading stories of big bonuses still being paid out, even in the face of this downturn.

While these displays of greed continue to escalate even as the pain workaday Americans continue to feel, Washington has been working on a two-pronged fix-it strategy for the U.S. economy:

• Prong One is focused on bailouts, spending billions in an effort to stop the financial leaks that are threatening to sink the country into Great Depression II.
• Prong Two has the government focused on efforts to then jump-start the economy with a series of stimulus plans, whose price tags continue to escalate.

Initially, the general public was highly critical of these efforts, viewing them as wasteful.

But an interesting shift has subsequently taken place: Americans began to view the federal government as a kind of “savior of the last resort,” and became thankful for the efforts the lawmakers were making.

Americans even grew irritable when news organizations criticized those bailout and stimulus efforts. There was clearly a feeling that, while the bailout and stimulus maybe weren’t perfectly designed, at least Washington was trying to do something.

“There is a shifting of power and influence at the moment from Manhattan to Washington. The same thing happened during other financial crises in our history but most especially in the 1930s,” Kenneth T. Jackson, a Columbia University historian, told Reuters.

Market Matters

What recession?  While much of the world has been pointing fingers at Wall Street for the global financial crisis, the major investment firms took a break from begging for distribution of that next round of Troubled Assets Relief Program (TARP) money in time to dole out $18.4 billion dollars in employee bonuses in 2008.  President Barack Obama called the move “outrageous,” although Wall Streeters pointed out that the pay represents a 44% reduction from last year’s level (though it still stands as the sixth-highest bonus pool on record).

Meanwhile, while energy companies cried “doom and gloom” over plunging oil prices, Exxon-Mobil Corp. (XOM) announced a record annual profit of $45.2 billion – despite a 33% decline in 4th quarter earnings).  Not to be outdone, while poor retailers panicked over the lack of consumer activity, Amazon.com Inc. (AMZN) called its holiday season “the best ever” and surpassed most analysts’ earnings estimates.

An oversight panel deemed the TARP plan a failure, thus far, as many of the major recipients of government funds actually reduced their lending activities during the prior three months.

Newly confirmed U.S. Treasury Secretary Timothy Geithner claimed that TARP (Part 2) will be overhauled to ensure enhanced lending and even hinted at the creation of a “bad bank” that would purchase toxic assets from financial institutions. An $819 billion economic stimulus package passed the House without any Republican support and Obama turned to the U.S. Senate where certain provisions on lower taxes and family planning may prove more acceptable to the opposition.

However, as Money Morning reported last week, those “acceptable” additions are likely to push the price tag of the stimulus package up over $1 billion. President Obama is hoping to have a bill he can sign on his desk by the middle of next month.

Earnings season moved into high gear and Thomson Reuters Corp. (TRI) projected that Standard & Poor’s 500 Index companies suffered a 34% drop in profits (losses), the 6th straight quarterly decline.  In addition to Exxon-Mobil and Amazon.com, a few other companies reminded investors that not everyone is losing money: Verizon Communications Inc. (VZ), United States Steel Corp. (X), Procter & Gamble Corp. (PG), and Colgate-Palmolive Co. (CL).

Wells Fargo & Co. (WFC), Starbucks, Corp. (SBUX) and Ford Motor Co. (F) were among those posting dismal reports, though the No. 2 U.S. automaker says it has no plans to tap into government bailout funds.

Pfizer Inc. (PFE) set out to prove that deals can still get done in this environment and announced its intent to purchase rival U.S. drugmaker Wyeth (WYE) for $68 billion [For two related stories in today’s issue of Money Morning, check out this analysis of the Pfizer/Wyeth deal itself; or click here to read our evaluation on the outlook for the overall U.S. market for mergers and acquisitions].

Crude oil fell again last week and was hovering around the $42-a-barrel level as weak economic data (see below) and higher inventory reports revealed that demand was continuing to wane. Despite a recent four-day winning streak for the S&P 500 Index – its first since November – the major indexes ended January with losses again.

According to the so-called January Barometer, when the market tumbles in the first month, it typically slides for the remainder of the year.  Investors took their cues from the weak economic and earnings reports and offered a collective yawn to the House’s partisan passage of the stimulus package.  The “bad bank” idea seemed to generate a bit of optimism, though no real details about how such a plan would work have been announced.

Economically Speaking

Companies across virtually every sector of the economy continued to play “follow the leader” as additional layoffs were announced daily. Last Monday alone, more than 75,000 hit the unemployment line as Pfizer (8,000), Sprint Nextel Corp. (S) (8,000), Home Depot Inc. (HD) (7,000), General Motors Corp. (GM) (2,000), and Caterpillar Inc. (CAT) (7,500) were among those issuing pink slips.

The weekly initial jobless claims data confirmed that more people than ever (or at least since 1967, when the statistics first started being kept) are receiving unemployment benefits.  Meanwhile, the housing sector showed few real signs of rebounding as new home sales fell for the fifth consecutive month and dropped to their lowest level since 1982.  While existing home sales actually climbed in December by 6.5%, the median sales price plummeted more than 15% and now stands at its lowest level since 1968.

