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  • This Week’s Economic News, In Pictures, and in a Hurry

    Last week’s economic news was not only minimal, what little we did get sent mixed messages.

    Take consumer credit for example. Experts were looking for a $2 billion contraction in credit, but we actually saw a $1 billion increase in total credit levels. That’s good news, pointing to a better-equipped consumer. But.

    Retail sales were expected to be slightly higher, yet we ended up seeing a 1.1% decline in total retail sales last month. Inventories (wholesale as well as business) were both expected to increase by 0.7%, yet both were only up 0.4%. The Michigan Sentiment Index, on the other hand, still topped expectations with an increase to 75.5.

    On the jobs front (which was the prompt for Thursday’s and Friday’s bullishness), new claims were down a hair, to 456K, while continuing claims plunged to 4462K, from 4717K. Analysts were expecting to see 4600K. Even so, last week’s better numbers may be as meaningless as the weaker numbers from a few weeks ago. Take a look at chart of both below….. is there actually a negative or positive (net) trend that should be driving decision-making, or are investors making something out of nothing?

    The reality is, continuing claims are not only sinking again, they’re on the verge of new multi-year lows. Expired benefits? That may be part of it. For some reason though, pessimists are certain there’s no way anyone could actually be finding jobs again…. even though other evidence points to the notion that they are. We’ll take a stand in the middle, and assume the picture isn’t as bleak as some want to believe, but also not as rosy as the renewed downtrend seems to suggest.

    As for new/initial claims, “not higher” is good, but the number isn’t sinking either. The floor seems to be 445K. Anything under that would be a cause for celebration. Anything less, well…..

    One thing to bear in mind about the nonfarm payroll data trend on the chart below - the bulk of the recent improvement is due to government census hiring. On the other hand, non-government net hiring has still turned positive, even if tepid…. something the gloom and doomers tend to gloss over (citing ’still not strong enough’ as the understandable reason for the dismissal).

    As for the current week, a lot more is in store beginning on Tuesday, but the fireworks really start on Wednesday.

    Housing starts, building permits, capacity utilization, and industrial production are all on tap for Wednesday morning. The former two will point to health on the real estate front, while the latter two will point to health on the industrial/manufacturing front. And, all four are heavy hitters in terms of being able to move the market. Economists expect tepid changes - if any - across the board though.

    Here’s the latest update on the two housing/real estate data sets, plus all the other related trends.

    And here’s a look at capacity utilization and productivity….

    Remember, we’re plotting the actual production index, and not the percent changes you’ll hear the media discuss. The plotted capacity utilization figure, of course, is a percentage.

    As always, new and ongoing jobless claims are out on Thursday. Economists are basically looking for stability there too.  Both charts were already posted above.

    Leading indicators and the Philadelphia Fed’s index are due on Thursday; the pros are mixed about what to expect, but aren’t looking for much change in either direction.

    The other big announcements for the coming week will be Wednesday’s producer inflation, and Thursday’s consumer inflation figures. Remember, the concern here has turned from the potential for too much inflation (thanks to rock-bottom interest rates) to not enough inflation (or even deflation), stemming from an alarmingly weak recovery. So far, both sides of the worry coin have proven irrelevant, as the economy has walked that inflation tightrope quite well. Still, it remains worth watching. Here’s that chart.

    And, here’s the whole calendar for the week. We’ve got a lot going on, and like we said, most of it has the potential to move stocks higher and/or lower.

    You’re not getting this kind of needed perspective on economic charts from the mainstream media.  Sign up for the free Micro Cap Press newsletter today, and start getting the proper commentary and these long-term trends…. not the short-term nonsense most news outlets create from it.

    Disclosure: No positions
    Jun 14 7:14 PM | Link | Comment!
  • Q4's Earnings Report Card - Hints & Red Flags
     With the majority of last quarter's earnings reports now posted, it may be worth investing a little time to study - and we mean really study - just how they came out. Why? They hold some important clues about the future.

    It's no big secret that earnings last quarter were better than earnings from the same quarter a year ago, as well as better than expected for this year. What's not as readily realized, however, is which sectors improved the most, which sectors doled out the biggest surprises, and which sectors fell short of all expectations. 

    We'll get to all of that. First though, let's start with the basics.  


    With nearly all of the stocks in the S&P 500 having reported their numbers, 72% have topped analysts' estimates, while 21% fell short of forecasts. Both were close to records, pointing to a widening gap between strong and weak results. 

    As for a raw number, the S&P 500 is going to earn about $16.77 per share for the quarter on an operating basis, and is going to earn about $15.51 on a GAAP basis. Both are slight adjustments to the numbers we posted last week. The respective annualized P/E ratios roll out to 16.6 and 18.0. 

    Overall, it's definitely a step in the right direction. On the other hand, with massive cost-cutting initiatives on the table, is it possible that corporate America is simply shrinking its way to success? Three quarters ago, the answer would have been yes. Now, however, we can say the growth is real.... even if modest.

