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Earnings News Couldn’t Trump Economic News Last Week
Two 1% up days, followed by one flat day, and two down days balanced out to a neutral week, but at least July was a positive month for equities. The DJIA eked out a gain of less than 1%, while the S&P 500 and NASDAQ each fell by less than 1%. Telecom and Financials rose almost 2% and 1%, respectively, while Technology fell by almost 2%. The earnings news continued to do well, although, maybe a little less well than in the week before. But the economic news continues to deteriorate.
Sell-Side Sentiment Inches Further Downward and Remains Bearish
First Coverage Market Sentiment remained bearish for the sixth week in a row. The drop last week in the sell-side sentiment overall number was only a modest 0.5%, but it was the ninth week in a row of declines. The decline would have been more severe if not for a huge 10% gain in sentiment in the Health Care industry. Sentiment declined in seven of the 10 industries, with declines of 2.7% or more in six of the 10. Sentiment has now dropped below the 2008 sentiment high set in the spring of that year but is still well above the level hit in late summer of that year before the market fell apart that fall. The rate of decline in sentiment the last two months is much more gradual than that of two years ago. So far, the sell-side sentiment indicators are not predicting a market collapse like what occurred in late 2008, but they are certainly not as bullish as in the spring of this year.
Oil & Gas Hangs on as Top Rated Industry
Although sentiment for Oil & Gas fell 3% last week, it held on as the most highly rated industry. It has been the highest rated or one of the highest rated industries for three months, but there is still no established direction as to where sentiment for the industry is headed. Industrials, Health Care, and Technology closed the gap on Oil & Gas last week. Sentiment for Industrials was only up 1%, but after sentiment had fallen off in May and June, it now seems to be bottoming out as overall sentiment declines. Health Care had fallen out of the top rated group in June, but the big 10% pop last week put it back up with the leaders.
A 3% drop in sentiment for Consumer Services kept it as the bottom rated industry, but a 4% drop in Consumer Goods and a 3% drop in Telecom sentiment left them not much above Consumer Goods. No industry sentiment index yet carries a bearish rating, but the aforementioned three are rated neutral, with Consumer Goods joining that category last week.
Earnings Did Their Job Again Last Week but to No Avail
Earnings reports have moved offstage. Two-thirds of the S&P 500 has now reported, and as we expected, the results have been much better than expectations. So far, earnings have come in 10% above final expectations. On average, earnings beat estimates by about 3%. Final results will probably show Q2‘10 S&P 500 earnings growth of 40%, compared to 23% expected at the beginning of the quarter and 27% at the beginning of the earnings reporting season. Revenues, at 9% so far, were good but did not quite measure up as well as earnings. About one-third of the S&P 500 companies failed to meet analyst revenue estimates. Among the companies we consider bellwethers, the results were not so encouraging last week. DuPont (NYSE:DD) was a star on earnings and guidance, but US Steel (NYSE:X) and International Paper (NYSE:IP) had negative things to say. Masco (NYSE:MAS), Ryder (NYSE:R), and Samsung (OTC:SSNLF) were lukewarm at best in their comments. Bellwether FedEx (NYSE:FDX) provided some good news when it pre-announced it had raised its outlook for the August quarter, but it did not upgrade the outlook for the following three quarters of its fiscal year. An ominous comment regarding the employment dilemma came from Robert Half, which said it is seeing a secular shift to more use of temporary help.
Despite the very good Q2‘10 earnings reports, looking ahead on earnings is what it should be all about. Unfortunately, there is nothing very definitive as of yet. Guidance has not been as strong as earnings results but is still good. Earnings growth estimates for Q3‘10 fell slightly last week to 25%, but the trimming is still less than average at this stage of a quarter. The sample size for earnings pre-announcements for Q3‘10 is still too small to draw good conclusions.
The most meaningful economic reports of the week, durable goods orders and consumer confidence were both disappointing. The two housing reports had positive headlines but, in reality, were not very good. GDP for Q2‘10 came in at a weak but expected 2.4%, but Q1‘10 was revised upward to 3.7%. Consumer spending growth fell from 3.8% to 1.4%. However, we don’t think the GDP number is necessarily a good indicator of trends. It is very volatile from quarter to quarter and is frequently revised by substantive amounts.
