The S&P 500 had a second consecutive week in negative territory declining 5.48% for the week. Last week I was lamenting the fact that investors were ignoring the good corporate earnings being announced for the fourth quarter. Well, I guess I should be careful about what I wish for.
The earnings week got off to a strong start with AK Steel and Apple Computer reporting significantly higher earnings than analyst expected. AK Steel noted that they were ramping up capacity utilization as they were beginning to see signs of increased demand. However, the market traded in a very narrow range the first three days of the week. Thursday marked the busiest day of the year for earnings announcements. Again we saw very good fourth quarter earnings, however, the market sold off by over 1%. We believe that investors are beginning to focus on potential earnings growth for the remainder of the year. Coming into this earnings season, investors were expecting 2010 earnings growth of 25%-30%. Kenn and I have been discussing this very same issue for a few months now. One of the concerns we had was that companies may have over done expense reductions and would be forced to incur fairly significant costs to capture increased revenues, thus mitigating company’s opportunity to drive significant operating leverage. In listening to company’s conference calls this last week, it became apparent that a number of companies are indeed expecting this to occur. As an example, US Steel indicated that they expect revenues to be up in the first quarter versus the fourth, yet they expect no improvement to earnings due to the increased cost associated with the increased revenues. This is a valuable process for investors and the markets to go through as it will more closely align expectations with what we see as reality. We expect earnings growth to be well into the double digits for the year, and as other investors come to believe this, it should set the stage for a less volatile market.
Jan 29th
Weekly Economic Insight: 25 January – 29 January 2010
Author: Kenn Lamson
Comments: 0
This wasn’t a great week of data for consumer-related data, with sales of new and existing homes seen to plummet and consumer sentiment improving but still depressed. Manufacturing showed signs of life, with better-than-expected ex-transportation durable goods orders. The week’s capstone was a 5.7% pop in the initial estimate of fourth quarter GDP. A jump was expected, given the boost to consumption provided by the first-time homebuyer tax credit and other stimulatives, the anticipated replenishment of inventories and the rising strength in exports.
RELEASE
(leading, coincident, or lagging indicator)
EXPECTED (consensus)
HIA COMMENT
4Q09 advance
4.5%
2.2%
EXISTING HOME SALES
Government stimulus clearly underpinned the housing market in recent months, where buyers rushed to “get under the wire” to receive the first-time homebuyers credit, initially scheduled to expire in November. According to the National Association of Realtors, December sales plummeted in the largest monthly decline since 1968 as the initial wave of first-time homebuyers crested in November but the second (assuming there is one) has not yet fully taken hold. Without sharply higher interest rates or other negative factor intervening, we’ll likely see another surge of first-time buyers in March and April.
The housing market’s also being supported in a less obvious way, through the Federal Reserve’s purchase of mortgage-backed securities, a key mechanism for providing liquidity to lenders and keeping mortgage interest rates down. Those purchases, however, expand the Fed’s balance sheet and exacerbate longer-term inflationary concerns. This program, like many of the other extraordinary liquidity programs in which the government has engaged, is slated to end on March 31, 2010; it’s an easy bet that rates will rise as we approach that date and thereafter if purchases are ceased.
Positively, the NAR reported that median and average home prices rose 4.9% and 6.4% respectively from November. However, those figures must be taken in the context of actual and potential supply; the NAR report also showed that the reported estimate of existing homes for sale spiked from 6.5 months to 7.2 months of inventory. It must also be kept in mind that the reported figures ignore the massive overhang of foreclosed and delinquent properties that have yet to be officially put on the market. According to one researcher, the actual supply is around 2 years’ worth, a far stronger headwind for the economy to lean against.
Existing home sales: 5 years through Dec 09
S&P / CASE-SHILLER HOME PRICE INDEX
The Index fell -0.2% month-over-month. While the overall level of home prices appears to be slowly improving, this report suggests a bifurcation of trends. As noted in the table, 5 of the 20 cities saw month-over-month price increases; also, 4 cities saw year-over-year price improvement. However, 4 cities reported new lows in prices. The Index is down -5.2% year-over-year.
