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Ain't Over Yet By: Dirk Van Dijk
Next week the fourth quarter earnings season is in full swing. A total of 492 firms are due to report, including 61 S&P 500 firms. So far the earnings season seems to be going well. The firms reporting this week include several icons of U.S. business, including Cisco (CSCO), Allstate (ALL), Phillip Morris (PM), Kraft Foods (KFT), Disney (DIS),, Coca Cola (KO) and Pepsico (PEP). It will be a relatively light week for economic data, but we will get data on both Deficits, Budget and Trade, as well as on Consumer Credit and the University of Michigan Consumer Sentiment survey. Monday After an unusually long period of decline, Consumer Credit (not including mortgages) rose by $1.3 billion in November. The rebound is expected to continue with a $2.5 billion increase in December. Last month’s increase was mostly due to higher non-revolving credit (such as an auto loan), which offset a small decline in revolving credit (aka credit cards). That was probably the case again in December. Tuesday Nothing of significance. Wednesday The Mortgage Bankers Association will release its weekly tally of new purchase applications. Last week they spiked by 11.3%. That seems unlikely to be repeated and they will probably fall back a bit. Last week Crude Oil Inventories climbed by 2.59 million barrels. Oil inventories probably will increase again, but not by as much. Thursday Weekly initial claims for unemployment insurance come out. They have been extremely erratic of late. Last week they fell by 42,000 in the last week, to 415,000. The consensus is for a further small decline to 413,000. Given how volatile initial claims have been over the last month or so, that seems to be a very unlikely result. That consensus probably has a big range around it. My guess is we see claims rebound again, to about the 430,000 level, but I hope that I am wrong. After a huge downtrend from mid-April through the end of 2009, initial claims have been locked in a tight “trading range." They are knocking on the low end of that trading range, and breaking out to the downside would be very good news. 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. Continuing claims have also in a downtrend of late, but the road down has been bumpy. Last week they fell by 84,000 to 3.925 million. That is down 941,000 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 fell by 68,000 to 4.551 million, and are down by 1.303 million over the last year. 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 9.299 million, which is down 112,000 from last week. The total number of people getting benefits is now 2.289 million below year-ago levels. What is not known is how many people have left the extended claims via the road to prosperity -- finding a new job -- and how many have left on the road to poverty, having simply exhausted even the extended benefits. Make sure to look at both sets of numbers! Many of the press reports will not, but we will here at Zacks. Wholesale inventories are expected to have risen by 1.3% in November. That is a fairly large increase, especially coming on top of a 1.9% rise in October. The Budget deficit has been trending down over the last year, but the recent deal to extend the Bush tax cuts for everyone, as well as extending unemployment benefits and cutting the payroll tax by 2% will reverse that, but probably not by too much in December. The budget deficit is extremely seasonal, but the data is not seasonally adjusted, thus the month-to-month comparisons are worse than useless. The budget deficit for January 2011 is likely to be well above to the $42.6 billion of red ink the Federal Government spilled a year ago. The consensus is looking for $50.0 billion for the month as the effects of the recent Obama-GOP tax deal set in. For fiscal 2011 as a whole, the budget deficit is likely to be higher than for fiscal 2010 ($1.3 Trillion) thanks to the Obama-GOP deal. The CBO is now forecasting $1.5 Trillion. Friday The Trade Deficit is expected to rise to $40.7 billion for December from $38.3 billion in November. That would reverse a two month trend of lower trade deficits and would be bad news. The change in the trade deficit directly impacts GDP growth, and the recent improvement has been one of the more positive things going on in the economy. The level of the deficit is a disaster, even at the November level. The reason we are so far in debt to the rest of the world is the trade deficit, not the budget deficit. The current levels are simply unsustainable over the long term. A weaker dollar would help the cause of bringing it down significantly, but can’t do the trick all by itself. About half the trade deficit is due to our addiction to imported oil, and as the dollar weakens, the price of oil tends to rise, offsetting any potential improvement from the weaker dollar (at least on the oil import side). Until we solve our addiction to imported oil, we are unlikely to eliminate the trade deficit. If we don’t eventually eliminate the trade deficit (and hopefully run trade surpluses), the country will go bankrupt. Moving to using more Natural Gas (lots of domestic supply) as a transportation fuel would be a great help in the medium term, but we need to start working on it soon, and it will need leadership from the Federal Government to make it happen. The University of Michigan Consumer Sentiment index is expected to rise to 75.5 from 74.2 last month. I think that this is a vastly overrated economic indicator, but it can occasionally move markets. While how the consumer feels is theoretically very important, what consumers actually do, and what they say in these surveys are often very different. Still, better to see it move up than down. The level is still well below what is seen in a healthy economy. Potential Positive or Negative Surprises Historically the best indicators of firms 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. Similarly a recent history of earnings disappointments, cuts in the average estimate for the quarter in the month before the report is due and a poor Zacks Rank (#4 or #5) are often red flags pointing to a potential disappointing earnings report. Potential Positive Surprises: Principal Financial (PFG) is expected to report $0.68 vs. $0.62 last year. Last time out it reported a 7.92% positive surprise, and over the last month the mean estimate for the about-to-be-reported quarter has increased by 1.76%. PFG is a Zacks #2 Ranked stock. Polo Ralph Lauren (RL) is expected to report $1.28 vs. $1.10 last year. Last time out it reported a 24.40% positive surprise, and over the last month the mean estimate for the about-to-be-reported quarter has increased by 1.09%. RL is a Zacks #2 Ranked stock. FMC Corp. (FMC - Snapshot Report) is expected to report $1.03 vs. $0.94 last year. Last time out it reported a 0.2.70% positive surprise, and over the last month the mean estimate for the about-to-be-reported quarter has increased by 0.42%. FMC is a Zacks #2 Ranked stock. Potential Negative Surprises: Sara Lee (SLE) is expected to report $0.25 vs. $0.36 last year. Last time out it reported a 27.78% disappointment, and over the last month the mean estimate for the about-to-be-reported quarter has dropped by 5.44%. SLE is a Zacks #5 Ranked stock. Avon (AVP)) is expected to report $0.67 vs. $0.69 last year. Last time out it reported an 12.77% disappointment, and over the last month the mean estimate for the about-to-be-reported quarter has been cut by 0.93%. AVP is a Zacks #4 Ranked stock. Allstate (ALL) is expected to report EPS of $0.86 vs. $1.09 last year. Last time out it reported a 14.43% negative surprise, and over the last month the mean estimate for the about-to-be-reported quarter has fallen by 13.85%. ALL is a Zacks #4 Ranked stock. Article Directory: http://www.articledashboard.com Dirk van Dijk, CFA is the Chief Equity Strategist for Zacks.com. 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 www.zacks.com. |
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