Still, the optimists point out that the mere fact some homeowners have emerged to buy houses at these distressed levels is a positive sign that a recovery is inching closer.  Unfortunately, investors weren’t buying it.

The domestic economy contracted at its fastest pace in almost 27 years as U.S. gross domestic product (GDP) plunged by 3.8% in the fourth quarter.  Again, the eternal optimists claim that most analysts were expecting a decline in excess of 5%, and said that the negative results should actually be perceived as positive for the economy.  (Unfortunately, investors weren’t buying that, either).

U.S. Federal Reserve Chief Ben S. Bernanke and his policymaking brethren repeated their pledge to keep rates at record low levels and hinted that they stand prepared to begin buying Treasuries and other fixed-income securities to spur lending activity. According to the central bank policymaking statement issued at the close of Thursday’s Federal Open Market Committee (FOMC) policymaking meeting, “conditions in some financial markets have improved, in part reflecting government efforts to provide liquidity and strengthen financial institutions; nevertheless, credit conditions for households and firms remain extremely tight.”

Weekly Economic Calendar

Source: Is Washington Replacing Wall Street as the City That Drives America?

U.S. stock index futures fell on Thursday, pressured by a weak earnings season and worries that the $825 billion economic stimulus package could still face a bumpy road.

Shares of widely held Dow component Exxon Mobil were down 2.1 percent at $77.55 before the opening bell after Goldman Sachs removed the company from its Americas Buy list, saying it saw better investment opportunities among energy companies.

The U.S. House of Representatives passed President Barack Obama’s stimulus package late on Wednesday but despite the new president’s goal of bipartisanship, every Republican who voted opposed the bill. The Senate begins debate next week.

“It’s clear the Republicans don’t want to play ball with the Democrats, they want to do it their way,” said Paul Mendelsohn, chief investment strategist at Windham Financial Services in Charlotte, Vermont.

“Any slowdown in the stimulus package is not going to be good. The market wants to see this passed, done, signed, in the bank and let’s move on to the next problem.

Investors were also watching for initial weekly jobless claims, due at 8.30 a.m. (1330 GMT). Worries over mounting job losses have been in the forefront this week as more companies have announced massive cuts as they attempt to stay afloat.

S&P 500 futures fell 9.20 points and were below fair value, a formula that evaluates pricing by taking into account interest rates, dividends and time to expiration on the contract. Dow Jones industrial average futures were down 79 points, and Nasdaq 100 futures lost 4.75 points.

A gain in Ford Motor Co helped futures trim losses after the ailing automaker posted a loss but saw a lower cash burn rate than expected and reaffirmed it plans to go ahead without government loans. Ford was up 6.9 percent at $2.17.

Starbucks Corp (SBUX) was the latest company to say it will slash jobs when it reported lower quarterly profit after the bell on Wednesday as sales fell globally. The coffee chain’s shares were down 3.6 percent at $9.30.

Stocks rose on Wednesday as financial stocks soared on optimism the Obama administration was making progress on a plan to relieve banks of money-losing assets.

The Wall Street Journal reported on Thursday that government officials looking to revamp the financial bailout have discussed spending another $1 trillion to $2 trillion.

With Wednesday’s advance, the benchmark S&P 500 capped its fourth straight day of gains, its longest run-up in two months. Year to date, the benchmark S&P 500 is down 3.2 percent, a marked improvement from a 6.4 percent loss seen at Tuesday’s close. After starting 2009 up more than 20 percent from its Nov. 21 bear market low, the S&P is up 16.2 percent from that significant low.

NEW YORK, Jan 29 (Reuters)

This from Money Morning:

Despite what you might be hearing about a global recession, consumer capitalism is alive and well in China.

And it’s still fueling growth.

Take a stroll through Beijing’s trendy Wangfujing area, a quick walk south of Tiananmen Square or the six-story Shin Kong Place in Beijing’s Dawanglu area, and you’ll find more than 100 top international designer brands on sale, including Prada, Gucci, Bvlgari, Dolce & Gabbana, and others. While you’re on the prowl, don’t forget Xidan Market, which the locals prefer. It’s also bursting at the seams from countless stores, fashionable-clothing shops and, of course, the ubiquitous and ever-present Starbucks (NYSE:SBUX).

In contrast to other global markets, like the Ginza, Beverly Hills’ Rodeo Drive or London’s Oxford Street, for example, where a heavy silence hangs over the once-bustling shopping areas, the sounds of commerce are everywhere.
Literally.

Cash registers clink and clank, and credit-card machines whiz, but not where most people would predict.

With the deepening of the global recession, throngs of Chinese consumers and expats no longer willingly stand for 40 minutes to get into stores selling Gucci, Vuitton and other top-end items. Instead, they’re pushing their way into places with names like Uniqlo (pronounced “uni-clo”), Lavinia, and Blur – all of which were once regarded as the illegitimate children of yuppie-dom, because of their bargain-based orientation.

