It is fairly quiet on the news front today. As for the week ahead, even the economic reports are a little dull after last week. However, we are nearing the end of earnings season:

MONDAY: American International Group (AIG)
TUESDAY: Disney (DIS)
WEDNESDAY: Time Warner (TWX)
THURSDAY: Duke Energy (DUK)
FRIDAY: Brookfield Asset Management (BAM)

Here are the economic events for the week ahead:

TUESDAY: Federal Reserve Open Market Committee (FOMC) meeting begins
WEDNESDAY: 1st guess at 2nd Quarter U.S. GDP, followed in the afternoon by the FOMC announcement.
THURSDAY: Weekly U.S. Jobless Claims
FRIDAY: U.S. Employment Report for July

And the earnings reports to watch:

MONDAY: Liberty Global (LBTYA)
TUESDAY: Pfizer (PFE), Merck (MRK), American Express (AXP), United Parcel Service (UPS)
WEDNESDAY: MetLife (MET)
THURSDAY: Exxon (XOM), ConocoPhillips (COP)
FRIDAY: Chevron (CVX), Procter & Gamble (PG)

Bloomberg: Apple Posts Second Straight Profit Gain as IPhone Jumps

Apple Inc. (AAPL) said quarterly profit rose 12 percent to $7.75 billion, with a jump in iPhone and Mac sales helping to make up for a drop in iPad demand.

Apple sold 35.2 million iPhones and 4.4 million Macs in the fiscal third quarter ended June 28, up 13 percent and 18 percent respectively from a year ago. That helped boost revenue by 6 percent to $37.4 billion. IPad sales fell for the second straight quarter to 13.3 million, the company said in a statement today.

…Yet the results were mostly in line with analysts’ estimates and weren’t the blowout that investors have come to anticipate from the company. Apple is also approaching one of its most critical product rollouts in years. After facing questions about whether it can build breakthrough products without co-founder Steve Jobs, Apple is prepping new bigger-screen iPhones, a wearable gadget and an upgrade to its Apple TV set-top box, people familiar with the plans have said.

Although Apple is cheaper than other companies in their industry, I still wouldn’t call it cheap. It would have to fall to $80 or less before I would consider it cheap. Apple is a good short-term growth company, but longer-term (5 years from now) it has too many dark clouds. Overall, I would rate Apple as a “hold”.

Bloomberg: Microsoft’s Quarterly Profit Hurt by Nokia Acquisition

Microsoft Corp. (MSFT) reported profit that fell short of estimates in the fiscal fourth quarter, weighed down by the acquisition of Nokia Oyj’s handset unit, where about 12,500 jobs will be cut.

Net income in the period that ended June 30 was $4.61 billion, or 55 cents a share, including adjustments related to Nokia, the company said in a statement today. Analysts were predicting, on average, profit of 60 cents a share, according to estimates compiled by Bloomberg. Excluding the Nokia-related items and taxes, profit would have been 66 cents a share, beating the average prediction for 64 cents.

Chief Executive Officer Satya Nadella, who took over in February, is struggling to cut costs at Nokia after Microsoft completed its 5.44 billion euro ($7.33 billion) acquisition of the mobile-phone operations in April. Microsoft’s main software business topped estimates, owing to strength in Internet-based cloud programs and corporate computer applications.

…Microsoft is also seeing signs of improvement in the PC market, which drives sales of Windows and Office software. PC shipments declined 1.7 percent in the second quarter, a smaller drop than estimated as businesses upgraded their equipment. Demand in the U.S., Europe and Canada also helped to make up for a drop in Asia, researcher IDC said earlier this month.

Intel Corp. also released results last week that topped analysts’ projections. Microsoft’s Hood said the company is seeing similar trends to those reported by Intel.

One of my main problems with the whole emphasis on mobile is the assumption that pc’s are dead. What is replacing the pc? The smartphone? The tablet? Neither of these has the computing power of a pc. Laptops are a lot closer to pc’s than they used to be, but even those are almost considered passé by the markets.

That said, even Microsoft is getting richly priced. It is time to start looking for the exit.

Market Watch: Yellen encourages ‘fully-fledged equity bubble,’ says Jeremy Grantham

Jeremy Grantham blasts Janet Yellen and her predecessors at the Federal Reserve in his latest quarterly letter.

