subject: First Clues to First Quarter [print this page] First Clues to First Quarter First Clues to First Quarter
Earnings Preview 3/18/11
The fourth quarter earnings season is over, but now we are starting to get a few first quarter reports (and a few stragglers for the fourth quarter, many of which are ADRs). That makes for a very light overall earnings week. A total of just 76 firms are due to report. However, an unusually high number of those are members of the S&P 500 -- 17.
The fourth quarter earnings season was a strong one, and this week should start to provide clues if that will be true for the first quarter as well. The firms reporting this week include: Best Buy (BBY), Darden Restaurants (DRI), Discover Financial (DFS), Oracle (ORCL) and Walgreen's (WAG).
It will be a moderate week for economic data. Not a lot of reports, but the ones we will get are important, including both New and Used Home Sales, new orders for Durable Goods and the final look at GDP growth in the fourth quarter. With a very light week for earnings, and a fairly weak week for economic data, the markets will probably be focused on the international crisis du joir and on the budget negotiations.
Monday
* Existing Home Sales are expected to dip to a seasonally adjusted annual rate of 5.05 million from 5.36 million. What is more significant will be the level of inventories, and if the January months of supply rate of 7.6 months can continue to decline. While down from last summer, the level is still extremely high and indicates strong downward pressure on home prices. That really is what to watch in the existing home sales numbers, since the amount of economic activity generated by an existing home changing hands is not really that big a deal. Home prices are a very big deal. Unfortunately, it looks like they are falling again.
Tuesday
* No major economic reports are expected.
Wednesday
* New Home Sales are expected to edge up to an annual rate of 288,000 from 284,000. While a 1.4% increase might look OK, it is coming off an extremely depressed base. In fact, the lowest nine months of New Home Sales on record have been in the last nine months, and if the consensus estimate is hit, make that ten of ten. 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. With the possible exception of the GDP report, this is the most important economic data of the week.
Thursday
* Weekly initial claims for unemployment insurance come out. After being extremely erratic over the holidays, they have started to fall significantly, but are still bouncing around a bit. Last week they fell by 16,000 to 385,000. I would expect the downward trend in claims to continue next week. The consensus is looking for a minor decline to 384,000. A level of 385,000 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" for most of 2010. 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. The four-week moving average (which smoothes out the week-to-week noise) was under the 400,000 for the third week in a row. Historically that has been an inflection point at which the economy starts to add significant numbers of jobs.
* Continuing claims have also in a downtrend of late, but the road down has been bumpy. Last week they fell by 80,000 to 3.706 million. That is down 988,000 from a year ago. I would expect a further decline this week. Some of the longer term decline due to people simply exhausting their regular state benefits which run out after 26 weeks. But those don't last forever either. Federally paid extended claims rose by 54,000 to 4.303 million, and are down by 1.690 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 8.954 million, which is up 181,000,000 from last week. The total number of people getting benefits is now 2.769 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.
* New Orders for Durable Goods are expected to have risen by 0.9% in February. That would be on top of a 2.7% rise in January. These numbers are frequently revised, and most forecasters think that the January numbers are more likely to be revised up than down. The January increase was due to a big percentage gain in orders for Transportation equipment, most notably civilian aircraft. Those orders had fallen to nearly nothing in December, so it was mostly a "division by zero effect." 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 fell by 3.6% in January. That number is also likely to be revised to show a smaller decline. For February, growth of 1.8% is expected. Changing the base can have a significant effect on the month-to-month change, and are worth paying attention too.
Friday
* We get the final look at the Big Kahuna, GDP growth in the fourth quarter. While that might be a bit of "old news," it is the most comprehensive measure of how well the economy is doing. In the first look, GDP grew at an annual rate of 3.2%, but the second peak at the data showed a big downward revision to just 2.8% growth. While that was a acceleration from the 2.6% in the third quarter, it was widely seen as being a disappointment. The quality of the growth was, however, far better than that of either the second or third quarters. The growth came from higher consumer spending and an improvement in net exports, not from simply re-stocking of inventories. The composition of growth is just as important and the overall level of growth. For the final look at the data, the consensus is looking for a small upward revision to 2.9% growth.