Lately, though, they’re the unsung heroes. That might strike you as strange because Uniqlo hails from Japan, while Lavinia comes from Italy. Only Blur is a native Chinese operation. But all three specialize in providing high quality at super reasonable prices.

It’s always fun for me to shop at Uniqlo, in particular, since my family and I shop there each year when we’re home in Kyoto. Just to be unique, I often pick up something for my wife and kids from China’s Uniqlo stores. The service is top notch and I can’t help but chuckle over the fact that I can buy several shirts for less than I would ordinarily pay for just one in Europe, or here in the United States.

Locals – like my friends Hao Jun and Hairong Zhao – tell me the situation is much the same among China’s yuppies, or “Chuppies,” as they’re now known.

“We’re still buying what we like, if we can afford it,” Hairong says.

And judging from the latest figures, which said China’s domestic consumption advanced at a mind-boggling 28% in 2008, there’s lots to like.

Depending on which studies you believe, Chuppies account for slightly more than 7% of the population. That doesn’t sound like much, but that puts the number of Chuppies at more than 100 million – every one of them with a middle class income, appetite and purchasing power that can be expected to grow.

Granted, China’s overall consumption is slowing and 2009’s domestic growth could slow to the mid-teens, but that’s still more than double what we’re likely to experience here in the United States, or in Europe.

For some, this slowdown is the end game. But others understand that this is just the beginning. I’m in that latter camp, having spent considerable time in the region over the past two decades – more than enough to watch several boom-and-bust cycles in both Japan, and China, and to understand how they work and what to look for.

“While it’s clear that Chuppies can’t replace a drop in Western consumerism [all] on their own,” said my good friend and noted China expert, Robert Hsu, “they’re still spending in many sectors – like education, for example. And the government is still spending on the infrastructure that enables financial growth.”

That’s a mantra I’ve spent years encouraging investors to take to heart, if for no other reason than there will be growth “because” of Chinese policy that’s not just limited to the growth taking place “in” China. And that, in turn, leads to some appealing investment opportunities – particularly now that the markets have beaten the share prices of so many superb companies down so significantly.

Assuming this strategy is correct, history suggests there are two potential ways to profit. Clearly the results won’t be immediate, nor will they be straight up – like the returns we saw a few years ago, during China’s earlier period of frenetic growth.

Nevertheless, the payoffs to come could well be the best we see for a generation or more.

First, savvy investors in sync with Chinese buying patterns can target companies that sell to Chuppies, like New Oriental Education & Technology Group Inc. (NYSE:EDU), the Beijing-based provider of private-educational services, and YUM! Brands Inc. (NYSE:YUM), the well-run global operator of the KFC, Pizza Hut and Taco Bell fast-foot-restaurant chains. Both companies are enjoying superb year-over-year sales growth in China – even in the face of worsening global economic conditions. [For Money Morning's recent report on Yum Brands' successes in China, please click here. The report is free of charge.]
Second, investors who believe that infrastructure is the way to go can easily choose from dozens of companies engaged in China’s great economic build-out, including choices related to rail, air and construction.

Third, still another choice is to invest directly in the Chinese Yuan (Renminbi). Not only is China’s currency continuing to appreciate and gather strength; it’s likely to emerge as one of the world’s most powerful currencies, once both the dollar and euro are eviscerated.

Undoubtedly, a good number of people reading this will take issue with my assessment. And I don’t blame them. On the surface, it appears that China may be all washed up.

However, at a time when our own economy is sliding into a deep, dark hole, China’s relentless march forward suggests that this Asian country not only has a more promising future; it will emerge as an important economic and political force to be reckoned with.

Not to mention a powerful investment opportunity.

Source: China’s “Chuppies” Point the Way to Growth and Profits

It will be interesting to see how the FOMC approaches this meeting. The current Fed Funds target rate is 0-0.25%, which in and of itself is rather strange. It is a moving target, not a fixed rate. Who determines which rate is used? My guess is this meeting will be used to clarify what the rate is. The Fed will either officially reduce it to 0% in a continued effort to resuscitate the economy, or lock it in at 0.25%. This would at least leave the Fed with one perceived bullet in the gun.

The rest of the week has a full slate, which starts this morning with the December Existing Home Sales report. Expectations are for a slowdown of 40k units versus the previous month, and I think that is overly optimistic. The housing reports last week both fell flat on their face so I don’t think this report, or the New Home Sales report on Thursday, will come anywhere close to expectations.

Tuesday morning sees the release of the Consumer Confidence report for January, and this one is a tough read for me. It is expected to be the same as the December reading of 38. I am not sure which one will have a bigger impact on the reading: consumers getting excited about a change in leadership, or fearful of more job cuts. I guess it all depends on when the reading was taken.

Earnings:
Mon: AXP, AMGN, CAT, HAL, MCD, TXN
Tues: BMY, DD, GILD, JAVA, YHOO
Wed: PFE, SBUX, WFC
Thurs: MMM, AMZN, CELG, CL, LLY, JNPR,
Fri: CVX, XOM, HON, PG,

Source: Fed Counts Bullets, Earnings Dominate Calendar