    Total revenue was up 4.9% last quarter. Granted, comparing Q4-2009 to Q4-2008 is a ridiculously easy comp to top, but still, it shows progress.  

    Biggest Improvement

    Lots of sectors you'd expect to do better did indeed do better. Information technology stocks grew earnings by about 58%, and basic materials earnings grew by about 78% last quarter. Revenue was up 8.8% and down 0.1%, respectively. Both areas posted upside surprises, fueled by economic growth and/or inflation, and/or easy comparables.

    The biggest turnaround story, however, came from the consumer discretionary sector. The sector's earnings rebounded 110% last quarter... more than twice the improvement expected. Sales grew by 4.0%. 

    Given the combination of revenue growth and earnings growth, fourth quarter's results bode very well for the tech and consumer discretionary sectors. And, both are arenas that stand to do well at this stage of a recovery. We expect more positive surprises going forward (which is saying something, since 89% of technology stocks and 94% of cyclical stocks posted upside surprises for the prior quarter). 

    The fact that basic materials stocks saw declining revenue despite stronger commodity prices, however, is a major red flag. Yes, higher earnings could mean better management of cash flow, but very poor results a year ago makes big improvements easier to muster now. Between inflation (or lack thereof), ever-changing expectations, excessive speculation, and so-so performance compared to other sectors last quarter, the basic materials sector may simply be overrated right now (more on that below).  

    Problem Areas

    Stunningly, some sectors managed to do worse in the fourth quarter of 2009 than they did in the fourth quarter of 2008.... earnings-wise and revenue-wise. 

    Telecom was one of the biggest losers, shrinking income by 30% despite a 3.9% improvement in revenue. It's a testament to higher costs and mismanagement of spending and internal investments. That said, we've also observed that the large cap names in the group are the ones doing most of the back-sliding. Many of the smaller names in the telecom sector (wireless and fixed line) are actually doing well. So, don't generalize too much.

    Energy stocks also saw earnings shrink by about 30%, with only a 1.7% increase in revenue. Neither are encouraging. If anything, both should have been strong in comparison, as gasoline usage and oil prices should have been stronger compared to the last quarter of 2008. 

    What gives? One possibility is that the oil companies really were gouging consumers late in 2008, and -frankly - they now realize they can't continue doing it and reaping the excessive reward. Another possibility may simply be that these companies just aren't doing as well as they were, as the recovery has been soft thus far. 

    Either way, until it's crystal clear the recession is over, the energy sector is apt to fall short of expectations going forward in 2010

    And finally, the industrials saw income shrink about 8% on a 4% dip in sales. This certainly doesn't point to 'recovery spending' levels from business just yet. However, the tepid declines don't scream 'stay away' either. Just choose carefully. 

    And the Financials?

    And where do the financial stocks rank in the 'improvement' pile? There's no answer, because it's impossible to measure meaningful 'improvement' when the sector was a net loser for the comparable quarter a year earlier. Just for the record though, the sector's revenue was up 23% last quarter, and earnings did turn positive. 

    While the sector as a whole is looking better, we still see a few rebounding companies carrying more (ok,most) of the group's weight than they can carry indefinitely. In fact, when you start to break the sector down into its individual industries, the gap between the winners and lowers is widening

    As for what this means to investors, there is opportunity within the sector, but the sector itself is not an opportunity as a whole right now. 

    Bottom Line

    With the exception of the basic materials sector and the special care needed with the financial stocks, we're taking all the trends we discussed above at their face value. Any sector we didn't mention above could be considered neutral from our viewpoint.

    That said, there is one dimension worth adding to the analysis.

    While improving earnings and revenues are important, if a stock is too expensive then it's still too expensive. To that end, on the nearby table you'll find 2009's operating P/E ratios by sector (which are almost entirely complete), and 2010's estimates (which have been updated as of last quarter's results). 

    Much of the time one would expect this P/E analysis to perhaps trump another form of analysis. In this case though, the valuations - now and later - pretty much support our outlook described above.

    For instance, though the tech sector did very well last quarter, the current P/E of 19.4 is very affordable by technology stock standards, and the projected P/E of 14.7 is very plausible just because these companies are close to those results now. 

    Conversely, the fact that energy stocks and basic materials stocks did so poorly last quarter - and last year - forces investors to question whether or not the forecasted P/E ratios are plausible - in the shadow of rich P/E levels for the last twelve months - for those groups. Can either of these groups really almost double earnings in 2010 as suggested? Based on what we saw last quarter, probably not, meaning these stocks are a recipe for disappointment. 

    Things can and do change as time wears on, but we now have enough data to make a fair assessment of different sectors' health. In short, the men are being separated from the boys. That's great news for stock-pickers, and bad news for certain sectors.  

