A VERY Busy Week Ahead

Earnings Preview 10/29/10

 

Earnings season might be more than halfway through, but that does not mean a slowdown in the earnings parade. Next week, a total of 1,128 firms will report, including 100 of the S&P 500 firms. So far this has been a very strong earnings season, but there are still plenty of important firms that have yet to show their hands. The firms reporting next week include Pfizer (PFE), Mastercard (MA), Hartford Insurance (HIG), Devon Energy (DVN), Time Warner (TWX) and Kraft Foods (KFT).

 

Earnings will be far from the only thing for the markets to be concerned about next week. We have the mid-term elections and we will find out if the Fed will launch another round of quantitative easing, and if so, how big the program will be. There is also a very heavy calendar of economic data due out, starting with Personal Income and Spending on Monday, and ending with the all-important jobs report on Friday.

We also get both ISM indexes, the construction spending report, Auto sales, and the first read on productivity in the third quarter.

 

Monday

 

* Personal Income is expected to have increased by 0.3% in September, down from a 0.3% increase in August. At the same time, Personal Spending is expected to have risen at the same 0.4% pace it rose in August. Of course, if spending is rising faster than income, it implies a fall in the savings rate. Over the short term that is a good thing, but in the longer term that is very bad news. In addition to the amount that personal income goes up, the data breaks out the sources of that income growth. Over the last few years, far too much of that income growth has come from higher transfer payments from the government, and not from higher wages and salaries.

Dividend income will probably rise nicely, but be offset by a fall in interest income due to the ultra low interest rate environment we are in.

* The ISM manufacturing index is expected to slip to a reading of 53.6 from 54.4 in August. As a “magic 50 index” that reading would mean that the manufacturing side of the economy is continuing to grow, but it is doing so at a slower pace than it was in August. In addition to the overall index, pay close attention to how some of the key sub-indexes that cover production, new orders and employment are faring.

* Construction Spending is forecast to have declined by 0.5% in September, more than reversing a 0.4% gain in August. Given the high vacancy rates in commercial real estate, and the big overhang of existing homes for sale, a decline in construction spending is to be expected, and I would not be surprised to see it come in even weaker than forecast.

 

Tuesday

 

* No data of note — GO VOTE!

 

Wednesday

 

* The ISM Services Index is expected to come in at 53.6 for October, up from 53.2 in September, indicating that the non-manufacturing side of the economy is expanding at a modest rate, but doing a little bit better than it was in September.

* We get the appetizer for the employment report in the form of the ADP employment survey. This is expected to show an increase of 25,000 private sector jobs in October, a nice improvement from the 39,000 jobs lost in September according to ADP. However, relative to the number of people looking for work, it is insignificant. As the firm that actually cuts the checks of most companies’ payrolls, ADP is in an excellent position to gauge the strength of the job market. However, its numbers are often quite different, and usually lower, than the private sector jobs numbers that are reported by the BLS on Friday.

* The Federal Reserve is going to leave the Federal Funds rate in its 0 to 0.25% range. The big issue is if they will go beyond that and engage in a second round of quantitative easing (aka QE2), or buying of longer-term assets (with money created from thin air), and if so how big the program will be. I am expecting a program of about 0 billion per month and lasting at least six months. QE2 should head off any threat of deflation and should help boost the economy, but it is far from a silver bullet. Additional fiscal stimulus would be much more useful to the economy than additional monetary stimulus, but politically it looks extremely unlikely that we will get any more fiscal stimulus, and indeed there is a likelihood of an anti-stimulus fiscal policy being put in place.

 

Thursday

 

* Weekly initial claims for unemployment insurance come out. They fell by 21,000 in the last week, to 434,000. They have fallen for three straight weeks now. After a huge downtrend from mid-April through the end of 2009, initial claims have been locked in a tight “trading range.” They are knocking on the low end of that trading range, and breaking out to the downside would be very good news. We probably need for weekly claims (and the four-week moving average of them) to get down to closer to 400,000 to signal that the economy is adding enough jobs to make a dent in the unemployment rate. A rate of over 500,000 signals that the unemployment rate is probably headed back up and a high probability of a double dip.

