Earnings Preview 12/10/10
The third quarter earnings season is over, and we will actually start to see a handful of fourth quarter reports next week, those with November fiscal ends. Only 63 firms will report, but 6 of those will be S&P 500 firms.
We define any fiscal period ending in November, December and January to be the fourth quarter. While there are a not a lot of reports, the reports we get will provide some early clues on the fourth quarter. The firms reporting this week include: Federal Express (FDX), Oracle (ORCL), Discover (DFS), General Mills (GIS), Best Buy (BBY) and Carnival Cruise Lines (CCL). That is an interesting cross section of the market that may provide clues to the overall direction of the economy.
While things will be quite on the earnings side, the same is not true of the economic data front. Inflation will be in focus to start the week as the PPI comes out on Tuesday followed by the CPI on Wednesday. We will also get data on Retail Sales, Industrial Production, Capacity Utilization, housing Starts and the leading economic indicators. In addition, we have a Fed meeting.
* Nothing of significance.
* We get the Producer Price Index (PPI). It has been running higher than the Consumer Price Index for several months now, particularly on the headline level. Headline PPI is expected to come in at an increase of 0.5% up from 0.4% in October. Excluding food and energy, the rise is not expected to be as big, but to also show more acceleration, with a rise of 0.3% only partially reversing the 0.6% drop in October. Those numbers are for finished goods. The report will also show data further up the production pipeline, which could warn of higher inflation down the road.
* Retail Sales are expected to rise by 0.8%, which is a healthy showing, but down from the very strong 1.2% increase posted in October. The October increase was, however, driven by a sharp rise in Auto sales (relative to September). Stripping them out, overall sales rose just 0.4% in October. Sales ex-autos are expected to accelerate to 0.6% growth.
* The Federal Reserve Open Market Committee is almost universally expected to keep the Fed Funds rate in the 0 to 0.25% range it has been in for over two years now. There should not be any major announcements out of the meeting like there was with the announcement of QE2 last meeting. The market will, however, probably look very closely at the Fed policy statement for any changes from the last meeting.
* The Consumer Price Index (CPI) has been extremely well behaved of late, rising just 0.2% in October. Stripping out food and energy prices, inflation has been even more subdued, unchanged not only in October, but for the last three months in a row. In November the consensus is looking for the headline number to again rise 0.2% while the core barely breaks into positive territory with a 0.1% rise. That would actually be good news as it would diminish the threat of actual deflation.
* The Empire State Manufacturing Index, one of the "mini ISMs" is expected to bounce back to a reading of 2.9% from an extremely and surprisingly weak showing of -11.14 in October. Any reading over 0 indicates an expansion in manufacturing activity in New York State. The expected reading would mean positive but very slow growth, but that is better than the fairly sharp contraction last month. On the other hand, it has been a long time since New York State was a manufacturing powerhouse. This is an index that is best tracked in conjunction with the other regional mini ISMs.
* Industrial Production is expected to have increased by 0.3% after being unchanged in October. The overall Industrial production number can sometimes be a bit misleading. It includes utility output, which is highly weather dependent. Thus it is important to look not only at the overall number, but the change in manufacturing output. The October number was actually much better than the unchanged reading would indicate as it included a 3.4% drop in Utility output. Manufacturing output increased by a healthy 0.5% on the month.
* Capacity Utilization is reported along with Industrial Production. This is a highly underrated economic indicator and deserves a lot more attention than it gets in the press. Effectively it is measuring the employment rate of our physical capital, the way the employment report measures the utilization of our human capital. Overall capacity utilization is expected to rise to 75.0% up from 74.8% in October. That is much better than the 70.7% reading we saw a year ago, but is still historically low and indicating recessionary conditions. A healthy economy has capacity utilization around 80%, so we are about half way back to normal on this measure. As with the Industrial production number it is important to look at the Manufacturing only utilization as well as the overall, since there can be weather related changes in utility utilization. The October unchanged overall reading masked a rise to 72.7% from 72.3% in manufacturing. That was offset by a drop to76.6% from 79.8% in Utility Utilization. I suspect a return to more normal utility utilization will lead to a bigger than expected increase in overall capacity utilization.
* New Claims for Unemployment Insurance have been trending down recently, but erratically. Last week the four-week moving average (which takes out some of the week to week volatility fell to its lowest level since August 2008. The actual reading for the week was 421,000, down from over 500,000 in mid-August. It looks like we have finally moved out of the "trading range" that initial claims have been stuck in for most of the year. That is very good news if it continues. We probably have to get down to under 400,000 and stay there to start to make a serious dent in the army of the unemployed, but at least we are making a serious move in the right direction. A small rebound for the week would not surprise me, but the four week moving average will probably continue to decline.
* Continuing claims have also in a downtrend of late. Last week they fell by 191,000 to 4.086 million. That is down 1.219 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 as well. Federally paid extended claims fell by 393,000 to 4.507 million, and down 120,000 from a year ago (the first year over year decline in this economic cycle). 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 8.298 million, which is down 612,000 from last week. The total number of people getting benefits is now 1.249 million below year-ago levels. The big unknown is if those people are actually finding new jobs, or simply slipping into abject poverty with no income at all. Extended benefits are made up of four tiers, and the ability to move on to the next tier ended on 11/30. Reinstatement of that ability is dependent on the overall tax deal being ratified, which is likely, but not a certainty. Look for a big drop in extended claims next week simply from benefits expiring. Make sure to look at both sets of numbers! Many of the press reports will not, but we will here at Zacks.
* Housing Starts are expected to rebound to an annual rate of 545,000, up from 519,000 in October. That is still a simply awful level of housing starts. Then again with the last six months being the lowest six months in history (back to 1963), there is simply not a big need to increase housing starts. There is still a huge inventory overhang of both new and existing homes, particularly relative to recent sales rates. Still, normally residential investment, of which new home construction is the biggest part, has historically been the locomotive that pulls the economy out of recessions and that locomotive has been derailed this time around. A rebound in housing starts could indicate that housing is getting back on track, and that could indicate much more robust economic growth as we move into 2011. It would not take very heroic absolute levels of housing starts to generate very robust percentage increases from current levels.
* The Philly Fed index, another regional "mini-ISM" is expected to drop to 14.1 from a surprisingly robust 22.5 in October. That would still indicate a healthy rise in manufacturing activity in the mid-Atlantic area, but not quite as fast as last month.
* The index of leading economic indicators is expected to show an increase of 1.2% up from a 0.5% increase last month.
* No numbers of any particular significance.