The Fed chairwoman is “sticking faithfully” to the “clearly wrong” policies of Alan Greenspan and Ben Bernanke, writes Grantham, who is the founder of Boston-based money manager GMO and has a reputation for sniffing out market bubbles early.

He says:

“She will not use interest rates to head off or curtail any asset bubbles encouraged by the extremely low rates that might appear. And history is clear: very low rates absolutely will encourage extreme speculation. But Yellen will, as Greenspan and Bernanke before her, attempt to limit only the damage any breaking bubbles might cause.”

Grantham criticizes Fed officials for not learning from history:

“I had thought that central bankers by now, after so much unnecessary pain, might have begun to compromise on this matter, but no such luck, at least in the case of the Fed. The evidence against this policy after two of the handful of the most painful burst bubbles in history is impressive. But not nearly as impressive as the unwillingness of academics to back off from closely held theories in the face of mere evidence.”

He said Yellen’s statements in early July have boosted the chances that the U.S. stock market will become completely bubbly:

“This affirmation of moral hazard – we will not move to stop bubbles, dear investors, but will help you out when things go badly wrong – should be of great encouragement to speculators and improve the odds of having a fully-fledged equity bubble before this current episode ends.”

On the other hand:

In addition, Grantham backs his prior call that the bull market probably won’t end for a year or two, not before the S&P 500 rallies past the 2,250 level.

I have a ton of respect for Grantham. He is a value investor in the mold of Warren Buffet, but without the good ole boy b.s. that Warren likes to peddle. Pay heed.

Business Week: Netflix’s 50 Million Subscribers Face a Flood of New Shows

Netflix’s second-quarter results popped out Monday afternoon, and here are the highlights: The company posted revenue of $1.15 billion vs. $837 million in the same period last year. Its net income hit $71 million, up from $29 million, and it now has more than 50 million customers worldwide—50.05 million, to be precise. Investors gave Netflix (NFLX) a pat on the back for increasing its subscribers at a healthy clip, sending shares 1 percent higher in after-hours trading.

The article goes on to point out all of Netflix’s new content, which is a fairly impressive list. But the rest of the analysis nails Netflix’s competitors:

…you have to feel gobsmacked after digesting Netflix’s list of shows. Whatever Amazon.com (AMZN) and Hulu are working on can’t match this in quantity or quality of talent…

Netflix has spent more and risked more to become a real competitor to HBO (TWX) and Showtime (CBS) in programming while maintaining a technology edge over everyone. When Netflix first set out on this strategy, it was easy to predict a bleak future in which the company would spend itself to death buying shows that no one watched. Netflix took a huge risk, although hindsight and the rising subscriber numbers are making it harder to remember just how gutsy the move was.

Neither Hulu nor Amazon seem as good at making or marketing their shows. Hulu’s shows tend to come off as amateurish, while Amazon’s are just hard to find and trapped in the company’s clunky interface. It’s unclear to me how either company will compete with Netflix over the long term unless they’re willing to go bigger and risk more.

In my view, Netflix IS the future of television. Amazon will eventually wake up and get on board with the new paradigm. Hulu is still a big question mark.

As for Netflix’s stock, it is still overpriced (if you swapped Apple’s earnings report for Netflix’s, then NFLX might be properly valued). With a potential market crash looming on the horizon (next year?), there just isn’t enough upside to take a chance on NFLX right now. But when the markets crash, Netflix should return to a valuation that makes it far more appealing. NFLX is still on my watchlist.

Welcome to the new week! Here is what to expect…

For economic reports:

TUESDAY: Consumer Price Index and Existing Home Sales
THURSDAY: New Home Sales
FRIDAY: Durable Goods Orders

Even more important, we are still in the middle of earnings season:

MONDAY: AbbVie (ABBV)
TUESDAY: Apple (AAPL), Microsoft (MSFT), Verizon (VZ), Coca-Cola (KO), Comcast (CMCSA)
WEDNESDAY: AT&T (T), Facebook (FB)
THURSDAY: Amazon (AMZN), Visa (V)
FRIDAY: LyondellBasell Industries (LYB)

One piece of good news from Friday that I overlooked:

Bloomberg (via Yahoo Finance): Google Sales Top Estimates on Robust Ad Demand

Google Inc. (GOOG)’s sales exceeded estimates in the second quarter as the company sold more advertising alongside Web-search results.

