The week of January 17, 2011, was a big week as it was the first full week of the 2010 physical fourth quarter earnings reports. So far, 49 companies from the Standard & Poor’s 500 Index have reported, with 32 companies reporting a positive surprise in earnings. Only 12 companies reported negative earnings. We are also seeing similar reports in revenues.
Apple, Inc. (NASDAQ: AAPL) reported Tuesday that profits skyrocketed 78% and sales increased 71% as a result of the popularity of the iPads, iPhones and Mac computers. Earnings of $6.43 a share beat analysts’ estimates by about a dollar a share. Apple also provided strong guidance for the current quarter despite Monday’s announcement that CEO Steve Jobs will take another medical leave of absence. While Jobs is seen as the brains, heart and soul of Apple, we do not believe that Apple is a one-trick pony company and certainly not a one-man operation. Jobs may be seen as the rainmaker for the company, but Apple has four capable people in powerful positions that should be able to keep the company going strong.
In the financial sector, we believe banks will have an up and down cycle for a few years. Goldman Sachs (NYSE: GS) reported their fourth-quarter profit plunged 52%, and earnings per share fell from $8.20 to $3.79. Wells Fargo Company (NYSE: WFC) was helped by its Wachovia acquisition and announced record profit and revenue for the fourth quarter. Earnings jumped 21% to $3.4 billion, buoyed by an $850 million reduction of the reserve for future loan losses.
While banks are making money, they are not as profitable as they once were. Business loans are increasing. Banks are also reducing allowance for bad debt. People are paying off their debt, which gives banks an artificial pop in earnings. Current earnings are not coming from revenues on increased interest rates. It is coming from bookkeeping.
This is also the first quarter where the new financial regulations have hurt banks because they were more conservative in their proprietary trading. While the rules are not official yet, we believe banks took less risk in their proprietary trading because they do not want to be required to restate their earnings in the future should current actions be judged as too aggressive.
In the technology sector, cloud computing helped major players like Apple and IBM (NYSE: IBM). Cloud computing is internet-based computing, whereby shared servers provide resources, software and data to computers on demand; thus, treating technology access like a utility. IBM posted its best quarterly revenue jump in nearly 10 years, as sales rose 6.6% to $29 billion. Earnings rose 9.2% to $5.26 billion, or $4.18 per share.
Interest rates rose slightly this week, keeping with the upward trend of recent months. Two-year Treasury bonds rose to yield 0.58%, while five-year Treasury bonds climbed to 1.96%. The 10-year bonds yielded 3.36% and the 30-year Treasury bonds remained flat at 4.53%, yet considerably above the all time lows set in December 2008.
In political news, Chinese President Hu Jintao made his first trip to the White House since 2006. President Obama pressed President Hu on letting the yuan rise. This spurred some discussion concerning which currency will ultimately emerge as the world’s reserve. We would be unconcerned if the U.S. dollar lost its position as the world’s reserve currency. Though it is unlikely, China could stop buying our Treasury bonds, but someone else will. We believe interest rates on U.S. Treasury bonds will increase and become attractive to hold again relative to other sovereign bonds.
Overall, it was a mixed week with the S&P 500 closing down 1% on Thursday, Jan. 20, 2011. The Dow closed up at 0.30%; the NASDAQ down 1.85% and the Russell 2000 closed down3.65%. Interestingly, both oil and gold were down 2.93% and 1.15%, respectively.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