Overall durable goods orders declined for the second month in a row, but the good news was the non-defense capital goods component, a key measure of business spending, rose. It was up 17% from a year ago, led by spending for technology.
Consumer confidence fell for the second month in a row to 50.4, just above the 50.0 divide between expansion and contraction, and just below the 51.0 estimate. The July drop from June was 3.9, less than the revised 8.2 drop in June. Jobs and income prospects were the prime problems. Both expectations and present situation views fell, but the former was down the most. Despite the two substantively down months, consumer confidence has not broken out to the downside from its yearlong trough centered around 52. So far, confidence is lackluster, but no worrisome trend of yet.
June new home sales at 330k rebounded a whopping 24% from May, but May sales were reduced from 300k to 267k, by far the lowest since records began in 1963. The “whopping 24% rise” was basically meaningless given the ridiculously low base distorted by the homebuyer tax credit. Nevertheless, the market jumped up on the announcement. The June sales were still well below the 422k in April, the last month to benefit from the homebuyer tax credit. Furthermore, June new home sales were 17% below the sales for the year ago month. Inventories did decline from 9.6 months in May to 7.6 months in June. The median price continued to slide downward, with a 1% drop in June, following a 1% drop in May. The June median price was down 1% from a year ago. At best we can say we are in a housing bottom that has lasted for over a year.
Finally, we got an upturn in home prices! But it means nothing! First, the Case Shiller Index results were only for the three-month period ending back in May, so the results are old. Second, the May period included the last two months that benefitted from the homebuyer tax credit. Third, the rise from the April ending period was only 1.3% for the 20-city index seasonally unadjusted and replacing February with May in the reporting period has a big positive seasonal effect.
Market Shifts Its Focus from Earnings to the Economy
Earnings reports are still in the news. Another 19% of the S&P 500 report this week. But with two-thirds of the S&P 500 having reported, the die is now cast for earnings, so the market will swing its attention back to what is going on in the economy. This week gives us plenty of opportunities.
This is an immense week for critical economic reports. The key reports to tracking the economic recovery are employment, housing and consumer spending. In addition to the most important report of all these days – the monthly employment report, this week provides several top consumer spending related reports and a key housing report. If all that isn’t enough, throw in a couple of manufacturing and a service reports. If you want to vacation in August, you’d best pick a later week in the month.
In trying to interpret all this data in this period of unusually uncertain economic times, remember that it is even more difficult because of several unusual factors that skew some of the data. Employment data is currently distorted by census workers being laid off and by GM not taking its seasonal shutdown for retooling. Housing is skewed by the homeowner tax credit.
All this means that you should put less value on the weekly or monthly changes in the data affected. Even in more normal times the market tends to overreact to short-term wiggles in economic data (as on last week’s new home sales that excited the market), rather than looking at trends and paying attention to the anomalies that may be causing short-term perturbations in those longer-term trends.
It may be a big week for economic reports, but we have to wait until Friday for the one that really counts, the employment report for July. The employment report is expected to show further job losses, although less than in the prior month’s report.
The day before the employment report, we get the weekly jobless claims. That report comes from the period after the employment report survey period so it gives a timelier, if more limited, look at the employment issue.
Housing remains on the docket with pending home sales. Also, DR Horton (NYSE:DHI) and Pulte (NYSE:PHM), two of the four companies reporting this week that we consider bellwethers, are both in the housing industry. Others are Molex (NASDAQ:MOLX) in technology and Mastercard (NYSE:MA) for its insights into consumer spending.
Consumer spending and personal income for June will be critical reports. Both are expected to show very modest growth, less than in May. Other reports this week pertaining to the subject are retail same-store sales, unit auto sales and consumer credit.
Another key report this week is the ISM manufacturing report, which is maybe the most closely watched report on where manufacturing is heading. Also this week we’ll get the ISM non-manufacturing index. Both are expected to show declines.
As expected, the two-week earnings report ride was great, but make sure your seat belts are fastened this week as the ride shifts to economic reports!
Stocks to Watch
Over the last week, the following stocks had the largest bullish and bearish sentiment shifts amongst the sell-side.
Until next week …
Disclosure: No positions