Mark Carney is paid to say positive things about the Canadian economy.
So, when the governor of the Bank of Canada talked up the country's financial fortunes in July, some people wondered whether he was simply engaged in the power of positive thinking in order to get companies and consumers enthusiastic about a possible recovery.
However, a growing herd of companies in Canada and the United States showed improved earnings in the second three months of the year — or at least did better than analysts had anticipated.
And that might be a better sign than Carney's words that the economy's trajectory is finally starting to turn skyward.
Second-quarter earnings at JP Morgan Chase outpaced analysts' forecasts. (Mark Lennihan/Associated Press) "Thankfully, the second quarter provided much stronger evidence of a transition in global markets from decline to recovery," said Fred Sturm, chief investment strategist with Mackenzie Financial Corp., a Toronto-based investment company.
The gain for the April-to-June period was not limited to firms that might be expected to lead a recovery, such as Research in Motion Ltd., makers of the popular Blackberry mobile communications device.
Instead, banks — including the Bank of America Corp., which ten months ago appeared headed toward some serious corporate restructuring — delivered strong earnings in the quarter.
"Difficult challenges lie ahead … However, we are convinced that Bank of America will weather the storm," Kenneth Lewis, the bank's president and chief executive officer said in a news release announcing the company's $3.2 billion US in earnings.
The accidental profit
Indeed, the overall jump in corporate earnings was basically unexpected.
In June, Zach's Investment Research, a prominent U.S. firm that tracks stock markets, forecast that approximately three-quarters of the 500 firms that constitute Standard & Poor's main stock index would post lower earnings in the three-month period than they did in the previous year.
"The second-quarter earnings will be ugly," wrote Charles Rotblut, Zach's senior market analyst.
In fact, Thompson Reuters reported that more than 75 per cent of S&P firms reporting earnings in July outpaced expectations.
(Companies must announce their earnings in a timely fashion after their financial quarter ends, but not on a specific date, which explains why all the S&P figures are not available at the moment.)
Technology gaining
Two high-tech firms — Apple Inc. and Yahoo! Inc. — topped what experts had forecast.
Yahoo! delivered net income of $141 million US, or a dime a share, for the three months ended June 30, exceeding analysts' predictions of $111 million, or eight cents a share.
Apple, the makers of the popular iPhone, did even better, earning $1.23 billion US in the second quarter. That translated into $1.35 on a per-share basis, or 15 per cent higher than the $1.17 company watchers had expected.
(Stock analysts tend to compare earnings on a per-share basis rather than by measuring the gross profit figure.)
There was even some action among newly listed firms.
LogMeIn Inc., a company that offers remote connections to computers, saw the price of its initial public offering rise 20 per cent on the first day of stock market trading at the end of June.
The firm's share price has traded between $19 and $20 for the past month.
Financial froth
Perhaps most interestingly, the financial sector — the area most exposed to the asset-backed commercial paper debacle of the past two years — has made a comeback, even to the point where some U.S. banks are paying back government assistance faster than anticipated.
Wells Fargo & Co. scorched analysts' forecasts with a profit of $3.17 billion US, up 81 per cent from the same time last year, on revenue that doubled compared with the second quarter of 2008.
The San Francisco-based bank earned 57 cents a share versus the 35 cents that Zach's had predicted.
Goldman Sachs Group Inc., which had tapped into $10 billion US worth of cash under Washington's troubled asset relief program (TARP) in 2008, earned almost $35 billion US for the quarter, or $4.93 a share.
Analysts had predicted that the New York investment bank would make money, but 40 per cent less than the actual result.
Goldman also paid off its own TARP assistance, giving the federal government a 23 per cent return on its cash.
JP Morgan Chase & Co. made $2 billion US in its latest results, enabling the bank to repay $25 billion in TARP money.
Things were not quite as bright for banks on the Canadian side of the border.
Royal Bank beat analysts' expectations after subtracting extraordinary financial items. However, unlike their American cousins, Canada's financial institutions saw neither the commercial carnage in the past year nor were they forced to seek government bailout money.
In the latest April-to-June period, the Royal Bank of Canada posted a quarterly loss for the first time since 1993. However, once one-time charges were removed from the company's financial picture, Canada's largest bank earned 97 cents a share, beating analysts' predictions.
The Bank of Montreal earned $358 million Cdn in the second quarter, a level three cents a share less than forecasts.
Spreading black ink
Even consumer companies — perhaps at greater risk as consumer spending in the United States and Canada fell in recent months — experienced a good quarter.
Earnings at PepsiCo. were 2.3 per cent lower than in 2008. But in a case similar to the Royal Bank, Pepsi beat analysts' forecasts once extraordinary items were subtracted.
Starbucks Coffee Co., which was already cutting jobs and closing outlets prior to last September's financial meltdown, earned $151.5 million US in the second quarter of 2009. That was a penny higher than expected and much better than the $6.7 million US loss the java chain produced in the same period one year earlier.
"The transformation of Starbucks business is delivering improvements in comparable store sales trends and is beginning to be reflected in our financial performance," said company chairman, president and CEO Howard Schultz.
A good showing at Loblaw likely means more about the trajectory of the economy than positive comments from Bank of Canada Gov. Mark Carney. (CBC) Canada's Loblaw Cos. Ltd. saw its profit jump almost 40 per cent, giving the supermarket giant enough cash to buy T&T Supermarket Inc., Canada's largest Asian-oriented food retailer, for about $225 million in July.
The earnings' hit parade extended into the equipment sector.
Machinery maker Caterpillar Inc. posted earning of $371 million US, or 60 cents a share. That was more than double the 22 cents per-share that company watchers had forecast.
Even aircraft builder Boeing Co., which had been rocked by the shrivelling air travel sector, popped earnings that beat Wall Street by 20 cents a share.
All in all, the profit recovery was widespread and substantial, market experts said.
"So far, second quarter earnings look pretty good," said Bob Doll, global chief investment officer of equities at BlackRock, a New York investment firm.
Clouds remain
Despite the strong financial showing in many sectors, the economy is not out of the woods, experts cautioned.
Wells Fargo, for instance, hiked its provisions for loan losses to more than $5 billion US, a sign the bank expects more defaults in the coming months.
In addition,Yahoo! saw advertising revenue, a bellwether for a rising economy, slipped 13 per cent.
Finally, McDonald's Corp. saw its second-quarter earnings tumble by eight per cent on lower sales and a weaker American dollar.
Nevertheless, after almost a year of unremittingly bad news, economy watchers are applauding the most recent results.
"While not etched in stone, the possibility is rising that the global economy could see a stronger recovery than most anyone had expected as recently as a couple of months ago," said Benjamin Reitzes, an economist with BMO Capital Markets.
