Most investors / readers know about inflation -- an increase in the price of a good or service not connected to an improvement.

But fewer know about its flipside -- deflation -- a decline in prices.

Moreover, while inflation is a serious problem -- it erodes purchasing power and makes it hard for businesses to project and plan for costs, moving forward- - deflation is an even bigger menace.

That's because deflation decreases the amount of money flowing to businesses for their products/services, reducing the money needed to keep commercial activity alive and the economy growing.

Deflation: a danger sign

Don't misunderstand: a price cut after a company becomes more-efficient, or implements a 'holiday or promotional' sale, is fine. Deflation is different: it's pervasive price cutting and asset price declines -- falling prices across the product/service spectrum -- usually driven by a lack of consumer / wholesale demand.

Further, if deflation persists it can, you guessed it, lead to lay-offs. Companies and factories with lower revenue and demand for their products / services scale-back production to reduce expenses by laying-off employees. Those laid-off employees then cut expenses as they search for new work assignments by cutting spending, resulting in even lower demand for products, further price cuts, and lower company revenues, and a vicious cycle can ensue.

I'm still enjoying the sweet taste left in my mouth from this morning's Coca-Cola Classic (I treat myself to three of four of the syrupy concoctions each week). I'm also still enjoying -- at least once a day -- Coca-Cola's (NYSE: KO) "It's Mine" Super Bowl ad, my favorite among the bunch. The dueling parade balloons concept (available to watch here) was clever and well-executed, nicely scored (with a 60-second excerpt from the Rossini Overture), and complete with a big payoff at the end. Also note the thoughtful inclusion of a young brunette girl, football in hand, around the 50-second spot. (Anyone else reminded of Lucy Van Pelt?)

Most importantly, the ad had solid brand placement, frequently reminding viewers what was being advertised. This was not the case with Coke's chief competitor, PepsiCo (NYSE: PEP), which employed dancing lizards and supermodel Naomi Campbell to publicize its SoBe Life Water. Problem was, "Life Water" was barely mentioned.

But the fun of Super Bowl Sunday is behind us, and the business of earnings is ahead. Coca-Cola is set to announce its fourth-quarter results tomorrow. The mean estimate among analysts is calling for per-share results of 55 cents, a 5.8% improvement from year-ago results of 52 cents per share. The high estimate at this point is 57 cents, with a low of 50 cents; the revenue estimate weighs in at 5.77%.

Bristol-Myers Squibb (NYSE: BMY) announced today that third-quarter earnings were solidly higher, resulting in an increased target for overall 2007 earnings. In the latest reporting period, the drug manufacturer posted net income of $858 million, or 43 cents per share, up from a year-ago profit of $338 million (17 cents per share). Excluding items, the company banked 38 cents per share, or a penny better than Wall Street's expectations.

Revenue was higher during the period as well, up 22% to $5.05 billion, edging out analysts' consensus view of $5.02 billion.

Helping the company achieve these robust profits was BMY's blood-thinning medication Plavix, which saw sales double to $1.25 billion. The company is continuing a legal battle with Apotex over a generic version of Plavix, which hit shelves last August but has been pulled amid a patent dispute. The Plavix patent is scheduled to expire in 2011. Generic competition had negative repercussions for cholesterol drug Pravachol, which saw sales drop 55% in the third quarter as a result.

Sun Microsystems Inc (NASDAQ: SUNW), the networking computing company, reported impressive cash generation metrics last night, while sales continued to be light.

For the June 2007 fiscal year, Sun generated $1.2 billion in operating income and cash flow from operations of $950 million -- a vast improvement. Gross margin also improved 200 basis points for the year and almost 400 basis points from last year's Q4.

The problem at Sun continues to be revenue growth, as there was little year-over-year growth in the current quarter and the company is guiding to low-to-mid single digit revenue growth for the year -- which is not a good sign for a technology company. Also, the company provided no guidance for the upcoming quarter, leaving much of the growth to the tail end of FY 2008, which typically is not good.

Sun announced that it will host its analyst day in New York on September 5 and mentioned that it will discuss its capital structure, which is not a subject that is typically highlighted, a sign something more dramatic might happen with the $5 billion in balance-sheet cash.

Overall, Sun has little downside risk and has a private equity investment via a convert priced in the $7 price range. The computer-is-the-network company appears it might be setting itself up for a private equity deal with its focus on higher margin businesses and better cost controls.

Profits of the 500 largest companies in the U.S. are up 80% from 2000 to 2006 with revenue up just 39%. Why? U.S. productivity is growing 3.9% per annum, one of the highest productivity growth rates in the world.

Another interesting data point from Shlomo Maital in this weekend's Barron's editorial is that total capital formation is only 17% of GDP, with two-thirds of it reinvested in obsolete plant and equipment. With unemployment and investment in new capital formation so low, this could mean employees are in a strong position to demand higher wages.

