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From Grant’s Interest Rate Observer

Everybody out of the pool!  Investors in Whirlpool Corp. (WHR on the NYSE) are throwing in the towel today after the Benton Harbor, Mich., home appliance behemoth once again fell short of consensus expectations. Weaker than expected earnings and revenues marked a fourth consecutive quarterly shortfall, while the company also trimmed its 2017 earnings per share guidance for a third straight time.  Margin compression was a chief negative catalyst:  On the conference call, management cited “significant raw material inflation and freight mix weakness,” along with “related promotion intensity” for the unwelcome shrinkage.
As might be expected amidst this run of futility, no shortage of bad news accompanied the release.  For instance, the company announced the termination of a 101-year-old business relationship with Sears Holdings Corp. amidst a pricing dispute. Sears released a memo accusing its ex-partner of “[seeking] to use its dominant position in the marketplace to make demands that would have prohibited us from offering Whirlpool products to our members at a reasonable price.” Whirlpool CEO Marc Bitzer countered by noting that “the entire Sears business declined over time.” Bitzer pegged Sears business at 3% of the company’s global revenues on today’s call. It was 8% in 2011.
Industry data also pose a concern.  In particular, the most recent reading of the Association of Home Appliance Manufacturers Factory Shipment Report (AHAM-6) showed a sharp deceleration in growth.  September home appliance sales grew by just 1.3% from 2016, far below the 3.5% advance seen year-to-date and the 6.6% compound annual growth rate in the four years ended 2016.  Major categories such as dishwashers, washing machines and both electric and gas cooking appliance sales shrank from their 2016 levels in September.  The destructive hurricanes may have played a role, but then again, new home sales in September rose by 6.1% year-over-year on a seasonally adjusted annual rate.  Year to date, the new home sales SAAR has gained by 3.1% over the first nine months of 2016.  Those divergent fortunes are reflected in recent share price outperformance of the SPDR S&P Homebuilders ETF (XHB on NYSE ARCA) against Whirlpool:
In a Feb. 10 analysis of Whirlpool it was postulated that the accelerating housing market may bestow less favorable winds on the white-goods industry than might be expected, while the post-housing bubble replacement cycle that underpinned the industry’s strong sales growth through 2016 might be set to wane.
[Replacement purchases] account for no less than 50% of overall appliance sales (purchases related to new homes deliver just 20%). So you can expect that a boom would be followed by a kind of echo-boom. And so it has proved recently. The average major appliance lives for eight to 12 years. So the big spending years of 2001 through 2005 have whistled up a second bulge in appliance purchases.
That bulge may have come and gone.
Whirlpool’s industry-leading margins likewise caught the attention of Grant’s, both as a mark of its operational success and as a potential bearish catalyst in the future:
[North American operating margins] reached 11.5% last year, roughly double the average margins of the global competition and 38% greater than the 20-year average margin earned by Whirlpool itself in Canada, Mexico and the United States.
We’re not the only ones who notice this yawning, golden disparity. Foreign white-goods makers, too, observe what riches the top American appliance maker plucks from North America. On form, they will try to move in, fat profits being the red carpet to determined competition.
For its part, Whirlpool management is drawing a line in the sand.  Questioned by analysts over the company’s 2020 earnings targets in light of the trio of cuts to this year’s guidance, Bitzer responded unequivocally:
We’re fully standing behind this. We’ve been part of developing these targets and we’re not going to back off. I know given that it’s my CEO call for an earnings call, probably we’ll be needing one to put some question marks behind this one, but we don’t. We’re fully behind it. We’re committed, which also means for next year without giving any 2018 guidance, our entire focus will be on margin expansion and we need to catch up what we lost this year.
No pressure!

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Next week TSLA & LNKD earnings look interesting. Nothing much else of note.

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JPM beat by a little. The stock traded to a high of about $65, which was its expected move, more or less and is currently trading lower.

I guess the trend higher will continue higher if:

(a) the general market trades higher

(b) other bank stocks report decent earnings.

I would like to see $67 over the next 4-5 trading days. That would provide maximum profits on this trade. If (a) & (b) work out, that should be possible.

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The second-quarter earnings season will kick off next week and investors can brace for more weak numbers and some new issues to keep an eye on for the rest of the year.

S&P 500 companies are expected to post their sixth straight quarter of declining sales and fifth straight quarter of declining earnings, according to FactSet. That marks the worst five-quarter streak since the period from the third quarter of 2008 to the third quarter of 2009.

