The Curious Investor: Earnings fade, but market may not care

• Reprints

FILE - In this May 23, 2011 file photo, customers look at the Apple MacBook Air and the iPad2 at the Apple Store in San Francisco. Apple Inc. reports quarterly financial results Tuesday, Jan. 24, 2012, after the market close. (AP Photo/Paul Sakuma, File)

Updated: January 30, 2012 8:18AM

Filter out the noise from the current onslaught of corporate earnings reports, and you are left with something not terribly encouraging, like the sound of one hand clapping.

Just when investors could use a little clarity about the strength of profits this year and how that might bolster the economy, the reports issued so far yield little. Most companies are checking in with reduced profit growth, which doesn’t bode well for meaningful cuts in joblessness.

The trend, however, could still justify an extension of the current stock rally.

About 40 percent of the companies in the S&P 500 have reported earnings and 59 percent of those have topped analysts’ estimates, said James Bianco, president of Chicago-based Bianco Research. While that sounds positive, earnings are a game of manipulation. Companies talk expectations down so they can beat them.

The markets typically like to see about 68 percent of companies exceed estimates, and Bianco said the average of the last two years has been 75 percent.

“Things are moving in the right direction, but slowing down,” said Jack Ablin, chief investment officer at Harris Private Bank. One signal he likes is that the best earnings growth is coming from the tech and industrial sectors, an indication, he said, that companies at last are tapping their cash to invest in operations.

Ablin said he hopes stocks can see some deferred gains this year owed from 2011. He said earnings growth should have powered about a 9 percent gain in the market last year, yet stocks were flat on scary news such as Japan’s earthquake and Europe’s monetary disaster.

Bianco is a shade more bearish. He believes the S&P, up 4.8 percent year-to-date, could have another 5 percent or 6 percent left in its rally before it collides with earnings reality.

Several companies have posted upside surprises with their reports. Among them are Caterpillar (CAT), Apple (AAPL) and Netflix (NFLX). “But what you’ve been getting is a lot of little misses,” Bianco said. They come from the likes of Ford Motor (F), Bank of America (BA) and Google (GOOG).

Bianco said that any strength the market finds will be less from earnings and more from the easy money policies of the world’s central banks, the unofficial QEIII, or third round of “quantitative easing.”

If markets continue to rise, Bianco said it shouldn’t be taken as a sign of a pickup in the economy. “Don’t convince yourself that this is a leading economic indicator,” he said.

APPLE HOLLER: When Apple posted its earnings, one commentator called it the company’s “barbaric yawp.” I had to look closer, wondering what prompted anybody in finance to quote Walt Whitman.

It was, alas, a collection of fabulous numbers complete with an operating profit margin of 37.4 percent. Canaccord Genuity analysts were so excited they raised their price target on AAPL to $650 from $560. The shares closed Friday at $447.28.

The numbers prompted Todd Campbell, president of E.B. Capital Markets, to muse about the coming of Apple’s TV, complete with voice recognition. Imagine your TV responding to, “When’s the playoff game on?” or “Find the top-rated Seinfeld episode.” Would Whitman say, “I sing the gadget electric”?

NEWS FLASH: The stock market is shrinking! Or at least it shrank a bit last year for the first time since 2009, according to research by Bloomberg and Birinyi Associates. Reviewing about 2,000 stocks, they found that companies repurchased more than $200 billion worth of shares than the value of the new issuances. The share supply is declining as more companies turn to bond sales to raise money.

“Having that equity base shrink and starting from a relatively pessimistic point usually sets up pretty well in the long term,” Laton Spahr, money manager at Columbia Management, told Bloomberg.

CME RIPOSTE: Last week’s item about CME Group (CME) disciplining a trader for entering orders designed to confuse firms’ trading algorithms elicited this comment from another trader: “Please tell me you find it a bit ironic that the CME fines and suspends a trader for using his own system of trading in the Nasdaq 100 because he was beating the algos and the algos are allowed to high frequency trade with the sole intent to manipulate prices to make money from the traders. What a place!”

CLOSING QUOTE: “I think the multifamily business, at the moment, is the best part of the real estate industry. I think it’s likely to stay that way. We may not, in our lifetime, see housing return to its hallowed status.” — Sam Zell, chairman, Equity Group Investments, as quoted by the Illinois Real Estate Journal