* Continuing claims have also in a downtrend of late. Last week, they fell by 122,000 to 4.457 million. That is down 1.5538 million from a year ago. Some of the longer-term decline due to people simply exhausting their regular state benefits which run out after 26 weeks. Federally paid extended claims fell by 414,000 to 4.879 million. Looking at just the regular continuing claims numbers is a serious mistake. They only include a little over half of the unemployed now, given the unprecedentedly high duration of unemployment figures. A better measure is the total number of people getting unemployment benefits, currently at 9.014 million, which is down 536,000 from last week. The total number of people getting benefits is now 767,000 below year-ago levels. What is not known is how many people have left the extended claims via the road to prosperity, finding a new job, and how many have left on the road to poverty, having simply exhausted even the extended benefits. Make sure to look at both sets of numbers! Many of the press reports will not, but we will here at Zacks.

 

Friday

 

* The most important report of the week is the employment report. Total payrolls are expected to rise by 45,000 after a decline of 95,000 in September. Census workers being laid off will no longer be a major factor this month as there are not that many of them left. Private payrolls are expected to have increased by 60,000, down from 64,000 in September. That is not going to put much of a dent in the vast army of the unemployed. Revisions to prior months numbers will also be important. The unemployment rate is expected to remain at 9.6%. Much of the change in the unemployment rate will depend on the civilian participation rate. If it continues to decline, the unemployment rate might stay where it is, but if the participation rate stops falling the unemployment rate will likely shoot upwards. The report is also expected to show that average hourly earnings increased 0.1% in October, after being unchanged in September. The average workweek is expected to be unchanged at 34.2 hours. Overall, that adds up to very weak report. Keep an eye on the duration of unemployment numbers which have shown some improvement in recent months — but which remain at historically very high levels.

* Consumer Credit Outstanding (excluding mortgages) is expected to decline by .8 billion in September, after a .3 billion decline in August. Instead of spending, people are trying to pay down their credit card balances, and weak auto sales mean that people are on balance paying down their car loans more than new car loans are being made. The weakness in consumer credit has been going on for over a year, and that is highly unusual. Over the long term, it is good that people are getting their personal balance sheets, well, a little more balanced. In the short term, it is a major reason why the recovery has been so anemic.

 

 

Potential Positive or Negative Surprises

Historically, the best indicators of firms likely to report positive surprises are a recent history of positive surprises and rising estimates going into the report. The Zacks Rank is also a good indicator of potential surprises. While normally firms that report better-than-expected earnings rise in reaction, that has not been the case so far this quarter.

 

Potential Positive Surprises

Coventry Health Care (CVH) is expected to report EPS of .66 unchanged vs. .66 a year ago. Last time out CVH had a positive surprise of 80.36%, and over the last month analysts have raised their expectations for the about to be reported quarter by 0.62%.  CVH is a Zacks #2 Rank stock.

 

Expeditors International (EXPD) is expected to report EPS of .47 vs. .27 a year ago. Last time out EXPD had a positive surprise of 7.36%, and over the last month analysts have raised their expectations for the about to be reported quarter by 0.49%. EXPD is a Zacks #2 Rank stock.

 

Amerisource Bergen (ABC) is expected to report EPS of .48 vs. .44 a year ago. Last time out ABC had a positive surprise of 6.12%, and over the last month analysts have raised their expectations for the about to be reported quarter by 0.70%. ABC is a Zacks #2 Rank stock.

 

Potential Negative Surprises

Principal Financial (PFG) is expected to report EPS of .63 vs. .74 a year ago. Last time out PFG had a negative surprise of 4.55%, and over the last month analysts have cut their expectations for the about to be reported quarter by 3.75%. PFG is a Zacks #5 Rank stock.

 

Kellogg’s (K) is expected to report EPS of .90 vs. .94 a