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Earnings Season Almost Over
The fourth quarter earnings season is almost over. A total of 350 firms are due to report, but only 13 are S&P 500 firms. A great many of next week’s reporters are retailers, many of which have fiscal years than end in January, not December. So far earnings season seems to be going well. With 95.8% of the S&P 500 reports in, total net income is up 29.6% over a year ago. The firms reporting this week include AutoZone (AZO), Costco (COST), Heinz (HNZ), Kroger’s (KR), Novell (NOVL) and Range Resources (RRC). It will be a heavy week for economic data. We will get data on Personal Income and Spending, both ISM reports (manufacturing and non-manufacturing), a revised look at Productivity and Unit Labor Costs in the fourth quarter. We wrap up the week with the payroll data for February. Monday * Personal Income is expected to have increased by 0.1% in January, down from a 0.4% increase in December. Personal Spending is expected to have increased by at 0.4%, down from a 0.7% increase December. 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. That started to change a bit last month, and it would be nice to see more increases in paycheck income. 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. * The Chicago Purchasing Managers Index is expected to dip slightly to 67.5 from 68.8 last month. This is a regional “mini ISM.” Like the ISM, any number over 50 indicates expansion, so we are still talking about pretty robust growth, just a bit slower than last month though. Not that significant in and of itself, but it might give a heads up on the ISM number, particularly if there is a big change in it. Tuesday * The ISM manufacturing index is expected to slip slightly from its 60.8 level last month to 60.5%. 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 January. 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. The 60.8 level last month was very strong. * Construction Spending fell by 2.5% in December. The consensus is looking for a decline of 0.6% for January. Look for possible revisions to the December number as well. * Auto and light truck sales probably continued to accelerate from the 12.6 million seasonally adjusted annual rate they posted in January. That is well over 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 187,000 private sector jobs. That set up a big disappointment when the BLS reported a gain of just 50,000 private sector jobs. It was the second month in a row where the ADP number was FAR higher than the BLS number. 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. * Challenger Gray and Christmas, the big outplacement firm, will release its tabulation of large layoffs. They were down 46.1% year over year in January. I would expect a similar year-over-year decline in February. * The Fed Releases its Beige Book, a collection of mostly anecdotal evidence on the state of the economy. The overall tone of the Beige Books has been improving over the last year or so, and I would expect that trend to continue. Thursday * Weekly initial claims for unemployment insurance come out. They have been extremely erratic of late. Last week they fell by 22,000 in the last week, to 391,000. The consensus is for them to bounce slightly to 400,000. Given how volatile initial claims have been over the last month or so, that seems to very possible. Still, even a level of 400,000 seems pretty good compared to the experience of the last few years. After a huge downtrend from mid-April through the end of 2009, initial claims were locked in a tight “trading range." We now appear to have broken out of that trading range to the downside. This could well indicate that the economy is about to start producing a significant number of new jobs. * Continuing claims have also in a downtrend of late, but the road down has been bumpy. Last week they fell by 145,000 to 3.790 million. That is down 1.004 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 fell by 65,000 to 4.437 million, and are down by 1.232 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 9.159 million, which is down 90,000 from last week. The total number of people getting benefits is now 2.235 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. * We get the second read on Productivity growth in the Fourth quarter. In the first look it was 2.6%, up from 2.3% in the third quarter. The consensus is looking for a slight upward revision to 2.7%. However, after today’s downward revision to 4Q GDP growth, that is highly unlikely, and a downward revision to 2.4 or 2.5% growth seems more likely to me. 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). * Unit Labor Costs fell by 0.6% in the fourth quarter in the first look. That is a sharp acceleration in the decline from the 0.1% in the third quarter. The consensus is looking for a revised decline of 0.8%. However if productivity is revised down as I expect, then we will probably see a smaller decline in unit labor costs than in the first look. Still down, but not quite as much. The growth in productivity was greater than the increase in compensation for labor. 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. * The ISM Services Index is expected to have slipped a bit from the extremely strong 59.4 reading in February. The consensus is for it to slip to 59.0. This is also a “magic 50” index, so we could see a decline and still indicate that the service side of the economy is still growing. 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. Friday * The most important report of the week is the employment report. In January, payrolls seriously disappointed by rising by only 36,000 and 50,000 on the private side. Growth should pick up in February, 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 expect total growth of about 172,000 in total and 185,000 on the private side. Revisions to prior months' numbers will also be important, and in recent months they have been upward significantly. The unemployment rate might bump up a bit from the 9.0% rate in January. The consensus is looking for a 9.1% rate. The two-month fall in the unemployment rate is the biggest since 1958, but it has happened without a lot of support from job creation in the establishment survey. Much of the change in the unemployment rate will depend on the civilian participation rate, which fell to 63.2% in January from 64.3% in December. 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 58.4% In January from 58.3% in December, but is still extremely low. The report will probably show that average hourly earnings increased slightly in February, most likely at a slower pace than the 0.4% increase in January. The average workweek was probably unchanged at 34.2 hours. 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: Nacco Industries (NC) is expected to report $4.23 vs. $2.48 last year. Last time out it reported a 4.07% positive surprise, and over the last month the mean estimate for the about-to-be-reported quarter has increased by 1.20%. NC is a Zacks #1 Ranked stock. Silver Wheaton (SLW) is expected to report $0.29 vs. $0.15 last year. Last time out it reported in line with expectations, and over the last month the mean estimate for the about-to-be-reported quarter has increased by 4.02%. SLW is a Zacks #1 Ranked stock. TPC Group (TPCG) is expected to report $0.23 vs. $0.15 last year. Last time out it reported a 18.64% positive surprise, and over the last month the mean estimate for the about-to-be-reported quarter has increased by 25.00%. TPCG is a Zacks #1 Ranked stock. Potential Negative Surprises: AES Corp (AES) is expected to report $0.25 vs. $0.22 last year. Last time out it reported a 20.0% negative surprise, and over the last month the mean estimate for the about-to-be-reported quarter is down 1.96%. AES is a Zacks #4 Ranked stock. Big Five Sporting Goods (BGFV) is expected to report $0.23 vs. $0.32 last year. Last time out it reported a 3.13% disappointment, and over the last month the mean estimate for the about-to-be-reported quarter has been cut by 2.51%. BGFV is a Zacks #5 Ranked stock. Kroger’s (KR) is expected to report EPS of $0.45 vs. $0.39 last year. Last time out it reported in line with expectations, and over the last month the mean estimate for the about-to-be-reported quarter has fallen by 0.62%. KR 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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