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Earnings Season In Full Swing
Next week the fourth quarter earnings season is in full swing. A total of 481 firms are due to report, including 129 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 almost half of the Dow 30. Some of the more significant companies to report next week are: American Express (AXP), Boeing (BA), Caterpillar (CAT), Chevron (CVX), DuPont (DD), Ford (F), Johnson & Johnson (JNJ) Microsoft (MSFT) and McDonald’s (MCD). And that's just in the first half of the alphabet! It will also be a fairly heavy week for economic data, including data on new home sales, durable goods orders, and the first read on fourth quarter GDP. The Federal Reserve is also scheduled to meet next week. Clearly there will be data with the potential to move the markets. Monday * Nothing of significance. Tuesday * The Case Schiller home price index showed a year-over-year increase of just 0.8% for October, and the month-over-month changes in home prices, based on the composite 20-city index have been negative for the last four months. I would expect the downward slide in prices to continue and for the year-over-year change to fall back into negative territory based on the November data. The Case Schiller index is the gold standard for tracking housing prices, but we are talking about November data here (actually a three-month moving average of September, October and November data) so it tends to be on the stale side. Still, given that housing equity is the primary store of wealth for millions of people, changes in home prices are very significant. They also have a very significant bearing on how much worse the foreclosure situation is going to get. * The Consumer Confidence Index is likely to improve slightly from its December reading of 52.8. While improving, it remains at a very low level. I am not a big fan of this indicator as what consumers say in these surveys does not always match what they actually do. Still, better to see it moving up than down. Wednesday * New Home Sales are expected to bounce to an annual rate of 300,000 from 290,000. While a 3.4% increase might look OK, it is coming off an extremely depressed base. In fact, the lowest seven months of New Home Sales on record have been in the last seven months, and if the consensus estimate is hit, make that eight of eight. It is hard to overestimate the importance of New Home Sales to the overall economy, especially in the early stages of an economic recovery. The low level of New Home Sales (and hence the low level of homebuilding activity) is the principal reason that this recovery has been so anemic. Every home built generates a huge amount of economic activity that feeds through the entire economy. * The Federal Reserve is almost universally expected to keep the Fed Funds rate unchanged at between 0 and 0.25%. It will probably keep the rate there through all of 2011. While the overall economy does seem to be picking up, it is not likely that they will change their Quantitative Easing program (QE2). Last year’s lone dissenter, Tom Hoenig, is no longer a voting member. It will be interesting to see if any of the new members take up his stance in favor of a tighter monetary policy. We will parse the Policy Statement closely for any changes. Thursday * New Orders for Durable Goods are expected to have risen by 1.9% In December. That would more than reverse the 1.3% decline in November. The October decline was due to a fall-off in orders for Transportation equipment, most notably civilian aircraft. Those orders are expected to rise in December. That is an extremely “lumpy” area for new orders, as just a few jumbo jets can swamp order growth or declines for the rest of the economy in any given month. Excluding transportation equipment, orders actually increased by 2.4% in November. These numbers, both total and excluding transportation, can be heavily revised. Changing the base can have a significant effect on the month-to-month change, and are worth paying attention too. * Initial Claims for Unemployment Insurance dropped by 37,000 last week to 404,000. Initial claims have been extremely volatile of late, but that is not terribly unusual around the holidays. There was a massive drop over the Christmas week, but then two weeks of big increase tempered those hopes. Last week’s numbers revived the hope that we have finally broken out of the “trading range” in initial claims we were stuck in for most of 2010 to the downside. We probably need to see them fall below 400,000 and stay there to signal the economy is adding enough jobs to finally bring down the unemployment rate. We are getting closer, but are not there yet. Just staying near last week’s 404,000 level would probably be considered good news by the market. * Continuing claims have also in a downtrend of late, but the path has been erratic. Last week they fell by 26,000 to 3.861 million. That is down 1.034 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, but even extended claims have started to decline (erratically) as well. Federally paid extended claims rose by 29,000 to 4.677 million, and down 979,000 from a year ago. Looking at just the regular continuing claims numbers is a serious mistake. Make sure to look at both sets of numbers! Many of the press reports will not, but we will here at Zacks. Friday * GDP is expected to have risen at an annual rate of 3.8% in the fourth quarter up from 2.6% growth in the third quarter. The composition of growth will be as important as the absolute level of growth. In the third quarter, a very large part of the overall growth came from a very low quality source, namely increases in inventory investment. It is likely that the quality of growth will be better, as well as the level, in the fourth quarter. Look for a bigger contribution from consumer spending and from business investment in plant and equipment, and for net exports to be less of a drag on growth. We will provide a complete breakdown of where the growth came from here at Zacks. * The Employment Cost Index is expected to have risen at an annual rate of 0.4% in the fourth quarter, unchanged from the third quarter pace. This is a very low level, and one that indicates that most of the benefits of productivity growth are flowing to the owners of capital, not the providers of labor. This has been a key reason from the rapid increase in net margins, and hence earnings growth. 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: Caterpillar (CAT) is expected to report $1.27 vs. $0.41 last year. Last time out it reported a 11.93% positive surprise, and over the last month the mean estimate for the about to reported quarter has increased by 0.66%. CAT is a Zacks #2 Ranked stock. Eaton (ETN) is expected to report $1.66 vs. $0.35 last year. Last time out it reported a 15.94% positive surprise, and over the last month the mean estimate for the about to reported quarter has increased by 0.53%. ETN is a Zacks #2 Ranked stock. Halliburton (HAL) is expected to report $0.63 vs. $0.28 last year. Last time out it reported a 3.57% positive surprise, and over the last month the mean estimate for the about to reported quarter has increased by 1.31%. HAL is a Zacks #2 Ranked stock. Potential Negative Surprises: Noble Energy (NE) is expected to report $0.34 vs. $1.72 last year. Last time out it reported a 7.14% disappointment and over the last month the mean estimate for the about to reported quarter has dropped by 6.82%. NE is a Zacks #4 Ranked stock. Covenant Transportation (CVTI) is expected to report $0.06 vs. a loss of $0.20 last year. Last time out it reported a 18.75% disappointment, and over the last month the mean estimate for the about-to-be-reported quarter has been slashed by 54.3%. CVTI is a Zacks #5 Ranked stock. USG Corp. (USG) is expected to report a loss of $0.81 vs. a loss of $1.17 last year. Last time out it reported a 30.51% negative surprise, and over the last month the mean estimate for the about to reported quarter has fallen by 0.8%. USG is a Zacks #5 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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