Weekly Recap & Outlook – 01.21.11

Tower Private Advisors


  • Earnings don’t matter
  • Housing perking up

Capital Markets Recap

Top Stories

As of today, 57 of the 499 companies in the S & P 500 index had reported earnings.  Typically, about 70% of them exceed analyst earnings estimates.  Such earnings surprisesare a bit of a joke in that companies are generally able to manufacture an extra penny per share of earnings almost at will.  Thus, 70% is pretty well a given.  This fourth quarter earnings reporting season isn’t much different.  Of the 57 companies that have reported, 42 have reported earnings surprises, which is–ta-da–74%.  The best results have come from the Health Care sector–far and away–while the worst have come from the Consumer Staples sector

As has been advertised here and elsewhere, however, we seem to be in the midst of a correction of sorts, and beating estimates in such an environment isn’t enough.  The outlook for future quarters has got to be strong.  And even that’s not always enough, as witnessed by shares of Google (beat by 8.28%, stock down by 2%) and Apple (beat by 18.94%, stock down by 4.1%)  .  Admittedly, the latter has been beset by Steve Jobs’ recurring health problems.  78% growth in sales has not been enough.

  • Hewlett-Packard Announces Board of Directors Shake-Up
  • Google’s Eric Schmidt Passes CEO Reins to Larry Page
  • Ebay Forecasts 2011 Revenue That May Exceed Estimates
  • BHP’s Second-Quarter Iron Ore Gains 4% to Record
  • Apple Profit Rises 78% on Demand for iPads, iPhones
  • Job’s Liver Transplant Carries Risk of Complications
  • Citigroup 46% Gain Masks Flawed Loans Sold to Freddie

Despite the assertions of the pretty people on financial television who love to find reasons for every intraday price fluctuations, earnings don’t matter, outlooks do.  Here’s a chart showing the virtually nonexistant correlation (0.85%) between earnings surprises and 5-day prior price changes.

This Week

This week’s two regional surveys, the Empire State Manufacturing index and the Philly Fed index, both continues modest improvements.  The latter is at 2010′s best levels, which are the best since 2005, while the former is languishing at less than half 2010′s best levels.  Both indexes saw December’s figures revised lower.  In a healthy economy, we want to see mostly upward revisions.

In a week of relatively few economic releases, we received four housing-related data points.  The National Association of Home Builders‘ index of builder sentiment continues to show glum builders.  Essentially a reading of the percentage of builders who are optimistic, the index has spent the bulk of the last 3 1/2 years at 20% or lower.  After a brief pop t0 22, the index has settled in at 16, in spite of economists’ efforts to wish it higher.  Housing Starts were lower than expected (529,000 v. 555,000), but Building Permits were better than expected (635,000 v. 554,000).  That left Permits 106,000 better than Starts, and there have only been a couple of readings better than that in the last four years.  Prior to 2006 permits regularly exceeded starts by a wide margin.  Since then, if they’ve exceeded starts, the margin has been very small.  No budding housing boom, but this is a positive development. 

Existing Home Sales jumped by 12.3% in December, whereas economists expected a +4.1% .  In addition, November’s sales were revised upward.

As is their wont, pundits tend to poo-poo the Leading Economic Indicators.  The ten components of the LEI don’t always reflect outright strength in the economy–stock prices, for example–while others swing seemingly inordinate weight.  Witness the table below, where Money Supply and the spread between Fed Funds and the 10-year Treasury note, swing a combined 45% of the LEI.

Still, it’s hard to argue with the general tenor of the LEI.  Since late 2008, the LEI has been decisively positive, as the chart below indicates.

Next Week

Key indicators to watch

  • FOMC Rate Decision (Wednesday)
  • Durable Goods Orders (Thursday) – December
  • Initial Jobless Claims (Thursday) – weekly
  • Q4 GDP (Friday) – Q4 2010 . . . first release
  • University of Michigan Consumer Confidence (Friday) – January final

Housing Related

  • S & P/CaseShiller Home Price Index (Tuesday) – November
  • Federal Housing Finance Agency – Home Price Index (Tuesday) – November
  • New Home Sales (Wednesday) – December
  • Pending Home Sales  (Thursday) – December

The Weekly Recap & Outlook will be out of the office next Friday.

 Graig P. Stettner, CFA, CMT

Vice President & Portfolio Manager

Tower Private Advisors

Hong Kong  |  Bangkok  |  London  |  Fort Wayne


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