Although Maital did not conclude this in the editorial, what the economic data suggest are that economists and other pundits calling for the collapse of the consumer -- and, ergo, the U.S. economy -- are simply way off. As the housing market collapses, this has more to do with the mortgage market and new home sales. Do not expect this to spill over completely into consumer spending. The growth in wages in this economic cycle to date has been muted, but do not expect that to last forever. High productivity and the supply-and-demand balance favoring the laborer will more than offset the impact of the mortgage market.

AES Corporation (NYSE: AES), the emerging-market power generation company, has had a tough few months, declining from $24 to $20.50 -- a big decline for a company with steady and large cash flow generation.

The stock's weakness began when its multi-year earnings guidance was a little lower than expected. Another reason for investor nervousness is that in the last liquidity crisis, from 2000 thru 2002, the stock got crushed as the company suffered from a seriously leveraged balance sheet with concerns about bankruptcy being high.

However, this time around, the company has considerably less debt and generates considerably more cash flow. Also, emerging markets around the world have an even greater understanding that they must place an emphasis on power generation if they want their economies to improve.

Having dropped 15% during the past month, it may be time to consider bottom fishing in AES. The stock has been trading nicely between $20 and $24.

Level 3 Communications (NASDAQ: LVLT), the IP telecommunications company, got hit pretty good yesterday due to the market's broad-based sell-off and its coming up short on revenue.

Management cited integration issues due to its seven recently completed acquisitions as the prime reason. The sales backlog is increasing but it is slow bringing customers on to its network. Level 3 will be a show-me stock for the next few quarters as management will have to hit their numbers to regain investors' confidence. October is expected to be another weak quarter, but business is expected to ramp in 4Q.

However, with what looks like a weak or a flat opening this morning in combination with yesterday's sell off, a quick recoil is possible from its oversold condition for traders to make a nice profit on.

While Google Inc (NASDAQ: GOOG), the new hyper-growth software company, was reporting results last night, so was the old giant, Microsoft Corporation (NASDAQ: MSFT).

The PC-centric company concluded fiscal year 2007 with revenue up 13% and EPS up 18% -- not too bad considering the company is approaching its 30th birthday.

What is often forgotten about Microsoft, and powerful from an investment perspective, is its continuing shift away from a licensing model to an annuity or application service provider model. Why this is important is that Microsoft's revenue and earnings should continue to become more predictable.

The other big positive, which investors tend to forget, is Microsoft is by far the low-cost producer of productivity software in the world on a per PC basis. Especially, in the business market.

From speaking to CIOs and other big buyers of Microsoft product, on the business front, no one can compete on the price side. Also, Microsoft has plenty of power to increase new annuity type agreements modestly and be able to increase revenue nicely for Microsoft.

Microsoft stock has had a nice run, so there is no need to rush into the stock, but I'd consider looking at this software powerhouse on stock market corrections.

Darden Restaurants Inc (NYSE: DRI), the casual dining restaurant chain that owns and operates the Red Lobster, Olive Garden, Bahama Breeze, Smokey Bones Barbeque & Grill, and Seasons 52 restaurant concepts, reported disappointing earnings last night after market close -- missing the consensus on both EPS and revenues.

As analysts expected the company to trade mostly in-line with their expectations, the terrible earnings report came as a negative surprise coming from the stock that had been upgraded nine times over the course of the past year. The company traded down 3.39% in pre-market trading, after trading near lifetime highs prior to the release.

Several analysts feel that Darden's reported $55.1 million loss for Q4 is reflective of a charge-off for selling 65 Smokey Bones restaurants over the past quarter; the company put another 73 Smokey Bones' restaurants up for sale in the quarter.

Following the decision to sell many of the Smokey Bones restaurants, CEO Clarence Otis said that the company would remain optimistic about making a "major acquisition." Let's face it, with their earnings, right now they need it.

Dell Inc (NASDAQ: DELL), the Texas-based computer manufacturer, shocked Wall Street last night with a massive 240 basis point expansion of gross margins. The stock was up as much as $2 in after-hours trading.

What was the response by sell-side analysts? Disbelieve. Merrill Lynch said sell into strength while Cowen & Co maintained its Neutral rating on the stock. However, Bernstein Research, a research firm known for sticking its neck out, had and continues to have, an Outperform rating on the stock.

Dell grew revenue year-over-year by 3%, besting estimates expecting little if any growth. Higher average selling prices and lower component costs helped results.

Dell's quick turnaround seems somewhat similar to what happened over at Motorola Inc (NYSE: MOT). Dell's new head of global consumer products, Ronald Garriques, worked closely with Ed Zander to help Motorola's quick turnaround. Maybe he is doing the same at Dell. Stay with the stock for a nice ride. When Dell's model is on track, it can generate a lot of cash.

Masco Corporation (NYSE: MAS), the huge home-improvement products supplier to companies like Home Depot Inc (NYSE: HD), reported awful revenue results yesterday, reflecting the slowdown in the US housing market. However, the company did an excellent job at controlling expenses by beating margins by a nice amount.