But with that news already baked into share prices, investors will be razor-focused on outlooks—and providing guidance will be tricky for some companies.
The UK’s shock vote to “Brexit”– leave the European Union—has created a cloud of uncertainty that has spread far beyond those companies with exposure to the UK and EU.

See: The Brexit currency domino effect isn’t over yet

Brexit has caused the dollar to reverse the weaker tone seen for most of the quarter and strengthen against major rivals, a trend that continued Friday after a stronger-than-expected June jobs report. It has pulled the recovering oil price down from recent highs and battered markets across Asia. Before the jobs report was released, it had put the Federal Reserve on hold with its interest-rate hikes, and even prompted talk of a U.S. rate cut that would only prolong the ultralow rate environment that has decimated returns for savers for the past eight years.

See: Fed rate hike back on table — but likely not July — after strong jobs report
And that’s not the only bad news.

China’s slowing economy has remained a worry, and been joined by troubled Latin American economies, such as Venezuela and Brazil, which is struggling with the Zika virus outbreak and glitches in its preparations for the summer Olympic Games.

Companies can expect heightened scrutiny of their numbers, too. Since the first-quarter earnings season ended, the Securities and Exchange Committee has formed an internal task force to closely review the widespread use of non-GAAP numbers in earnings reports, or those that don’t comply with Generally Accepted Accounting Principles, or GAAP.

Don’t miss : Here’s how investors are duped each earnings season

And even without all of those factors, companies have come through a period of asset sales and lowered capital spending, and have spent record sums buying back their own shares, leaving them with little ammunition to spur growth.

Still, analysts agree that the first quarter likely marked an earnings trough, and that numbers will be better, or at least less bad, in the second half. S&P 500 companies are expected to post a 5.5% decline in per-share earnings for the second quarter, narrower than the 6.6% decline posted in the first quarter. Sales are expected to fall 0.9%, after a decline of 1.5% in the first quarter.

Bank of America Merrill Lynch is cautioning against over-optimism.

“With the S&P 500 just shy of its all-time high, we remain near-term cautious, as the market is likely already anticipating an earnings rebound,” analysts wrote in a note. (The index bolted to that high in late trade Friday, in a wave of buying driven by the jobs report.)

The energy sector remains the biggest headwind to overall earnings growth, and is expected to show a decline of 81%, a big negative but a significant improvement over the roughly 107% decline posted in the first quarter, according to S&P Global Market Intelligence.

That s not enough of an improvement to make S&P 500 index growth turn positive — excluding the energy sector, growth is still a negative 0.6%, according to S&P.

Here are five things to expect this earnings season:

The Brexit effect
The word “Brexit” showed up just 29 times in first-quarter earnings transcripts, according to Bank of America, suggesting U.S. companies were relatively unfazed before the referendum. For most of the lead up to the vote, the “remain”camp was widely expected to prevail, with sentiment only turning in the days before ballots were cast, creating a bigger shock when the “leave” camp won.

See also: Brexit chills global M&A as companies struggle with currency, trade uncertainty

Also: Will Brexit block a tech M&A boom and IPO resurgence?

Read: Apple could take a hit from Brexit

Analysts are expected to pepper executives with questions about what Brexit means for their companies on conference calls, but they are unlikely to get a satisfying response. Not even the UK government is currently able to say what could or should happen next as they brace for negotiations with Brussels that are expected to be long and contentious.

See : Brexit uncertainty is starting to drive companies to disclose possible impact

Fitch warned Thursday that issues that have not even arisen yet could become major stumbling blocks. Uncertainly will form the backdrop for talks that could last two years and cover every aspect of the UK’s relationship with the trading block. That is expected to weigh on UK and EU growth, which will likely have a knock-on effect on other economies.

Read: IMF slashes eurozone growth forecast due to Brexit

For U.S. companies, the financial sector will be hit hardest, with the big U.S. banks already warning they may be forced to relocate at least part of their business to EU countries to retain the EU “passport” that allows them operate in all EU member states without requiring separate regulatory oversight.

“We view indirect effects of Brexit and uncertainty related to U.S. election (i.e., a pause in activity as companies wait and respond to the outcome) as potential downside risks for growth outlook,” said J.P. Morgan analyst Dubravko Lakos-Bujas. “With this in mind, management guidance during this earnings season will be instrumental in determining the magnitude of negative revisions to current aggressive forward estimates.”

