The Real Deal With Earnings

texas instruments earningsFor the past month I have continually said that earnings would most likely decide the fate of the market for the next month or so, as we lingered in this stalling, head and shoulders trading formation. Thus far, it has been what people perceive as "positive earnings" reported, which has helped the market reach new 2009 highs. But how good are these earnings really and are these numbers really justifying the big move in the markets?

We closed out trading today with another 100+ day for the Dow. Texas Instruments reported earnings today, which as many have been, was above analyst expectations. Thus far, the trend has been to buy buy buy when reports beat market. However, investors are slowly learning that analysts are setting expectations that are not sustainable. Texas Instruments did indeed beat analyst's expectations, but their profits were half what they were the same quarter a year ago.

This is not the only time we've seen this. Most earnings that are being reported are suffering monumental losses from the year prior. However, it seems that investors feel that if they are within what market analysts are expecting, than all is well. There are not many companies that I know that actively position themselves in a way to be able to operate and sustain themselves for a long period of time while earnings 50% less profits from just the prior year. The hope is, of course, that these numbers are only temporary and that large profits will return shortly. However, that assumption is a big gamble that I'm not taking.

Thus far in the recession, we have not spent much time off the leash. During the first part of the crisis, the government quickly stepped in and wrote checks to almost every major industry to help absorb big losses. Literally, trillions and trillions of dollars were spent to keep the economy afloat. Eventually, that spending will be accounted for, which I don't look forward to that time. The point is, our government cannot afford to provide such aide during the next round, or else they risk a severe dilution of the dollar.

One thing can be sure, if profits remain at such low levels for many of these companies, we can expect many more bankruptcies. We did not see many of the bankruptcies of the Great Depression until well into the second year of the cycle. As we are continuing to see unemployment levels come to new highs, corporate bankruptcies will follow. I, personally, do not buy into the low balled expectations of broadcasting bobble heads. Instead, I read the numbers and see exactly just how sustainable they really are. I believe it's only a matter of time until this earnings phenom becomes exposed.

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