Revenue, excluding sales passed on to partners, was $12.7 billion, the company said in a statement yesterday. That topped the average projection of analysts for $12.3 billion, according to data compiled by Bloomberg.

Chief Executive Officer Larry Page is adding new features in mobile, video and Web services to boost user traffic and attract marketers as he seeks to bolster Google’s main ad business. As a result, the number of clicks on ads on YouTube, search and other Google sites increased 33 percent in the latest quarter, making up for a decline in ad prices. Since Google gets paid each time someone clicks on an advertised link, higher volumes result in more revenue.

“They’re the largest player, and they’re gaining share,” said Youssef Squali, an analyst at Cantor Fitzgerald, who rates the stock a buy. “It was a very good quarter.”

…Net income, including from Motorola, which is being sold to Lenovo Group Ltd., rose to $3.42 billion, or $4.99 a share during the second quarter, from $3.23 billion, or $4.77, a year earlier.

…Second-quarter profit excluding certain items was $6.08 a share, compared with the average analyst estimate for $6.24.

In a flat economy, growing revenue is a great sign, even if the earnings disappointed. However, I wouldn’t buy at the current price, even for a long-term hold. $560 would be my target buy price, with the closer it gets to $500 being ideal. I would rate Google as a “hold” at the current price.

There isn’t much on the economic front this week, so it will be all about the earnings reports:

MONDAY: Citigroup (C)
TUESDAY: Johnson & Johnson (JNJ), JPMorgan Chase (JPM)
WEDNESDAY: Bank of America (BAC)
THURSDAY: Google (GOOGL)
FRIDAY: General Electric (GE)

In other news:

The Telegraph: BIS chief fears fresh Lehman from worldwide debt surge

Another party heard from…

The world economy is just as vulnerable to a financial crisis as it was in 2007, with the added danger that debt ratios are now far higher and emerging markets have been drawn into the fire as well, the Bank for International Settlements has warned.

Jaime Caruana, head of the Swiss-based financial watchdog, said investors were ignoring the risk of monetary tightening in their voracious hunt for yield.

“Markets seem to be considering only a very narrow spectrum of potential outcomes. They have become convinced that monetary conditions will remain easy for a very long time, and may be taking more assurance than central banks wish to give,” he told The Telegraph.

Mr Caruana said the international system is in many ways more fragile than it was in the build-up to the Lehman crisis. Debt ratios in the developed economies have risen by 20 percentage points to 275pc of GDP since then.

Credit spreads have fallen to to wafer-thin levels. Companies are borrowing heavily to buy back their own shares. The BIS said 40pc of syndicated loans are to sub-investment grade borrowers, a higher ratio than in 2007, with ever fewer protection covenants for creditors.

Bloomberg: Fed Watcher’s Guide To FOMC Minutes

The big news today:

Here’s what to look for when the Federal Reserve releases minutes from the Federal Open Market Committee’s June 17-18 meeting at 2 p.m. today in Washington.

— Lift-off timing: Any indication of how close the Fed is to its first interest-rate increase since 2006 is “the most important question” the minutes could answer, said Guy Berger, a U.S. economist at RBS Securities Inc. in Stamford, Connecticut. The minutes could reveal a growing sentiment that Fed officials “feel like they are moving toward the lift-off date faster than they previously anticipated,” even if they “haven’t quite reached a consensus on it yet,” he said.

— Updated FOMC forecasts for unemployment, inflation, and the federal funds rate released in June “suggest that there are certainly people, relative to where they were three or six months ago, who are more optimistic about the recovery,” Berger said.

— The question is whether the views of hawkish FOMC members, who would rather see rates rise sooner, are “gaining much traction within the committee,” said Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, and a former economist at the Federal Reserve Bank of Richmond.

The markets may be a little tepid this morning in anticipation of the FOMC minutes.

New York Times: Samsung Foresees a Decline in Profit

To me, the bellwether for earnings season is Samsung, which typically issues earnings estimates right at the start of earnings season. The news this quarter is not good:

Samsung, which is based in South Korea, on Tuesday published a financial earnings preview that forecast a profit of about 7.2 trillion won, or $7.1 billion, for the three months that ended in June.

