“Thus bad begins, and worse remains behind.” – William Shakespeare, Hamlet
The quarterly earnings parade continued last week, and as is so often the case when prices have been marching higher seemingly of their own accord, accompanied by a steady parade of misinformation. One CNBC guest proclaimed the latest quarterly earnings to show 10% growth – “10%, Kelly [Evans], 10%!” to which Evans herself added the affirmation that last quarter was about 10% too.
Except that they weren’t. The first quarter earnings myth keeps growing even as the second quarter earnings dream blooms. First quarter earnings for the S&P 500 were 2.1% according to FactSet, below 2% according to Zacks, between 5%-6% according to a Reuters story a couple of weeks ago and now have been rumored up to nearly 10%. No doubt there are a some “adjusted” EBBS reports floating around (Earnings Before Bad Stuff) from brokerages that tell us that earnings were great if you would only look at them from just the right angle. For now, the “blended” earnings growth rate (i.e., reported plus estimated) for the second quarter is 6.7% for the S&P 500. Not 9%, as CNBC’s Bob Pisani avowed late Friday.
A final tally of 7% would certainly be better than last quarter’s 2%, though the rebound effect of the quarter ought to be kept in mind. Still, a number of large Dow stocks have disappointed either with earnings or outlook, including Coke (KO), IBM (IBM), McDonald’s (MCD), Boeing (BA), Caterpillar (CAT), Traveler’s (TRV), United Technologies (UTX), AT&T (T) and Visa (V). How about Microsoft (MSFT) and JP Morgan (JPM)? That’s a lot of jumbo cap disappointment for what I hear being called a “great” earnings season. Visa management had an interesting comment on Friday – “we see no signs yet of any acceleration in economic recovery.” I guess they don’t listen to CNBC. Not enough, anyway.
Goldman Sachs (GS) made an interesting call on Friday that dovetails with what I’ve been saying. They downgraded equities over a 3-month period, while remaining bullish over 12 months. For one thing, the market does badly need at least a small correction, which may seem like an odd thing to say but is necessary to stave off a sharper decline later. Goldman is worried about rates rising at the same as European bonds marked record low yields amid an ocean of complacency and perhaps equity-related fear – European equities took an even worse beating on Friday from the threats of EU sanctions moving into Russia, and heavy military equipment from Russia moving into the Ukraine. As Louis Armstrong used to sing, it’s a wonderful world.
For another thing, a lot of companies have been unenthusiastic about June, implying that the rebound effect is waning even as geopolitics heat up. I don’t know what will happen in the Ukraine or Gaza, though prospects for peace looked pretty rotten for both at week’s end, but keep in mind that stocks will need a constant diet of constantly worse news to keep up selling pressure. There doesn’t have to be peace in Ukraine, just a few days of standing down to get stocks to rally again.
On the other hand, the stock market does feel heavy right now. A Fed meeting comes next week, so things aren’t apt to go seriously awry the next few days unless the statement sounds unexpectedly hawkish, and there is also the matter of an impending jobs report that I expect to post a good result. All of that said, prices still feel vulnerable and ripe for a pullback of at least a few percent. August could get bumpy, and it often is.
The Economic Beat
The two main US reports last week were June new home sales and durable goods. The former was a clear disappointment, while the latter report was mixed. Both led to downgraded estimates for second quarter GDP, heightening the possibility that the first half of 2014 was one of zero growth (the first estimate is due next week, though recent initial estimates haven’t been close to final ones).
With new home sales, the disappointment in June results was magnified by a major revision downward to May data. What had been a 504K annualized rate – the first 500K print since May 2008 – was revised all the way back down to 442K. Instead of being the best rate in six years, it ended up the best rate in four months. That leaves first half sales for 2014 running 4.3% behind the first half of 2013, clearly not what was expected this year. The trailing twelve-month (TTM) year-on-year growth rate has been falling quite fast, from +23%-24% in May-June last year to +1.2% in the latest read (!). The count of actual TTM sales has been edging downward from a peak of 430K in January to 419K through the June estimate. That’s not good, but we can expect some Wall Streeter to claim it is by declaring it will add extra rebound fuel to 2015.
New orders for durable goods were better than expected at 0.7% (consensus 0.5%), but May data was revised downward and shipments were light (+0.1%). The latter means another downward revision to estimates for 2nd quarter GDP, which now looks to have trouble cracking 3% (the Bureau of Economic Analysis, keepers of the GDP flame, could still come to the rescue with a very low deflator). The compound rate of growth for the trailing 24 months in business cap-ex spending remains quite low at 2.2%.
Coming back to housing, existing home sales were a bit ahead of consensus at a 5.04mm annualized rate versus the 4.99mm estimate. I certainly am seeing a lot of new “for sale” signs here in my town and on my bike route. However, the rate still remains 2..3% below last year, and mortgage-purchase applications are down 15% year-on-year in June. The rate of price increase for conforming loans (less than $750K and owned by one of the federal mortgage agencies) moderated to 5.5%. That’s actually a good thing for first-time buyers.
Employment continues to print decent numbers, with initial jobless claims falling back below 300,000 again (284K seasonally adjusted) for the first time in two months. The improvement that had nearly disappeared in March has picked up again with the better weather. The insured unemployment rate remains at 1.9%; the last cycle got down to 1.6% so we can hope for some more improvement to come.
The consumer price inflation rate remained steady at 2.1% (overall) and 1.9% (core). On the regional Fed side, the Chicago Fed’s national activity index remained at a modest +0.12 with the three-month average at +0.13 (zero is neutral). The Richmond Fed’s manufacturing index moved up from 3 to 7 (zero is neutral), while Kansas City moved up to 9 from 6.
Among next week’s highlights in data releases should be the first estimate of second quarter GDP due Wednesday morning, though if it hits right on target the effect might be muted. Anything with a 3-handle will probably be considered a victory.
The real highlight is of course the FOMC statement that comes out later that day at 2PM. I cannot imagine the Fed not continuing the taper, but stranger things have happened.
It’s a busy week with other data, with the monthly housing data completing with pending home sales Monday and the Case-Shiller price index on Tuesday. Consumer confidence comes Tuesday, and there are regional surveys from Dallas on Monday and Chicago Thursday.
Friday is the busiest day of the week, with the jobs report being the third highlight of the week. Estimates are for about 235,000, but claims data suggest something over 250K. It will be released at the same time as June personal income and spending. The ISM manufacturing survey and June construction data come out later that morning, and July auto sales should come out throughout the day.