Europe is doing better

European crises is over and the actions from countries in Europe to cut their budgets so far have impressed the market. The credit spreads have narrowed between Germany and Spain. Germany is doing extremly well. Its economy probably is the best among developed countries. The low and stable Euro helped German exports. The better European economy has reduced the risk of global slow down. That's why stock market refused to go down despite worse economic data from U.S.

Why earnings are diverging from economices

The earnings so far are very good. But the macro economy is not performing at par. There are some reasons behind the earning surge.
1. The deep recession and tight credit have reduced the number of competitors and increased the barrier of new entries.
2. Cost cutting has made corporations lean and more profitable.
3. Many companies are more rationalized and they took out extra capacities. The margin is high. The best example is airline industry.
4. Overall inputs have stabilized and commodity prices did not jump.

Some of these factors are more permanent and some are temporary. Pay attention to the turn.

earnings and economy

The earnings overall are positive but economy data is worsening. So what's going to happen next? My sense is that the earning upsides are most coming from global operations. However, given the high cash level of corporations, a double dip is unlikely. That's why I purchased BAC and CSCO. However, I do not believe the overall market is cheap. The era of 15X multiple is over.

One bright spot is that M&A activities will heat up given the high cash level and cheap credity. Most companies have to look cost savings to increase earning. One way is to merge to take out competitors and realize cost savings.

Big U.S banks

The market is disappointed on most big U.S. banks earnings. But I look at the positives. The earning quality is much higher because the strict loan requirements. I will expect the loan reserve will come down and this is more important than short term profitability. I will put an order in for 200 Bank of America for 13.38.

bought CSCO

Just bought 200 CSCO @22.20. Given the cash CSCO has and the dominant position it has in the router market, the stock is undervalued. My target is 26 in six months

flat yield curve

Bank of Canada has increased interest rate to .75%. The yield curve in Canada has flattened, which is negative for banks. I would be very cautious on Canadian banks.

The weather is very hot for North America and Europe. It has a negative impact on crops. It may surprise people on food inflation over next few months.

IBM and texas Instrument results

Just as I wrote a few days ago about Intel's results, you can not project INTC's result to other tech companies. There are lots of competitions in PC, notebook, and computer software. The competition in service which IBM is in has been increased gradually. That's why IBM still enjoys a high margin. Most companies do not change their service provider regularly and it gives IBM a stable revenue. IBM is a mature company should trade 10-12 multiple which is 115-130. I will be very comfortable to buy IBM around 115.
TXN is another story. I would not touch it until it drops to 20 or below. There are too many variables in mobile semiconductor space and I do not know who will be dominant player yet.