Current estimates are for earnings to return to growth of 7% in the fourth quarter and 14% for 2017, he said.

Outside of banking, luxury goods makers and retailers are expected to take a hit, given their exposure to the UK and EU. Wells Fargo said Friday the roughly 15% depreciation in the pound since the vote is bad news for watchmaker Fossil Inc. FOSL, +4.60% Michael Kors Holdings Inc. KORS, +2.41% Ralph Lauren Corp. RL, +1.62% TJX Cos TJX, +2.19% and Urban Outfitters Inc. URBN, +3.67% among others, and that was just based on the currency move. About a third of Fossil sales are generated in Europe, and about a fifth of Ralph Lauren’s are made there, creating another headwind in a market already grappling with discounting and shifts in shopping behavior.

Before Brexit, the dollar was helping earnings for a change
Multinational companies have gotten used to using the argument in recent quarters that results would have been a lot better if it wasn’t for the dollar’s strength. It’s not our fault, the companies say, it’s just math.

A rise in the dollar relative to the currencies of countries in which a company does business reduces the value of profits and sales derived from those countries. A strong dollar also tends to increase prices of U.S. exports, reducing their appeal to overseas customers.

For the latest quarter, however, be wary of companies that blame the dollar for their woes. The ICE U.S. Dollar Index, which measures the dollar’s value against a basket of currencies of major U.S. trade partners, rose sharply in the final week of the quarter in the wake of the Brexit vote to close June 30 up 0.5% from a year ago. But the average daily price during the quarter of 94.53 was 1.5% below the average price in the second quarter of 2015 of 96.00.

The average price of the euro relative to the U.S. dollar increased 1.5% from a year ago, while the yen shot up 12% against the dollar. Meanwhile, the average price of the sterling-dollar exchange rate was down 7.3%.

And it’s not a given that a strong dollar is bad for earnings and stock prices. The dollar index soared 23% from the end of the second quarter of 2014 through the first quarter of 2015, and the S&P 500 climbed 5.5%.

“The dollar has been more deterministic since the global financial crisis due to its ‘safe haven’ status, not an equity market indicator,” Tobias Levkovich, chief U.S. equity strategist at Citigroup, wrote in a note to clients.

As for the dollar’s post-Brexit gains? Citigroup’s global strategy team wrote, “we don’t expect this to continue much further.”

Low rates aren’t helping

The drop in borrowing rates, as longer-term Treasury yields extended declines toward record lows, may have helped boost stock prices, but hasn’t been the boon to earnings that many may have hoped.

In fact, Morgan Stanley strategists said this week that they have become more cautious on U.S. stocks, after three years of being bullish, partly because of lower yields on benchmark 10-year Treasury notes. History suggests that “multiple expansion occurs with higher real rates,” Morgan Stanley chief U.S. equity strategist Adam Parker wrote in a research note.

Despite the strong June jobs report, the yield fell to 1.375% on Friday, just a touch above record low close of 1.367% earlier in the week. In contrast, the aggregate yield on the S&P 500 index was 2.140% on Friday, according to FactSet.

Some companies may cite concerns over the message of low yields—slowing U.S. growth and/or growing international recession risk—for downbeat earnings outlooks.

One of the sectors with the most to lose from falling or low longer-term interest rates is financials. Lower yields reduce the spread between what banks earn on funding longer-term assets, such as loans, with shorter-term liabilities.

Financials have a 15.7% weighting within the S&P 500, according to S&P Dow Jones Indices, which makes them the second biggest of the index’s 10 key sectors.

The China syndrome

China is expected to show up in many earnings reports, as companies update investors on how their business is performing there. China has transformed from being mostly a source of cheap goods and semifinished products for U.S. companies to a promising market with a burgeoning middle class that is now embracing consumer goods.

The Chinese economy is showing signs of strain after its rapid expansion, and there are widespread concerns about heavy leverage in its stock market and the burden of nonperforming loans for its banks.

Don’t miss: This economist thinks China is headed for a 1929-style depression

In the first quarter, weakness in China was behind the first decline in sales in 13 years at giant Apple Inc. AAPL, +0.77% the world’s biggest company measured by market capitalization. Investors punished the stock, which fell 8% immediately after the news, wiping out more than $40 billion in market cap.

Apple is now appealing a patent ruling that was won by a Chinese smartphone marker, which had temporarily blocked it from selling its products in Beijing.