The variance from the price increases reported in the existing and new home sales reports can be explained by the difference in methodology between the measures. As noted last month, the Case-Shiller Index uses only sales of homes in specific markets with two or more transfers; condos and co-ops are excluded. The Index has declined -29.2% since its peak in the second quarter of 2006. As with other lagging indicators, this data is a bit stale and projections made from it may be suspect.
S&P / Case-Shiller Home Price Index: 5 years through Nov 09
NEW HOME SALES
The margin of error for New Home Sales month-over-month decrease was 14.6%, so as usual the initial estimate should be taken with a grain of salt. Also, the decline was not distributed evenly across the US, as the Northeast and West regions saw an uptick; the Midwest reversed November’s gain. The NAR reported that 374,000 new homes were sold in 2009, a -22.9% decline from 2008.
As with existing home sales, the drop in new home sales can in part be attributed to a lull in purchases via the first-time homebuyer tax credit. Also like the existing home sales release, supply was reported to have risen from 7.6 to 8.1 months, and the NAR reported that median and average home prices rose 5.2% and 7.6% respectively from November.
New Home Sales: 5 years through Dec 09
DURABLE GOODS ORDERS
While the overall orders figure fell below the consensus expectation due to weakness in aircraft orders, if transportation equipment is excluded orders rose a better-than-expected 0.9%. Month-over-month growth in new orders was seen in 2 of 9 major industry groups surveyed, including primary metals (+8.1%) and machinery (+6.0%). Weakness was centered in the computers and electronic equipment, especially computers (-3.0%) and electronic equipment, appliances and components (-3.9%). New orders fell -0.2% in the important manufacturing sector. Over the past 12 months durable goods orders have dropped -20.2%.
Durable goods inventories continued to fell for the twelfth consecutive month in December, frustrating those that have for months have predicted increases in production to restock. We expect that this trend will reverse in 2010, however. The tentative resumption of business spending, whether demand originates from overseas or domestic sources, will help underpin broader economic growth, especially when companies begin hiring.
Durable Goods Orders: 6 years through Dec 09
CONSUMER SENTIMENT
Consumers may be breathing ever-so-slightly easier in recent days; the U of M Consumer Sentiment Index rose to 74.4 from 72.8 in mid-January and 72.5 at the end of December. Friday’s reading represents the highest level in 2 years. That said, they apparently don’t expect much of an improvement in their own personal financial situation despite forecasts by the economy’s cheerleaders.
The measure of current conditions, which reflects Americans’ perceptions of their own finances and whether it is a good time to buy big ticket items such as cars and homes, rose to 81.1 in December from 78.0 in November and 66.5 in October. The index of expectations six months from now, which more closely projects the direction of consumer spending, rose to a still-dismal 70.1 from 68.9.
U of MI Consumer Sentiment Index: 5 Years through Jan 10
“ADVANCE” GDP
This release is a first look into the final quarter of 2009, which beat the consensus expectations handily. The report was dominated by an enormous inventory adjustment that accounted for the majority of the 4Q change. While one can only infer this conclusion by the consumption trends reported elsewhere in this release (and Thursday’s durable goods orders report), it would appear that most of the restocking was in nondurable goods. The other major categories that comprise GDP also rose:
The contributions to growth looked like this:
Other bright spots in Friday’s report were a +4.8% increase in disposable personal income and a savings rate that crept higher from 4.5% in 3Q09 to 4.6% in 4Q09.
GDP growth: 8 Years ending 12/31/09
The problem with inventory restocking-driven growth, of course, is that it’s temporary – once the proverbial shelves are full manufacturers will return to lower production levels. In order to create a self-sustained economic growth we need to see demand from domestic consumers and businesses and/or foreign ones. As regular readers know, the downward pressure on demand is why we continue to focus so much of our work on understanding the unemployment trends.
For 2009, this initial report puts full-year economic growth at -2.4%. We’ll get a second look at 4Q09 GDP, with more complete data, on February 26th.