EARNINGS SEASON TO KICK-OFF

By Dirk Van Dijk, CFA

Next week marks the semi-official start of fourth-quarter earnings season. Things will be getting off to a slow start, with only 37 firms due to 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, and many of those reporting have November fiscal period ends.

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 next week include Alcoa (AA – Analyst Report), Apollo Group (APOL – Analyst Report), Intel (INTC – Analyst Report), JPMorgan Chase (JPM – Analyst Report), Lennar (LEN – Analyst Report) and Supervalu (SVU – Analyst Report). That is an interesting cross-section of the market that may provide clues to the overall direction of the economy.

While things will be quiet on the earnings side, the same is not true of the economic data front. We will get the reads on the two deficits, Budget and Trade, as well as inflation at both the producer and consumer levels. In addition, data on Retail Sales and Industrial Production and Capacity Utilization is due out. All of those data points have the potential to move the markets.

Monday

• Nothing of significance.

Tuesday

• Wholesale inventories are expected to have risen by 1.3% in November. That is a fairly large increase, especially coming on top of a 1.9% rise in October.

Wednesday

• The Budget deficit has been trending down over the last year, but the recent deal to extend the Bush tax cuts for everyone, as well as extending unemployment benefits and cutting the payroll tax by 2% will reverse that, but probably not by too much in December. The Budget deficit is extremely seasonal, but the data is not seasonally adjusted, thus the month-to-month comparisons are worse than useless. The budget deficit for December 2010 is likely to be close to the $91.4 billion of red ink the Federal Government spilled a year ago. If I had to bet on the direction, it is more likely to be lower than higher than it was last year as the economy has been recovering and that should aid revenue collection, but a minor move in either direction relative to last year would not surprise me. For fiscal 2011 as a whole the budget deficit is likely to be higher than for fiscal 2010 ($1.3 trillion) thanks to the Obama-GOP deal.
• The Fed will release its Beige Book, which is a collection of mostly anecdotal evidence from around the country. The tone of the books has generally been improving over the last year and I would expect that trend to continue.

Thursday

• The Producer Price Index (PPI) is expected to have increased by 0.7% in December, down slightly from the 0.8% increase it posted in November. Most of the increases are likely to come from higher food and especially energy prices. Strip out those volatile components and the increase is expected to be only 0.2%, down from 0.3% 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.
• Initial Claims for Unemployment Insurance have finally broken out of the trading range they were in for most of 2010, and have done so to the downside (that's good). There was a massive drop over the Christmas week, but that was partially reversed last week. Last week they rose to 409,000 an increase of 18,000. The Christmas week number was the first drop below the 400,000 level in this cycle, but it proved to be too good to be true. The consensus is looking for the reversal to continue with a rise to 420,000. 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.
• Continuing claims have also in a downtrend of late, but the path has been erratic. Last week they fell by 47,000 to 4.103 million. That is down 897,000 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 fell by 23,000 to 4.507 million, and down 950,000 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.
• The Trade Deficit is expected to rise to $40.6 billion for November from $38.7 billion in October. That would reverse a two-month trend of lower trade deficits and would be bad news. The change in the trade deficit directly impacts GDP growth, and the recent improvement has been one of the more positive things going on in the economy. The level of the deficit is a disaster, even at the October level. The reason we are so far in debt to the rest of the world is the trade deficit, not the budget deficit. The current levels are simply unsustainable over the long term. A weaker dollar would help the cause of bringing it down significantly, but can't do the trick all by itself. About half the trade deficit is due to our addiction to imported oil, and as the dollar weakens, the price of oil tends to rise, offsetting any potential improvement from the weaker dollar (at least on the oil import side). Until we solve our addiction to imported oil, we are unlikely to eliminate the trade deficit. If we don't eventually eliminate the trade deficit (and hopefully run trade surpluses), the country will go bankrupt. Moving to using more Natural Gas (lots of Domestic Supply) as a transportation fuel would be a great help in the medium term, but we need to start working on it soon, and it will need leadership from the Federal Government to make it happen.

Friday

• The Consumer Price Index (CPI) is expected to rise by 0.4% in December after being up only 0.1% in November. Inflation has been very tame over the last year. Most of the acceleration 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.
• Retail Sales are expected to have increased by 0.7% in December on top of a 0.8% increase in November. While this is a very broad measure of Consumer Spending, not just what goes on at the malls, based on the relatively week results posted by some of the major retail chains this week, I would have to take the under on this number. The East Coast snow storm probably didn't help matters either. Excluding autos, sales are expected to have risen 0.6% down from a 1.2% increase in November. The sales reports from the auto companies earlier this week were better than expected, so I wouldn't be surprised if the ex-autos number is weaker than expected, even if the headline number does manage to meet or even exceed expectations.
• The University of Michigan Consumer Sentiment index is expected to rise to 75.0 from 74.5 last month. I think that this is a vastly over rated economic indicator, but it can occasionally move markets. While how the consumer feels is theoretically very important, what consumers actually do, and what they say in these surveys are often very different. Still, better to see it move up than down. The level is still well below what is seen in a healthy economy.
• Finally, 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 0.4% in December matching its November rise. 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 getting colder because it is December, not November) weather in December, we might get a bit of an “artificial” boost to the overall number. 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 75.5% 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. 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 implement the $600 billion QE2 program.

Potential Positive or Negative Surprises

Historically the best indicators of firms which are 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. While normally firms that report better-than-expected earnings rise in reaction, that has not been the case so far this quarter. Given the small number of firms reporting, we skip this section this week.

Earnings Calendar

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.

More about Zacks Strategic Investor >>

Post Footer automatically generated by Add Post Footer Plugin for wordpress.