The Earnings "Surprise"--There Was None
Futures actually moved up at 8:30 ET, despite PPI much stronger than anticipated (core PPI was in-line, apparently because car and truck prices were dropping; the NY Empire State Index was stronger than expected).
The most important fact about today is that there were no negative earnings surprises. State Street , US Bancorp ,Northern Trust in the financials, and Johnson & Johnson in the healthcare sector were all names people have been hiding out in expecting good earnings, and they delivered. This is in contrast to the disappointing start of this earnings season, with disappointments from GE ,Alcoa , and Wachovia .
1) So the long-awaited mergerof Delta and Northwest is a reality (at least the announcement is real). The positives:
--Nearly $7 billion in cash at closing
--Minimal overlap that should ease the regulatory review process
--A deal in place with the Delta pilots
--12 percent reduction in headcount.
Now that consolidation looks like a reality, expect considerable opposition from labor groups; any anti-trust review must consider the consolidation play holistically. How about Continental/United ,which would be another roughly 20 percent of the market?
Before everyone gets too excited about this, consider what Morgan Stanley's airline analyst, Willliam Greene, had to say to his clients this morning: "our rule of thumb is to look for opportunities to become sellers once consolidation momentum has run its course because airline mergers are inherently risky." Still, the "Delta domino effect," as Greene calls it, will at least create some short term tailwind.
Delta up 5 percent, Northwest up 10 percent pre-open.
2) Johnson & Johnson beat on consumer sales, medical devices were also strong, pharmaceutical sales look in-line. 2008 guidance is in-line with expectations. Once again, international growth is the driver:
--Pharmaceutical sales in the U.S. up 0.9 percent, but up 7.9 percent international
--Medical devices up 0.2 percent in the U.S., but up 13.8 percent internationally
--Consumer sales up 11.7 percent in the U.S., but up 20.2 percent internationally
Up 1 percent pre-open.
3) US Bancorp up about 3 percent, as they beat on the topline and bottom line. One trader in the stock noted to me that USB was very much in line and because it it well capitalized and therefore less shorted than others, he is expecting it to be up but not a 10 percent short squeeze.
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