Tower Private Advisors
- Earnings season
Capital Markets Recap
I’ll be at a timely John Mauldin conference next week, and while I won’t be sending out an e-mail alerting you to a new post, I will do some posting of good stuff from the conference. If you check back next Thursday and Friday, I should have some good stuff here. Click on the “Home” button in the upper right-hand corner of this webpage…bookmark it and check back next week.
I’m not smart enough to know what’s going on, but something doesn’t smell right about this week’s market action. The volatility index fell by 10%+; the Gartman Risk On index beat the Risk Off index, and in the U.S. high beta stocks (e.g. small cap) beat low beta (e.g. large cap), and yet Emerging Markets turned in a negative week.
That the problems in Europe are widely digested was evidenced in the markets’ reactions to news that France’s President Nicolas Sarkozy was trailing a challenger who threatened to throw off the shackles of the austerity program foisted upon it by others. It turned out that the Others was Germany. The French CAC index was up 3.83% this week, as was the Spanish IBEX.
We’re in the thick of the Q1 earnings reporting season. With 271 companies having reported, we’re a bit more than halfway through. It starts to taper off now, with 126 companies reporting next week; just 33, the following. The positive surprises total 74.9% of the releases. The biggest surprises are coming from Telecom and Finance, while the biggest earnings disappointments are coming from Utilities and Energy. The best earnings growth is, not surprising, from Information Technology (+23.22% yoy), where Apple resides, and Industrials (+12.93% yoy).
The current run rate of positive surprises looks pretty good on an historical basis, as shown in the chart below.
…but it seems to be as much a function of companies drinking the Kool Aid they’re serving to analysts. The latter group has been ratcheting down earnings expectation, usually in response to company guidance, or the hand-holding they give analysts in meetings and on conference calls. The chart below shows the number of companies raising their outlooks (green line, top chart) and lowering (red line, top chart). The bottom panel shows the difference between the two, suggesting that company sentiment has driven analyst sentiment, and both company and analyst have been surprised by the actual results.
Almost forgot about Apple… Judging by some of the bears on the stock, this was to have been it, the quarter that Apple disappoints Wall Street. Instead, the company crushed the ball. Wall Street expected quarterly earnings per share of $10.045, and the company produced $12.30, a mere 22.45% besting of the analysts. Many had glommed on to the story put forth by one analyst or more that the cell phone companies weren’t going to take it any more, as they were tired of losing money on iPhones, were going to begin charging for early upgrades, etc. Instead, the company sold 88% more iPhones than the same quarter last year; iPad sales more than doubled. Importantly, Apple sales in China made up 20% of its sales in the quarter. A Chinese consumer quoted in a Bloomberg news story “didn’t need it for work,” and “wasn’t planning to use many of its features.” Instead, she bought it because people in her office said she should. Apple’s not-Steve-Jobs CEO, Tim Cook, said that, “it was an incredible quarter in China. It is mind boggling that we could do this well.” Practically speaking, the market yawned. Sure, as you can see below, it rallied by 10%, but that left it well below its April 10 high of $644.
It’s pretty easy to see how analysts have put $1,000+ price targets on the stock. At it’s nose-bleed-inducing price, it’s only selling for 14.7 times trailing earnings. Nike’s P/E…23.05x (56% higher than AAPL). Oh, you say, it’s not a consumer stock? Okay, the average P/E of the First Trust Technology ETF (FXL)? 19.12x.
There were a number of housing datapoints this week. First, with respect to home prices, the index with the widest coverage, the House Price Index, rose slightly, holding above early-2011-low levels. The Case-Shiller index continues to search for a bottom, as evidenced in the chart below. Both reflect February data.
Second, New Home Sales rose from the figure that was reported last month, but that figure was subsequently revised higher. So, the 328,000 homes sold was less than the upwardly-revised 353,000; the figure was better than the 319,000 that analysts expect, but I suspect they weren’t in on the revision. Pending Home Sales grew by 4.1% in March, well above the 0.4% of the month earlier and the 1.0% that economists expected. The housing picture continues to look quite grim, but there is some hope expressed in a graph of Existing Home Inventories, shown below. We have, essentially, worked off all of the inventory spike that occurred in the housing bubble. There is, however, still some question of the so-called “shadow inventory,” the homes that could become part of the inventory, were banks to initiate foreclosure proceedings.
Some folks have suggested that the unseasonably weather we had been enjoying provided an unexpected but passing boost to the economy. Here it is, sort of quantified. As you may know, it’s possible to buy and sell futures contracts based on weather. Featured below is a related index, U.S. Average Temperature Variance from Normal (bottom chart), along with weekly Initial Jobless Claims (top chart). In the bottom chart, the red portion is where the weather was warmer than normal; green, where cooler than normal. Notice how much warmer 2012 has been than average and compared to 2010 and 2011. How many times did you hear global cooling jokes this winter? That allows a lot of weather-dependent work to be moved up in the year, and just like a sugar buzz, it can fade quickly. Notice the spike in jobless claims (the second chart below.)
The first release of Q1 2012 Gross Domestic Product was released today. It came in at an annual rate of 2.2%, below the consensus estimate of 2.5%, and below the fourth quarter’s 3.0% pace. Consumer Spending grew by 2.9%, well above the 2.3% expected and the prior 2.1%. Lowered Defense Spending and Inventory Stocking were offsets to the strong consumer performance. We wrapped up the week with University of Michigan Consumer Confidence, which rose from 75.7 (economists expected a repeat of that) to 76.4.
Key indicators to watch
- Personal Income, Spending, and Saving
- ISM Manufacturing
- ISM Non-manufacturing
- ADP Employment Change
- Non-farm Payrolls (already?!)
- Initial Jobless Claims
- Chicago Purchasing Manager
- NAPM – Milwaukee
- Dallas Fed Manufacturing Activity
- ISM New York
There will be no formal WR&O next week, but you can check back for some updates late in the weeek.
Graig Stettner, CFA, CMT
Chief Investment Officer
Tower Private Advisors