Traders Edge 7-16-12- A Tale of Two Earnings

The stock market in the U.S. is market is set to open lower as World indices closed or are trading mixed. Although earnings began last week, the real meat of quarterly earnings starts today, and will only begin to taper off next week. Retail sales and business inventories are set to be released in the U.S and may add fuel to the volatility fire surrounding earnings reports. The Consensus is looking for a paltry 0.1% rise in retail sales and and 0.2% gain in business inventories.

As for last Friday earnings announcements, Consol Energy (ticker CNX) reported their second quarter production updates. The company stated the coal division produced 14.6 million tons of coal, which includes 1.1 million tons of low-vol (read higher priced) metallurgical coal . In addition, the gas division produced 37.3 Bcf in natural in the second quarter. Although the company indicated that they continue to see some weakness (via talk of continue increased vacation schedules), we think these figures do not necessarily point to the calamity that the stock is indicating.

The shares of CNX are up against a short-term resistance level and the downtrend has not been broken. That said, we continue to believe that coal stocks remain attractive for a long-term purchase.

As for other earnings, both JP Morgan (ticker JPM) and Wells Fargo (ticker WFC) reported their quarterly results. It appears that investors liked what they saw. Shares of JPM traded up nearly 6% while WFC gained more than 3%. These results and the subsequent share price rise helped boost the the Financial spider ETF (ticker XLF) by nearly 3%

Although EPS beat the consensus at JPM, we are surprised as to the degree that the reduction in credit-related costs added to earnings (as a note, it is our opinion that most large banking concerns have significant leeway to reported any earnings number they want, considering the portfolios are marked to model. This adds a large degree of uncertainty to results in any one quarter). In the second quarter, credit costs were just 0.9% of revenue versus 6.6% in the year-ago period and 2.7% in the first quarter of 2012. The credit costs booked against revenue appears small relative to past revenue results and compared to net charge-offs, totaling $2.3 billion. That said, nonperforming assets as percentage of assets has improved over the last four quarters.

As for the chart, watch the resistance around $38.

In comparison, the results at WFC look cleaner. Although the performance is not directly attributable to the quality of the earnings, we also note that shares of WFC are ahead of JPM (see below). Credit-related costs were 14.6% of interest revenue in the second quarter. This compares to 16.3% in the first quarter of 2012 and 14.8% in the year ago period. In addition, nonperforming assets ticked down from the sequential quarter and the year ago period, a positive indication. That said, total charges of about $2.2 billion were ahead of the credit-related costs of $1.8 billion.