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Predicting a Market Bottom: How to Read Earnings Reports


Can results really indicate whether or not recovery is ahead?

Now that the second quarter of the year is over and earnings season is in full force, could the results of publicly traded companies indicate whether we're on the road to an economic recovery?

Some believe so. After all, it's corporate America that drives the economic health of our nation and history has indicated that a recovery on Wall Street generally occurs before a recovery on Main Street.

On the other hand, it appears that many companies have been implementing lean measures and merely cutting costs to survive as opposed to generating higher revenues and expanding business. At the end of the day, most believe that the 2 driving forces behind an economic recovery are numbers and consumer confidence.

Let's take a look at some of the companies that have released earnings and see what they may indicate. Transportation giant CSX Corporation (CSX) beat Wall Street's expectations, however showed a decline in second-quarter earnings of nearly 20%. This performance primarily came from cost-cutting measures and not any increases in revenue. In fact, the nation's third largest railroad stated that it expects shipping demand to sink by double digits in the upcoming quarter. The company has performed very well since witnessing a March low to gain 56% and close at $32.54 on July 13. With regards to the overall economy, this means that CSX doesn't expect business to get any busier and suggests that the economy will continue to struggle.

Financial giant Goldman Sachs Group (GS) released earnings and smashed Wall Street's expectations. The nation's largest surviving investment bank reported earnings of $4.93/share as compared to the $3.49 anticipated by analysts. This jump in profits can be accounted for by strong trading results, improving markets, and an upswing in advisory fees. The company's stock has more than doubled to a July 13 close of $142.54 from its January low. So what does this mean for the overall health of the economy -- the worst of the financial crisis could be behind us and investor confidence may be emerging, indicating that the economy could be in rebound mode.
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