Emerging market problems aren’t retreating

Although the overall revenue exposure of the S&P 500 companies to emerging market economies has decreased slightly to 11.2% this year from 11.6% in 2015, according to FactSet, the health of those economies remain a significant factor in the guidance that companies provide.

That’s the bad news.

“Our economists remain concerned about the emerging market economies,” Citigroup’s global strategy team wrote in a recent research note. The team expects emerging-market gross domestic product growth of 3.7% in 2016, hurt by contraction in Latin America and slowing growth in China.

Among some of the S&P 500 companies with the highest revenue exposure to emerging market economies, according to data provided by Citigroup, include Mead Johnson Nutrition Co. MJN, +1.63%  at 71%, Wynn Resorts Ltd.WYNN, +0.89%  at 70%, Lam Research Corp. LRCX, +3.46%  at 68%.

There is some good news. Analysts have become a little more optimistic on the outlook for emerging markets in recent weeks, especially for Brazil, which has been one of the most distressed markets of late.

The iShares MSCI Emerging Markets exchange-traded fund EEM, +2.16%  has run up nearly 6% in the two weeks since the Brexit vote, and has gained 7.1% year to date. Meanwhile, the Brazilian real has appreciated 2.5% against the dollar in the past two weeks and 17% so far this year.

“Since the peak of the political turmoil is behind us, we think the [Brazil] economy will start to stabilize in the second half of the year,” Morgan Stanley economists wrote in a research note.

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Earnings Season is a quarterly event, a right of passage so to speak, that comes along every three months like clockwork.

Earnings season is the four times a year, celebrated several-week stretch from early January to early February, from early April to early May, from early July to early August, and from early October to early November in which the vast majority of the nation’s corporations report their quarter’s sales and earnings–hence the name earnings season.

This four-times-a-year event reflects the fact that U.S. corporations file such reports with the SEC on a quarterly basis. Since such reports are typically issued from two to five weeks after a quarter ends, and since the majority of U.S. corporations are on a calendar fiscal basis for reporting purposes, these are the four times during the year that companies report. The notable exception are the nation’s retailers, which typically have their quarters end in late April, July, October, and January.

Earnings season typically gets under way with several well-known companies, e.g., JPMorgan Chase(JPM – Free JPMorgan Stock Report), the banking giant; UnitedHealthGroup (UNH – Free UnitedHealth Stock Report), the insurance behemoth, and Intel (INTC – Free Intel Stock Report), the semiconductor manufacturer leading the way. It is most helpful and often telling that these three major corporate names are three of the earliest reporting companies, as they represent a trio of key sectors, respectively, financial services (JPMorgan), insurance (UnitedHealth), and technology (Intel). Each is also a member of the Dow Jones Industrial Average.

These three companies are so-called bellwethers of their respective industries or economic sectors, and they often serve as proxies for additional key reporting companies. Their effect on the stock market, particularly in the case of Intel, is considerable. If any of these companies surprises on the upside, with either revenues or earnings, or issues a negative surprise, the individual stocks can jump or fall appreciably–and take the stock market with them. That is because these reports are seen as leading indicators of other earnings reports to come in the following days. Other key early reporting names in the tech sector are Microsoft (MSFT – Free Microsoft Stock Report) and International Business Machines(IBM – Free IBM Stock Report), both of which are also Dow-30 companies.

As a rule, most American corporations report their quarterly results either before the stock market opens–often at 7:00 AM (Eastern Time), or after the market closes (4:00PM along the East Coast). This is, theoretically at least, to give as many investors as possible the time to react to these reports and to act accordingly, before trading commences.

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Nike report earnings after the market closes Tuesday. Will place a trade on Monday [US time] for these earnings.

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FDX reports after the market close. Market trading higher currently. I think earnings trades that are before the market open actually work better than the after market closes trades.

I’ll have to go back and check to see if that is actually the case, or simply a prejudice.






Nothing terribly inspiring from this quarter’s earnings. Makes some very nervous as the market seems extended.



Earnings, despite the new highs, are not optimistic currently.



Year Weekly Earnings (1982-84 dollars)

1972 $341.73 (peak)
1975 $314.77
1980 $290.80
1985 $284.96
1990 $271.10
1992 $266.46 (lowest point; 22% below peak)
1995 $267.17
2000 $285.00
2005 $285.05
2010 $297.79
2011 $295.49
2012 $294.83 (still 14% below peak)

Which you can add to part of the reason why consumer spending is not part of this fantasy recovery.

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