Custom Search
|
|
Busy Earnings Week Ahead
It will also be a heavy week for economic data, including data on both ISM surveys (Manufacturing and Service), Personal Income and Spending, Productivity and finally the all important employment report. All in all, it looks like a very busy week, with lots of news that has the potential to move the markets. Monday * Personal Income probably increased by 0.3% in December, matching a 0.3% increase in November. Personal spending probably rose at the same 0.4% pace it rose in November. Of course, if spending is rising faster than income, it implies a fall in the savings rate. Over the short term that is a good thing, but in the longer term that is very bad news. In addition to the amount that Personal income goes up, the data breaks out the sources of that income growth. Over the last few years far too much of that income growth has come from higher transfer payments from the government, and not from higher wages and salaries. Dividend income will probably rise nicely, but be offset by a fall in interest income due to the ultra low interest rate environment we are in. Tuesday * The ISM manufacturing index is expected to slip slightly from its 57.0 level last month. As a “magic 50 index,” that reading would mean that the manufacturing side of the economy is continuing to grow, but it is doing so at a slower pace than it was in December. In addition to the overall index, pay close attention to how some of the key sub-indexes which cover production, new orders and employment are faring. * Construction Spending grew by 0.4% in December. It was probably slightly positive in January as well. * Auto and light truck sales probably continued to accelerate from the 12.5 million seasonally adjusted annual rate they posted in December, that is well off the under-10 million pace at the depths of the Great Recession, but a far cry from the 16 to 17 million annual rates that were the norm before the recession. It will be a very long time before we hit those levels again, but we will continue to see vehicle sales slowly recover. Wednesday * We get the appetizer for the employment report in the form of the ADP employment survey. Last month, the ADP raised hopes greatly when they reported a net increase of 297,000 private sector jobs. That set up a big disappointment when the BLS reported a gain of just 113,000 private sector jobs. As the firm that actually cuts the checks of most companies payrolls, ADP is in an excellent position to gauge the strength of the job market. However, its numbers are often quite different than the private sector jobs numbers that are reported by the BLS on Friday. The BLS numbers do tend to be revised in the direction of the ADP numbers, so the big differential last month might be pointing to an upward revision to the November numbers when the BLS reports. Thursday * Weekly initial claims for unemployment insurance come out. They have been extremely erratic of late. Last week they rose by 51,000 in the last week, to 454,000. I would expect them to decline, perhaps quite sharply, this week. 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 rose by 94,000 to 3.991 million. That is down 847,000 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 98,000 to 4.819 million, and are down by 991,000 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 9.411 million, which is down 224,000 from last week. The total number of people getting benefits is now 2.124 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. * The ISM Services Index is expected to have slipped a bit from the extremely strong 63.5 reading in January. This is also a “magic 50” index, so we could see a very big decline and still indicate that the service side of the economy is still growing. I would be surprised at a major decline, and think we will still stay north of the 60 level, indicating still strong growth. As with the ISM manufacturing index, the behavior of the key sub-indexes of business activity, new orders and employment are at least as interesting as the overall level of the index. * We get the first read on Productivity growth in the Fourth quarter. In the third quarter, it was running at 2.3%. Over the long run, productivity is probably the single most important economic statistic there is. It is productivity, after all, that determines per capita GDP, and that is the GDP growth that really counts. Growing simply because there are more people in the country does not improve living standards. However, in the short term, rapid increases in output per hour are not particularly helpful in raising the number of hours worked (i.e. reducing unemployment). Given the relatively strong growth of 3.2% in GDP in the third quarter, and the still anemic growth in employment during the third quarter, I would expect to see an acceleration in productivity probably to around 2.6%. * Unit Labor Costs fell by 0.1% in the third quarter as the growth in productivity was greater than the increase in compensation for labor. That was probably the case again in the fourth quarter. Falling unit labor costs are one of the big reasons for the high net margin fueled earnings growth that we have been seeing in the recent earnings reports. Essentially all of the gains from productivity growth are accruing to the owners of capital rather than the providers of labor. Capital getting the lion's share of that growth has been the pattern for several years now, but historically the two factors of production tended to share equally in the fruits of productivity growth. In the short term, that is certainly good for corporate profits and hence the stock market. However, the resulting large disparities in income inequality are seen by many (including myself) as one of the underlying causes of the financial meltdown and the resulting Great Recession. Friday * The most important report of the week is the employment report. In December, payrolls seriously disappointed by rising by only 103,000 and 113,000 on the private side. Growth should pick up in January, but total payrolls will likely again be lower than private sector payrolls, as State and Local governments continue to lay people off to deal with their dismal fiscal situations. Consensus estimates are not available, but I would expect total growth of about 175,000 in total and 185,000 on the private side. Revisions to prior month’s numbers will also be important, and in recent months they have been upward. The unemployment rate might bump up a bit from the 9.4% rate in December. Much of the change in the unemployment rate will depend on the civilian participation rate, which fell to 63.4% in December from 64.5% in November. If it continues to decline, the unemployment rate might stay where it is, or even fall further. If the participation rate stops falling, the unemployment rate will likely shoot upwards. That would not really be all bad. The key measure will be the percentage of people who are actually working. That ticked up to 58.3% in December, but is still extremely low. The report will probably show that average hourly earnings increased 0.1% in January, the same pace of growth as in December. The average workweek was probably unchanged at 34.3 hours, the same place it has been for the last three months. Overall, that adds up to middling report. Keep an eye on the duration of unemployment numbers which remain at historically very high levels. 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: Ameriprise Financial (AMP) is expected to report $1.29 vs. $0.91 last year. Last time out it reported a 28.04% positive surprise, and over the last month the mean estimate for the about-to-be-reported quarter has increased by 5.88%. AMP is a Zacks #1 Ranked stock. Novellus (NVLS) is expected to report $0.94 vs. $0.39 last year. Last time out it reported a 4.76% positive surprise, and over the last month the mean estimate for the about-to-be-reported quarter has increased by 0.41%. NVLS is a Zacks #1 Ranked stock. Aetna (AET) is expected to report $0.60 vs. $0.40 last year. Last time out it reported a 25.37% positive surprise, and over the last month the mean estimate for the about-to-be-reported quarter has increased by 1.11%. AET is a Zacks #2 Ranked stock. Potential Negative Surprises: Vulcan Materials (VMC) is expected to report a loss of $0.19 vs. a loss of $0.10 last year. Last time out it reported a 57.89% disappointment, and over the last month the mean estimate for the about to reported quarter has dropped by 1.83%. VMC is a Zacks #5 Ranked stock. Cincinnati Financial (CINF) is expected to report $0.36 vs. $0.53 last year. Last time out it reported an 8.11% disappointment and over the last month the mean estimate for the about-to-be-reported quarter has been cut by 3.23%. CINF is a Zacks #4 Ranked stock. Clorox (CLX) is expected to report EPS of $0.62 vs. $0.77 last year. Last time out it reported a 4.42% negative surprise, and over the last month the mean estimate for the about-to-be-reported quarter has fallen by 14.29%. CLX 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. |
|