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Earnings Season Enters Final Stretch
We are not done with the fourth quarter earnings season yet, but by the end of next week we will be close. A total of 420 firms are due to report, including 51 S&P 500 firms. So far the earnings season seems to be going well. With almost three quarters of the S&P 500 reports in, total net income is up 27.4% over a year ago. The firms reporting this week include several icons of U.S. business, including Apache (APA), Analog Devices (ADI), Campbell Soup (CPB), Dell (DELL), Deere (DE), Duke Power (DUK) and Waste Management (WM). It will be a relatively heavy week for economic data. We will get data on Inflation at both the Producer and Consumer Level, as well as on Industrial Production and Capacity Utilization. We will also get the numbers on Retail Sales and Housing Starts. Any of those numbers has the power to move the markets. Monday * Lots of roses and chocolates are sold. Tuesday * Retail sales are expected to have climbed by 0.5% in January after a 0.6% rise in December. This is a very broad measure of retail sales, not just pending at the mall. It also includes Auto sales. Excluding them, sales are expected to have risen 0.6% on top of a 0.5% rise in December. However, January is a much less important month for retail sales than is December. * The Empire State Index is expected to rise to 16.0 from 11.92. It is sort of a mini-ISM, just covering New York State, only with zero as the dividing line between expansion and contraction. Thus the economy is expected to continue to expand in NY and at a faster pace than last month. * The National Association of homebuilders index is expected to remain at 16, an awful showing. Any reading below 50 indicates a contraction. While off its all time low of 9 set in January 2009, it is still pointing to a very weak environment for the homebuilders. Wednesday * Housing Starts are expected to creep up to an annual rate of 540,000 from 529,000 in December. This is an extremely low level. The good news is that the low level of housing starts means that less housing is being added to the current bloated inventory. The bad news is that normally homebuilding is one of the main forces pulling the economy out of a recession and that is simply not happening this time. The very low level of housing starts is one of the key reasons job growth is so sluggish. * The bad news for the homebuilders is likely to continue into the Spring. Building permits, the best indicator of future housing starts, are expected to fall to 580,000 from 635,000. That is an 8.7% decline off of an already very depressed level. * The Producer Price Index (PPI) is expected to have increased by 0.7% in January, down from the 1.1% increase it posted in December. Most of the increases are likely to come from higher food and especially energy prices. Stripping out those volatile components and the increase is expected to be only 0.2%, the same as last month. Those numbers are for finished goods. The report also includes data on prices further up the production chain. Most likely the increases at the intermediate and crude levels of production will be higher, indicating potential price pressures down the road. * The Mortgage Bankers Association will release its weekly tally of new purchase applications. Last week they fell by 5.5%. With mortgage rates climbing, I would not be surprised to see another decline. * Last week, Crude Oil Inventories climbed by 1.9 million barrels. Oil inventories probably will increase again, but not by as much. * We get what I think is one of the most important reports of the week, Industrial Production and Capacity Utilization. Industrial production is expected to have increased by 0.6% in January down from a very robust 0.8% increase in December. The headline number can sometimes be distorted by the weather, as it includes the output of Utilities. Given the relatively cold (relative to normal, not just cold because it is January) weather, we might get a bit of an “artificial” boost to the overall number (as also happened in December). It is thus best to look at what is happening in just manufacturing output as well as the overall number. Capacity Utilization can suffer from the same weather related problems that Industrial Production can. Still it is a very good gauge of the economy, particularly if one just looks at factory utilization. Since the end of the recession, capacity utilization has staged a dramatic comeback, but that is from disastrously low levels. The expected 76.4% level (overall, factory only consistently runs slightly below the overall number) is about as low as we got at the bottoms of most recessions prior to the Great Recession. Still that is a nice increase from the 76.0% level in December. It indicates that there is still very significant slack in the economy and provides the green light to the Fed to keep the Fed Funds rate pegged at zero and to fully implement the $600 billion QE2 program. Thursday * Weekly initial claims for unemployment insurance come out. They have been extremely erratic of late. Last week they fell by 36,000 in the last week, to 383,000, the lowest level since the summer of 2008. The consensus is for a bounce back to 410,000. Given how volatile initial claims have been over the last month or so, that seems to be very possible. That consensus probably has a big range around it. The big decline over the past two weeks might have been the unwinding of high weather-related claims previously. If we see a further decline, it will be exceptionally good news. 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 has been bumpy. Last week they fell by 47,000 to 3.888 million. That is down 908,000 from a year ago. Some of the longer-term decline is due to people simply exhausting their regular state benefits, which run out after 26 weeks. Federally paid extended claims rose by 84,000 to 4.636 million, and are down by 1.092 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 9.406 million, which is up 106,000 from last week. The total number of people getting benefits is now 2.139 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 Consumer Price Index (CPI) is expected to rise by 0.3% in January after being up 0.5% in December. Inflation has been very tame over the last year. Most of the rise is expected to come from the volatile food and energy components of the index. Stripping them out to get to the core CPI, the increase is expected to be only 0.1%, matching the November increase. Rent and Owners Equivalent Rent together make up over 30% of the overall CPI and more than 40% of core CPI and are likely to be either unchanged or up just 0.1% as they have been for the last year or so, thus keeping the overall increase in inflation very low. * The Philly Fed Index, another of the regional “mini-ISMs” is expected to rise to 21.9 from 19.3. Unlike the ISM, zero is the dividing line between growth and contraction for this index. Thus, the expectation is that growth in the Middle Atlantic States will have accelerated from an already robust level. Friday * Nothing of significance. 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: John Deere (DE) is expected to report $1.00 vs. $0.57 last year. Last time out it reported a 12.63% positive surprise, and over the last month the mean estimate for the about-to-be-reported quarter has increased by 1.59%. DE is a Zacks #2 Ranked stock. Hormel Foods (HRL) is expected to report $0.85 vs. $0.82 last year. Last time out it reported a 13.92% positive surprise, and over the last month the mean estimate for the about-to-be-reported quarter has increased by 0.32%. HRL is a Zacks #2 Ranked stock. Analog Devices (ADI) is expected to report $0.65 vs. $0.43 last year. Last time out it reported a 4.29% positive surprise, and over the last month the mean estimate for the about-to-be-reported quarter has increased by 0.14%. ADI is a Zacks #2 Ranked stock. Potential Negative Surprises: Intuit (INTU) is expected to report $0.28 vs. $0.27 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 dropped by 6.99%. INTU is a Zacks #4 Ranked stock. American Car (CRMT) is expected to report $0.57 vs. $0.53 last year. Last time out it reported a 12.50% disappointment, and over the last month the mean estimate for the about-to-be-reported quarter has been cut by 5.76%. CRMT is a Zacks #4 Ranked stock. Vectrin (VVC) is expected to report EPS of $0.54 vs. $0.67 last year. Last time out it reported a 23.08% negative surprise, and over the last month the mean estimate for the about-to-be-reported quarter has fallen by 7.43%. VVC 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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