Stuffing the Turkey with Data Earnings Preview 11/19/10 The third quarter earnings season is now almost over; just a handful of stragglers, mostly October fiscal ends, are left to report. Next week only 81 firms will report, but 9 of those will be S&P 500 firms, including Hewlett Packard (HPQ), Analog Devices (ADI), Medtronic (MDT), Campbell Soup (CPB) and Deere (DE). We define any fiscal period ending in August, September and October to be the third quarter. On the economic data front, everything will be squeezed into two days, Tuesday and Wednesday, but they will be very busy days with both new and used homes sales, personal income and spending, durable goods, and the second look at GDP growth in the third quarter. Oh, and in addition we get the minutes from what was probably the most contentious Federal Reserve Open Market Committee meeting in decades. Monday * Nothing of significance. Tuesday * We get the second look at the whole enchilada, GDP, in the third quarter. In the first look, growth was reported at 2.0%, up from 1.7% growth in the second quarter, but still anemic for coming out of a recession. More recent data -- on inventories and international trade in particular, but also revisions to the employment numbers -- suggest that the numbers will be revised upwards. The consensus is for growth of 2.3%. It will be important to look at more than just the headline number -- where the growth comes from is important. If all, or even most, of the upward revision is due to just stocking the shelves with more inventory, it will not be a good sign. If it comes from a better trade picture, higher business investment or more consumer spending, it will be good news. At Zacks we will provide a complete analysis of what each part of the economy added or subtracted from growth in the third quarter. * Existing home sales are expected to have edged up ever so slightly in October, rising to an annual rate of 4.55 million, up from a rate of 4.53 million in September. The actual level of used home sales is not that important to the economy. What does matter is the level of sales relative to the number of houses for sale, or months of supply. That metric has been in the double digits for the last few months, on par with where it was in the worst of the home price collapse of 2008 and early 2009. That will be an indicator of just how much further home prices will fall. The level and direction of existing home prices is extremely important, as home equity is a major store of wealth for the U.S. middle class. Also when it goes negative, foreclosures tend to follow. Wednesday * Personal income is expected to have risen by 0.4% in October after having declined by 0.1% in September. This is a broad definition of income, including not just wages, but also interest, dividends, small business income, and government transfer payments (such as Social Security). In other words, all the fuel people need to spend and save. The composition of income is as important as the overall level. The report will also show the change in Personal Spending, or Personal Consumption Expenditures, which accounts for 71% of GDP. That is also expected to rise 0.4%, accelerating from a 0.2% increase in September. If both spending and income rise at the same rate it implies no change in the savings rate. Over the long term, we need the savings rate to rise, but in the short term, a rising savings rate lows the economy. * In what is possibly the most important report of the week, new home sales are expected to have rebounded slightly in October to an annual rate of 320,000 from a near record low of 307,000 (the five lowest sales rates on record, have been in the last five months, and the records go back to the Kennedy Administration). While if achieved, that would mark a nice percentage increase, it is still at an absolutely dismal level. Unlike used home sales, each new home sale represents a huge amount of economic activity. The extremely low level of new home sales is the principal reason why the economic recovery has been so sluggish. * Weekly initial claims for unemployment insurance come out a day early due to Turkey Day. They rose by 2,000 in the last week, to 439,000. On the other hand, they have been trending downward since hitting 502,000 in August. After a huge downtrend from mid April through the end of 2009, initial claims have been locked in a tight trading range, but are now knocking on the door of breaking out to the downside (a good thing). We probably need for weekly claims (and the four-week moving average of them) to get down to closer to 400,000 to signal that the economy is adding enough jobs to make a dent in the unemployment rate. A rate of over 500,000 signals that the unemployment rate is probably headed back up and a high probability of a double dip. The current numbers are consistent with the sort of jobless recovery we have been seeing so far this year, some absolute job growth, but not enough to really put much of a dent in the vast army of the unemployed. * Continuing claims have also in a downtrend of late. Last week they fell by 48,000 to 4.295 million. That is down 1.331 million from a year ago. Some of the longer-term decline due to people simply exhausting their regular state benefits which run out after 26 weeks. Federally paid extended claims rose by 121,000 to 4.933 million, but that is still up 735,000 from a year ago. Looking at just the regular continuing claims numbers is a serious mistake. They only include a little over half of the unemployed now given the unprecedentedly high duration of unemployment figures. A better measure is the total number of people getting unemployment benefits, currently at 8.854 million, which is up 145,000 from last week. The total number of people getting benefits is now 458,000 below year-ago levels. The big unknown is if those people are actually finding new jobs, or simply slipping into abject poverty with no income at all. Unless Congress acts soon, extended benefits for over 2 million people will start to end on 11/30. That could act as a significant drag on the economy. Make sure to look at both sets of numbers! Many of the press reports will not, but we will here at Zacks. * New Orders for Durable goods are expected to have risen by 0.7% in October, a sharp slowdown from the 3.3% increase reported in September. However, the September rise was all (and then some) due to a sharp increase in the very volatile transportation equipment segment, including civilian aircraft. Orders for Jumbo jets tend to be very lumpy. Excluding the transportation equipment, new orders actually fell by 0.8% in September. In October, transportation equipment is again expected to lead the way, but not quite so dramatically. Excluding transportation, orders are expected to edge down by 0.1%. I suspect we will do a little better than that. * The University of Michigan consumer sentiment index is expected to rise ever so slightly to 69.5 from 69.3. It remains very depressed. I am not a big fan of this, or the similar Consumer Confidence number. Theoretically it should be important given how significant consumer spending is to the economy. The problem is that what consumers say in the surveys is often not a good match with what they actually do. * Finally we get the minutes from the 11/3 FOMC meeting. That was the meeting in which they decided to launch the QE2, a $ 600 billion program of buying longer term T-notes. The move has been highly controversial, and probably generated a fair amount of heated conversation around the conference table. I think the move was the right thing to do. It will help a bit at the margin, but is really a poor substitute for what the economy really needs: more fiscal stimulus. Unfortunately, starting in 2011, fiscal policy is likely to start moving rapidly in the wrong direction, towards austerity (well at least for the bottom 98% of the population, money will continue to be thrown at the rich in the form of extending the tax cuts for the very wealthy). The reduction in government spending is likely to act as a significant drag on economic growth. QE2 will be able to offset only some of that damage. Thursday * Bellies are stuffed, football is watched. I hope you have a Tasty Turkey. Happy Thanksgiving, and travel safely. Friday * No numbers of any particular significance. People will rush to the malls for Black Friday, the traditional start of the Holiday shopping season. Anecdotal evidence of just how crazy and crowded the stores are will be of great interest. Potential Positive or Negative Surprises Historically, the best indicators of firms which are likely to report positive surprises are a recent history of positive surprises and rising estimates going into the report. The Zacks Rank is also a good indicator of potential surprises. While normally firms that report better-than-expected earnings rise in reaction, that has not been the case so far this quarter. Given the small number of firms reporting, we skip this section this week. Dirk van Dijk, CFA is the Chief Equity Strategist for Zacks. With more than 25 years investment experience he has become a popular commentator appearing in the Wall Street Journal and on CNBC. Dirk is also the Editor in charge of the market-beating Zacks Strategic Investor service. For more information, visit zacks.
Posted on: Sun, 24 Nov 2013 18:28:50 +0000
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