While that is still a substantial chunk of money, the overall profit represents a decline of 24 percent from the same period a year ago. The profit forecast also missed analysts’ expectations of about 8 trillion won.

The problem:

Growth of the overall smartphone market has slowed over the last year, largely because many people who want a smartphone already have one. Smartphones with nice screens and high-quality cameras are commonplace, and people may be feeling less compelled to upgrade as frequently, analysts say.

But Samsung, which offers a range of phones at various prices, is feeling pressure from all sides of the market. In the high end, it faces stiff competition from Apple, whose iPhone sales have recently accelerated thanks to a new partnership with China Mobile, the largest phone carrier in the world.

And in the low end and midtier phone markets, Samsung is facing intense competition from emerging Asian phone makers like Lenovo, ZTE, Xiaomi and Huawei.

If you want to know why the Nasdaq, of the three U.S. indexes, took the biggest hit yesterday, look no further than this story. While I won’t call this the death knell of the mobile internet industry, I will say it is probably a good idea to expect lower growth rates going forward, especially in the hardware part of the industry.

The Jerusalem Post: Hamas rockets reach Jerusalem and Tel Aviv

We get yet another Palestinian attack on Israel. The main thing to watch with this is what Israel does. As long as this confrontation remains between Israel and Palestine, it shouldn’t have much of an impact on world markets. On the other hand, if Israel uses this as an excuse to launch a preemptive attack on Palestine’s weapon suppliers (Syria? Iran?), this could have a chilling effect on markets.

The S&P 500 levels to watch today:

UPSIDE: 1978 (July 1st’s high), 1984 (July 7th’s high and the top of the Bollinger Bands), and 1985 (July 3rd’s high and the all-time high).
LAST CLOSE: 1977.
DOWNSIDE: 1974-1976 (3 data points), 1972 (July 2nd’s low), 1968 (June’s high), 1962 (July 1st’s low), 1956 (20 day moving average), 1928 (bottom of the Bollinger Bands), 1924 (May’s high), 1919 (50 day moving average), 1915 (June’s low), 1897 (April’s high), and 1888 (100 day moving average).

S&P 500 Daily Momentum: Bullish (weakening)
S&P 500 Daily Overbought/oversold: Neutral (leaning overbought)
S&P 500 Weekly Momentum: Bullish
S&P 500 Weekly Overbought/oversold: Overbought
S&P 500 Futures: Negative
Overall: Yesterday’s drop in the S&P 500 relieved some of the overbought pressure, but it is still overbought on the weekly technicals. While I would expect an overall drop this week, that doesn’t mean anything for just today. Although earnings season starts today (with Alcoa), the big earnings report won’t come until Friday (Wells Fargo).

Welcome back! Feel free to grumble, or take a look at the week ahead:

MONDAY: The calm before the storm…
TUESDAY: Earnings season kicks off! Alcoa (AA) releases their earnings.
WEDNESDAY: The Federal Reserve’s Open Market Committee releases the meeting minutes from their June 18th meeting at 2 pm EST.
THURSDAY: Family Dollar Stores (FDO) releases their earnings.
FRIDAY: The first of the mega-cap stocks releases earnings, with Wells Fargo (WFC) stepping up to the plate.

Bloomberg: Microsoft’s Nadella Posts Cloud Gains in Third Quarter

Mister Softee hits one out of the park:

Microsoft Corp. (MSFT)’s push into cloud computing, which is accelerating under new Chief Executive Officer Satya Nadella, is paying off.

Net income in the fiscal third quarter was $5.66 billion, or 68 cents a share, Redmond, Washington-based Microsoft said yesterday in a statement. That topped the average analyst estimate of 63 cents, according to data compiled by Bloomberg. Sales were $20.4 billion, matching projections.

Nadella, who took the helm two months ago, is leading a shift to focus on selling devices and software delivered over the Internet, both for Microsoft’s own Windows operating system and rival programs. Rising sales of Web-based tools, such as Office software and Azure cloud services, are helping the largest software maker grapple with shrinking personal-computer demand and a failure to gain ground in tablets and phones.

…Sales from Office 365, the cloud-based subscription version of Microsoft’s productivity programs, more than doubled in the quarter that ended March 31, as did revenue from Azure, the company said.