Organic sales were weak, down 9.6% versus expectations of 11%. Total US sales were down 15.7%, however, this was offset by a 21% increase in international sales -- that is a big number and reason why you want keep this company on your radar screen.

Operating margins came in at 11.4% versus estimates of 8.7% -- beating estimates by almost 270bps, a sign of very good management.

Also, the company is buying back a ton of stock, purchasing 9 million shares in the most recent quarter with 27 million shares remaining on the buyback.

Masco will be a high flier once its revenue decline ends. I'd put this stock on the list of stocks to own when the housing supplier inventory overhang is over.

A couple of months ago, I mentioned that while a Coach (NYSE: COH) handbag can be quite the splurge, shares of the luxury-goods retailer could potentially be a prudent investment. Since this posting, the stock has gained nearly 15%, hitting a new all-time high in Monday's session.

This morning, the company said its third-quarter net income surged 38 percent, to $150 million, or 40 cents per share. Revenue increased 30 percent to $625.3 million. Both of these figures surpassed analysts' expectations of 38 cents per share and $617.6 million, respectively.

Peeking in on sales, direct-to-consumer sales rose 29 percent to $481 million, while same-store sales expanded 20 percent. The newly introduced Coach fragrance accounted for three percent of retail sales during the latest reporting period. No word on what percentage of COH sales came from various car trunks in Manhattan.

While Amazon.com (NASDAQ: AMZN) had a nice fourth quarter of 2006, coming in with an upside surprise of two cents per share, there is every reason for low expectations when Amazon reports first quarter 2007 earnings this week. After all, the holiday shopping season is well past, and according to Thomson Financial, the five-year growth rate is -2.79. The consensus estimate for earnings per share is 15 cents, down from 23 cents actual in the previous quarter, and 23 cents a year ago as well. Revenue is expected to be $2.9 billion, down from $3.9 billion last quarter. Twelve out of 28 analysts rate AMZN a hold. Their mean price target is $36, ranging from a high of $48 to a low of $25. And in our Battle of the Brands feature, Amazon is just barely holding its own against rival Barnes & Noble (NYSE: BKS).

However, the share price has been trending upward this past quarter, and closed at $44.95 on Friday. That was down from its 52-week high of 45.32, which it reached this past week when share price received a bump after an analyst's upgrade. Amazon has been showing strength through the diversity of its offerings, and though Borders Group (NYSE: BGP) has decided to go separate ways with Amazon, Amazon has also made a deal with Tivo Inc. (NASDAQ: TIVO) that shows some promise.

Could low expectations lead the way to a company that's not used to upside surprises in its EPS offering them two quarters in a row? Or could rising expectations be dashed by signs of weakness in the first quarter report? We'll find out on Tuesday.

Intel Corporation (NASDAQ: INTC) reported flat average selling prices (ASPs) which is a good sign for the company versus week ASPs for quite some time. In addition, gross margins increased sequentially from 4Q06 to 1Q07, another good sign. Typically, investors would expect gross margins to drop in the first quarter.

• Revenue for 1Q07 hit the lower end of guidance, not too impressive
• Gross margin and revenue guidance for 2Q is weak, but it appears Intel is low-balling gross margins for 2Q, possibly due to start-up costs for 45 nanometer technology

Intel continues to focus on manufacturing scale and product introductions. In manufacturing, producing microprocessors at 65 nanometer technology and transitioning to 45 nanometer platforms by the end of 2007 continues to provide it with a competitive advantage. Intel will have six different applications running on five operating systems on this platform. This, plus product initiatives, is allowing Intel to build a wider and deeper moat to protect and expand its position in the microprocessor business.

As we blogged last week, Intel's stock appears to be washed out -- with not too many sellers remaining. Historically, Intel's stock has done well with gross margin expansion, which appears ready to occur by year end.

There is not a big rush to get into this stock, but I'd chip away during the spring and summer on market weakness for what appears to be a stronger fall and winter on the horizon for the chip giant.

Hewlett-Packard Company (NYSE:HPQ) is still embroiled in a scandal or two based on corporate spying and employee impersonations, but that didn't keep the calendar year of 2006 flat by any means. HP overtook rival Dell Inc. (NASDAQ:DELL) in overall revenues in the computer industry last year, helped by refreshed designs along with a bigger focus on the retail and consumer segment.

Will that translate into HP meeting its expectations when it reports this Tuesday, February 20th? We will all see then -- and I'll be live blogging the event right here at http://hpq.bloggingstocks.com, so stay tuned to this website on Tuesday as we cover the HP quarterly webcast in real-time, starting around 2:00 pm Pacific Time.

Analysts surveyed by Thomson Financial estimate HP will earn 62 cents a share for its most recent quarter, excluding one-time items. This would be a 30% increase over the 48 cents a share it earned in the year-ago quarter. Quarterly revenue is also forecast to rise 7% -- to $24.3 billion from $22.6 billion a year ago.

Will HP meet, beat, or blow past expectations? You decide.

Also check out some other earnings reports that we're following, and let us know what you're expecting.