by Matthew Weinshenck
Forget the Four Horsemen of the Apocalypse. While they foretold the end of days, there are five new riders in town, with a new prophecy:
There will be no double-dip recession. The market will rally. The economy will recover.
The reason for the confidence? These five “horsemen” are riding on the backs of strong quarterly earnings reports. Ones that carry significant meaning for the economy and stock market. Here’s the deal…
Five Windows into the Economic World
Quarterly earnings season started a bit over a week ago – on October 7. During the first week of reports, five very important companies released their numbers: Alcoa, Inc (NYSE: AA), Pepsico, Inc (NYSE: PEP), CSX, Inc. (NYSE: CSX), Intel Corp. (Nasdaq: INTC), and JP Morgan Chase (NYSE: JPM).
I didn’t choose these five companies arbitrarily. They’re not only among the first to step up to the earnings plate and set the tone for the season, more importantly, each company tells us something different about the economy…
- Alcoa: Its aluminum business provides clues on the amount of industrial spending.
- Pepsico: As the company behind many everyday food and drink items, the company reflects consumer-spending levels.
- CSX: The railway freight shipper is a good barometer of general economic activity.
- Intel: The tech giant reflects spending on technology.
- JP Morgan Chase: As a major financial firm, it highlights the health of the financial sector.
Together, these companies have a wide geographic reach, a good mix of international sales and enough different products to provide a decent measure of economic health. They also have an interesting short-term impact on the stock market.
So specifically, what do these companies predict?
Why You Should Pay Attention to These Five Earnings Reports
First, all five companies just met or exceeded expected earnings – a significant occurrence in itself. That’s because when I reviewed the past 20 quarterly earnings for each company, here’s what I found:
When four or more of these companies meet or exceed their earnings expectations, the market rises by 2.2% over the next 30 days. But when only three or less companies post good numbers, the market turns negative.
|Number of “Horsemen” That Met or Beat Earnings||S&P 500 Return over 30 Days||S&P 500 Return over 60 Days|
|4 or 5||2.20%||2.19%|
|3 or less||-3.90%||-4.11%|
Of course, the earnings reports of these five firms alone can’t drive the entire market over the longer-term. A sample of this size isn’t enough to make a categoric judgment.
However, these “horsemen” are influential firms and are important economic barometers. Together, they produce valuable information. And information is what moves the market.
As Frank Holmes of US Global Investors says: “Good partial information early is value-added investment research, while complete information after the fact is low-value reporting that’s already priced into the market.”
And that’s essentially what happens all the time when you invest. It’s impossible to have all the information and facts you need, so you make decisions based on what you do have – with partial information in uncertain conditions.
And it works, too…
You Don’t Need All the Information… You Just Need the Right Information
We’ve used partial information before. In fact, I used one particular indicator to predict the end of the recession in May 2009.
Result? In September 2010, the National Bureau of Economic Research declared the official end to be June 2009. Pretty darn close.
And just a few months ago, I used partial information to predict five reasons why the S&P 500 will hit 1,350. The index hasn’t got there yet, but it’s on the move, having risen 10% since then.
The point is, the earnings reports from Alcoa, Pepsico, CSX, Intel and JP Morgan provide information that we can use to draw a pretty decent picture of the economy.
For example, we might not know exactly what decisions Chinese builders are making, but Alcoa’s numbers can give us some clues.
So aside from the headline earnings numbers, here’s what these five companies are telling us is happening now – and what could happen next…
Goodbye, Macro… Hello, Micro
- Alcoa: Aluminum demand is rising – especially in the aerospace and construction industries. And demand is rising fast enough to push prices up by 15%. Much of the growth is coming from China, where inflationary concerns and available storage capacity may have builders stockpiling supplies now for the future.
- Pepsico: With a 5% increase in sales, Pepsico beat its forecast. However, earnings only matched the estimated figure, due to the company hiking its costs in order to expand capacity and infrastructure in China, as well as setting aside more money for research and development. When businesses make capital investments, it bodes well for the economy.
- CSX: The firm reported a 10% jump in shipping volume and healthy business across all its divisions. Earnings were up by an impressive 48% over last year. In addition, CSX has hired 2,000 workers this year and expects to hire 3,000 next year. Like Pepsico, it’s also raised its planned capital investment for next year – another good sign for the economy.
- Intel: The tech titan beat sales estimates, thanks to increased demand for computers in less developed countries. This could signal a broader scale technological expansion for up-and-coming markets, which would add a layer to Intel’s growth – and the U.S. economy’s, too. Interestingly, much of the boost came in the last four weeks of the quarter, which suggests the economic revival is only just now accelerating.
- JP Morgan Chase: The good news: JP Morgan beat its earnings forecasts and saw lower write-offs on consumer credit card debt. However, investment banking and new mortgage income were both down, so we perhaps shouldn’t get too carried away with the company’s quarterly performance.
What we can say, however, is that while it’s tricky to absorb the mass of information on the overall economy and its prospects, breaking it down into smaller bites is much more revealing.
And what these five important companies tell us is that we’re shipping 10% more goods around the country… sales are climbing, both in the United States and abroad… capital expenditure is rising in key areas like consumer goods and railroads… and credit card debt write-offs are declining.
Information like this is much more useful than an all-encompassing quarterly GDP number that reports what the economy did months ago (not to mention a number that’s far from accurate and is casually revised up and down).
These are real-time details on what’s happening around the world – and the details look good. It’s what makes these companies the “five horsemen.” And it’s why the economy and stock market could be destined for a brighter spell.
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