subject: Housing and Inflation in Focus [print this page] Housing and Inflation in Focus Housing and Inflation in Focus
Earnings Preview 3/11/11
The fourth quarter earnings season is almost over. A total of just 141 firms are due to report and only 3 are S&P 500 firms, and actually two of those are first quarter reports (fiscal periods ending in February). A great many of next week's reporters are retailers, many of which have fiscal years than end in January, not December.
So far the earnings season seems to be going well. With 98.2% of the S&P 500 reports in, total net income is up 30.5% over a year ago. The firms reporting this week include: Nike (NKE), Ross Stores (ROST), Federal Express (FDX), Federal Signal (FSS) and Dole Foods (DOLE).
It will be a relatively heavy week for economic data. We will get data on both Producer and Consumer Prices, Housing Starts and Building Permits and Industrial Production. In addition, we get a Fed meeting and the Policy Statement that goes with it. Any of those numbers can move the markets.
Monday
* No major economic reports expected.
Tuesday
* The Empire State Index is likely to rise slightly from its February level of 15.43. 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.
* The Federal Reserve is meeting. The near-universal expectation is that the Fed Funds rate will stay in the 0.0% to 0.25% range it has been in since December 2008. Realistically, it cannot go any lower, and the economy is still too weak, and the risk of serious inflation too low to justify increasing it. Since the Fed is already at the zero boundary, it has had to resort to other, less conventional methods of providing a more accommodative monetary policy, known as QE2. The key issue is likely to be if the full $600 billion program will be implemented (I'm pretty sure it will be) and if it might make sense to stretch out the program rather than have it finished in June (tapering off the program so it ends in say September could make some sense). Economists will be parsing each word in the policy statement the way that Kremlinologists would look at who was standing where on Lenin's tomb during the Soviet era. We will provide a paragraph by paragraph analysis of the new policy statement relative to the last one.
Wednesday
* Housing Starts are expected to continue to slide, falling to an annual rate of just 551,000 in February from 596,000 in January. In January, starts were better than expected (although still awful) mostly due to the extremely volatile multi-family part of the market. Single-family starts are a better gauge of the overall pace of housing activity. Single-family starts were only running at an annual rate of 413,000. 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 edge up to 570,000 from 562,000. While any rise is welcome, that would not be enough to even begin to think that housing activity is on the rebound.
* The Producer Price Index (PPI) is expected to have increased by 0.6% in February, down from the 0.8% 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%, down from a 0.5% increase 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. Inflation has generally been higher at the producer level than at the consumer level. In theory, that should indicate some pressure on corporate profit margins, but so far we have seen very little evidence of this happening as net margins continue to rise dramatically. The rapid rise in productivity and falling unit labor costs have more than offset rising input costs.
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 rose by 26,000 in the last week, to 397,000, but that was from the lowest level since May 2008. I would expect the downward trend in claims to reassert itself next week. Still, even a level of 397,000 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 second 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 20,000 to 3.771 million. That is down 923,000 from a year ago. I would expect a further decline this week. Some of the longer-term decline is 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 fell by 201,000 to 4.303 million, and are down by 1.192 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 8.773 million, which is down 463,000,000 from last week. The total number of people getting benefits is now 2.647 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 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, after it declined 0.1% in January. The headline number can sometimes be distorted by the weather, as it includes the output of Utilities. It is thus best to look at what is happening in just manufacturing output as well as the overall number. In January, manufacturing output was up 0.3%. 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 76.5% 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 76.1% level in January. 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.
* The Consumer Price Index (CPI) is expected to rise by 0.4% in February, matching its January rise. 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%, down from a 0.2% rise in January. 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. Inflation, particularly core inflation is not a significant economic problem at this point. Efforts to combat it aggressively are misguided, since those measures will tend to make real economic problems, like unemployment, much worse.
* The Philly Fed Index, another of the regional "mini-ISM's" is likely to slip a bit from the extremely high 35.9 reading last month. Unlike the ISM, zero is the dividing line between growth and contraction for this index. A reading around 30 would still indicate very robust economic growth in the Mid-Atlantic states, but just a bit slower than what we saw last month.
Friday
* No significant economic reports due out.
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.
Given the small number of major companies reporting this week to choose from, I am skipping this section. In the Earnings calendar below, $999.00 should be read as N.A.