    Disclosure: NA
    Mar 03 1:45 PM | Link | Comment!
  • A Realistic Market Valuation Forecast.... Uh-Oh

    With 88% of the S&P 500's Q4-2009 earnings now in (and now that Standard & Poor's has updated their marketwide outlooks through 2011), we've got more than enough data to reassess where the market's likely to be headed over the course of this year. Let's just say it's a mixed bag.

    Assuming the S&P 500 were a company and not just an index, we can assign it all sorts of company-like attributes. The two we're most interested in are earnings per share (the index itself acts as one share), and a P/E ratio. With just these two simple measures, we can actually do quite a bit in the way of assessing the market's health and making a reasonable price forecast. 

    A couple of housekeeping items first though, just to set the stage..... 

    The Good 

    Earnings are indeed getting better - this is undeniable. Now that nearly 90% of the companies in the S&P 500 have reported earnings, we know that the S&P 500 itself will 'earn' about $17.34 (operating) per share for Q4 of 2009. On a GAAP or reported basis, the S&P 500 will earn about $15.72 per share. 

    Just for perspective, those figures were -$0.09 per share and -$23.15,respectively, in the fourth quarter of 2008. Each has gotten sequentially bigger since then. 

    As of Wednesday's closing price of 1105.24, the S&P 500's trailing-twelve month operating P/E is 19.47, and its equivalent GAAP or reported P/E is 21.45. For comparison, the long-term averages of those numbers are 19.40 and 26.18, respectively. (Those averages are marked by red and green dashed lines, respectively, on the accompanying charts.) 

    Better still, both earnings figures are expected to at least hold flat or continue improving this year and next. Standard & Poor's is looking for an operating EPS of $21.26 in the fourth quarter of 2010 ($77.72 for the full year), and a GAAP EPS of $14.48 in the fourth quarter of this year ($58.46 for the full year). That translates into a 2010 P/E of 14.21 and 18.90, respectively. 

    So what's the problem? Comparing the projected P/E ratios to the long-term average P/E ratios says stocks are undervalued by anywhere from 19% to 27%. Based on those numbers this is a no-brainer - get in the market and enjoy the ride, right?

    The problem is timing. Keep reading. 

    The Bad 

    The funny thing about 'averages' when it comes to the market... the data in question spends much of the time above the average or below the average, but very little time at the actual average itself. And yes, this applies to the S&P 500's P/E ratios. 

    The reality is - and this is at the core of what could hold stocks back in 2010/2011 - the P/E ratios in post recession environments like the one we're in now tend to be at the very low end of the typical P/E range. Historically speaking, P/E ratios tend to sink until we're about at the midpoint of the market's post-recession growth phase. We saw this coming out of the 2001 bear market as well as when we were coming out of the 1990 bear market. (Click here for that full-screen perspective.) 

    So what? The 'so what' is that while stocks may be priced and/or headed to lower than average pricesrelative to earnings, they may already be priced appropriately at this point in the cycle.... which is the second year of the recovery. 

    Said another (more direct) way, anyone assuming stocks will price themselves according to the normal operating and GAAP P/E ratios of 19.4 and 26.18 by the end of 2010 may be sorely disappointed. Stocks may already be at or near their maximum valuation for this stage of the cycle. 

    Historical Perspective 

    To add some detail to the warning, following the 2001 bear market, the S&P 500's operating P/E ratio didn't bottom at 15.55 until the middle of 2006... more than three years after the index itself had hit its ultimate bottom.Its operating P/E ratio didn't bottom at 14.47 until late 1994 following the 1990 bear market... four years after the market began to move higher again. (Click here for the entire P/E ratio history for the S&P 500.) 

    Do you see where this is going? If history is any indication, we should expect operating P/E ratios to drift towards 15.0 in 2010 - not the normal 19-ish - as we enter only our second year of the recovery phase. 

    Based on that P/E and the previously-discussed earnings forecast, it would be hard to say the S&P 500 will be worth much more than 1165 by the end of the year - about 5.5% higher than its current trading level. Applying the same math on a GAAP/reported basis suggests the S&P 500 will actually be worth less by the end of 2010 than it is now. 

    None of this is intended to frighten you. In fact, you shouldn't be frightened at all - the market is recovering. Moreover, the forecast can be adjusted between then and now (though they're rarely significant adjustments). 

    Our only intent is to encourage investors to recognize that what the market considers to be an appropriate price is always changing. Here in an environment where investors are still a little shocked and worried, it's much tougher for stocks to justify frothy valuations. Indeed, history says theywon't... at least not for a while. 

    Bottom Line 

    In simplest terms, these numbers are a recipe for mediocrity (at best) for 2010, and perhaps beyond. That's not inherently troubling unless you're a true buy and hold investor. See, the odds are very much against a broad market tide rising and lifting all boats with it in 2010. History tells us so. 

    The secret to sustaining 2009's progress into this year is focusing on the best of the best sector, industry, and stock trends, and being pro-active with them. Yes it's a little more work, but it beats a wasted year.

    Disclosure: NA
    Mar 03 1:42 PM | Link | Comment!
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