Elections, Earnings and Economic Numbers, from David Kelly, chief market strategist, JPMorgan Funds
The week will bring a blizzard of earnings numbers, with 61 of the S&P500 companies slated to report fourth quarter profits. Of the 36 firms that have reported so far, almost 80% have beaten estimates. This pattern is likely to continue. Of particular interest this week will be the performance of financial companies with Bank of America, Goldman Sachs, Wells Fargo, Morgan Stanley and American Express all due to report.
Economic numbers will be less important. December housing starts could be hampered by a very wet December in the South while producer prices should have remained subdued. On a more positive note, unemployment claims may well have stayed below 450,000 for the fourth consecutive week, while leading economic indicators should have risen by a robust 0.7% in December, a 9th consecutive monthly increase. These data tend to confirm a more general strengthening of the economic expansion with 4th quarter real GDP potentially rising at a faster than 5.0% annual rate.
However, the most important event of the week will be reported in in Massachusetts. In a special election to fill the Senate seat left vacant by Ted Kennedy, polls now favor the Republican, Scott Brown over the Democrat, Martha Coakley. Brown is shown leading in five of six polls released in the last week with an average lead of over five percentage points. If Brown wins he would be the 41st Republican in the Senate, and as such would represent a major roadblock to the President’s agenda.
The Recovery is Priced In, from David A. Rosenberg, chief economist and strategist, Gluskin Sheff
What made last Friday’s action interesting wasn’t just the triple digit decline in the Dow on higher volume but what the response was to Intel’s and JP Morgan’s earnings releases; both are leaders in their space, both reported EPS that was 10x higher than a year ago, and both stocks finished the day sharply lower (and the SOX index closed the week down a hefty 6%).
There was a time, little more than nine months ago, that quarterly numbers like that would have sent their share prices sharply higher. The fact that their stock prices fell is a full testament to the view that the era of the ‘green shoots’ is officially over and after the most profound bear market rally in recorded history, what we have on our hands is a market that is more than just fully priced.
It was easy to beat low-balled expectations in 2009 because investors are now becoming much more discriminating. So it wasn’t just about the bottom-line earnings performance this time around. Questions now abound over Intel’s ability to maintain record gross margins. The lack of revenue growth at JPM did not go unnoticed, and neither did the still-high level of loan loss provisioning on the consumer book. And generating profits from fixed-income trading, tax breaks and contained compensation growth also calls into question the sustainability of future profits — especially when it is so evident on the revenue line that there is minimal, if any, loan demand!
From Recovery to Expansion, from Alan D. Levenson, chief economist, T. Rowe Price
Last week’s releases of November business and inventories and international trade, and December retail sales completed the monthly dataset that will serve as the basis for the Commerce Department’s first estimate of real GDP in the final quarter of 2009. We estimate a 6.0% annual rate of growth in that span, powered by a surge in production to arrest the rate of inventory liquidation. While a current quarter downshift is likely, the stage is set for sustained, slack-reducing expansion.
The inventory cycle has legs.
The 3.3 percentage point contribution to Q4 real GDP growth from the inventory cycle reflected the sharp rise in output required to slow the pace of inventory liquidation as sales revived. Business inventory levels cannot fall indefinitely in absolute terms or, more importantly, relative to the pace of business sales. In order to stabilize the inventories-to-sales ratio (which has now returned to the middle of its pre-recession –
mid-2004 to mid-2008 – range), production must rise sufficiently to lift inventory growth to the prevailing rate of sales growth. That is, supply must catch up with demand after a sharp, inventory-liquidating overshoot to the downside. Even as sales are likely to moderate from their recent growth pace, the wide gap relative to inventories portends solid production gains in the months ahead.
Reports Calendar
Tuesday, Jan. 19: January Investor Confidence Index; January Housing Market Index. Corporate earnings: Citigroup, CSX, IBM,
Wednesday, Jan. 20: December Housing Starts; December Producer Price Index. Corporate earnings: AMR, Bank of America, Bank of New York Mellon, Delta Airlines, eBay, Morgan Stanley, Starbucks, State Street, U.S. Bancorp, Wells Fargo
Thursday, Jan. 21: December Leading Economic Indicators; January Philadephia Fed Manufacturing Survey. Corporate earnings: Advanced Micro Devices, American Express, Continental Airlines, Fifth Third Bancorp, Goldman Sachs Google, Southwest Airlines, UnitedHealth Group, Xerox
Friday, Jan. 22: Congressional hearing scheduled on financial-industry compensation. Corporate earnings: General Electric, Harley-Davison, Kimberley-Clark, McDonald’s, Schlumberger.