Microsoft beat profit estimates by saving money on the costs of running cloud services, as well as marketing, said Chief Financial Officer Amy Hood. Gross margin in the Commercial Other segment, largely cloud products, increased 80 percent.

…Third-quarter sales from devices and consumer hardware, including Xbox and Surface devices, rose to $1.97 billion, compared with an average analyst prediction of $1.95 billion, according to data compiled by Bloomberg First Word.

…Devices and consumer licensing revenue, including copies of Windows sold to PC makers, increased to $4.38 billion, compared with the $4.2 billion average analyst estimate. Other revenue from devices and consumer businesses, such as the Bing search engine and video games, came in at $1.95 billion, compared with a $1.81 billion projection.

In the Commercial Licensing unit, revenue from software like server programs and corporate versions of Windows and Office rose to $10.3 billion. Analysts on average had predicted $10.5 billion. Other commercial revenue, which includes cloud software like Azure and Office 365, was $1.9 billion, compared with an estimate of $1.82 billion.

Unearned revenue, which comes from sales of multiyear deals that will be recognized in the future, was $19.5 billion for the quarter, compared with the $18.6 billion average analyst projection, according to data compiled by Bloomberg.

Not perfect, but darned good! Especially for a company which the markets have almost given up for dead. The most pleasant news is how Microsoft has monetized their cloud services so well. For long-term investors, especially people looking for dividends and safety, Microsoft is a solid part of any portfolio.

Bloomberg: Amazon Spending Hailed by Investors as Bezos Touts Growth

Amazon.com Inc. (AMZN) Chief Executive Officer Jeff Bezos is spending on growth as fast as he reaps revenue.

First-quarter sales at the world’s largest online retailer rose 23 percent to $19.74 billion, the company said in a statement yesterday. That topped analysts’ average estimate of $19.4 billion, according to data compiled by Bloomberg. Expenses also increased 23 percent during the quarter, limiting profit to 23 cents a share, in line with analysts’ projections.

Bezos is pouring cash into expanding Amazon’s business at the expense of profits. The Seattle-based company is building more warehouses to speed shipments, while adding new services like a grocery-delivery program and a TV set-top box for streaming movies and TV shows to compete with Apple Inc. (AAPL) and Netflix Inc. (NFLX) Amazon indicated spending wouldn’t decelerate anytime soon, with a forecast for an operating loss of $55 million to $455 million for the current quarter.

Amazon tempts me. I like their business plan, even if it means chewing up all their profits on expenses to grow more. Unfortunately, it is hard for me to justify buying a stock with a triple-digit PE and razor-thin margins, especially when their future forecasts are for more of the same. If Amazon were to drop significantly, I would be a buyer, but not at these prices.

Bloomberg: Yellen Concerned Fed Model Fails to Predict Price Moves

Federal Reserve Chair Janet Yellen is concerned that the standard models central banks use to forecast inflation may be broken.

Behind her disquiet: the failure of the models to foresee the path of prices in the U.S. during the last recession and its aftermath and in Japan during its deflationary period from 1998 to 2012. U.S. inflation has been higher than the simulations suggested, while Japanese price declines proved more persistent.

Yellen alluded to her concerns in a speech last week, saying the Fed has to “watch carefully” to see if inflation rises as the central bank projects — and hopes — during the next few years.

If it doesn’t look as if this is happening, Yellen suggested the Fed would keep short-term interest rates near zero as it seeks to avoid Japan’s experience of a prolonged period of falling prices and wages and a stagnant economy.

Janet, try visiting a grocery store once in awhile. You’ll see inflation…

Daily Mail: Nissan develops the world’s first SELF-CLEANING car

Japanese giant Nissan has developed the world’s first ‘self-cleaning car’ which it predicts will make car-washing ‘obsolete.’

Its UK engineers are testing innovative ‘nano-paint technology’ which repels dirt before it gets a chance to take hold on the paintwork.

…It is set to be an option on future models but is being tested in Britain on the new Sunderland-built Nissan Note which went on sale in October priced from £12,100 to £17,100.

No price has yet been set but it is likely to be around £450 ($750) – or similar to a metallic paint option.

Now we need the “self-cleaning” shirt, dog, and baby…