By Eldon Mast, on August 9th, 2010
Market fear continues to subside drastically following a peak six weeks ago. Fear about the insolvency of European banks — which was a basic staple of bear analysts has now proven itself to be grossly overblown. And as the fear about Europe has subsided so has the VIX S&P Volality Index
(chart source: Yahoo! Finance)
The index — which appeared to be on its way to 50 at the height of the European Crisis — now appears to be headed for the teens again.
And there were plenty of signs this week that August news will continue to calm the markets.
1. The Institute for Supply Management released 2 reports this past week. Pointed to continued growth in both the manufacturing and non-manufacturing service sectors.
2. Construction spending — which was forecast to decrease — actually increased during the June reporting period.
3. Domestic motor vehicle sales for July came in stronger than most economists had predicted.
4. According to the most reliable retail indexes, the retail sector (which accounts for nearly three quarters of the US GDP) continues to growth at a healthy rate between three and four percent year over year.
5. The mortgage purchase index for the purchase of new homes has now been up for three weeks in a row. Refinancing and purchase interest rates continue to fall.
6. Although jobs creation is always the last sign of a healthy recovery, the private sector is now clearly beginning to add jobs — ADP reports + 42,000 private sector additions and the U.S. government calculated 71,000 additions in July. The return to jobs growth can be argued as the quickest return to growth from a recession than at any point in modern U.S. history.
7. It is now clear — as evidenced by earnings calls and transcripts — that the majority of U.S. businesses have returned to profitability. Not only have the majority report Q2 results better than expected, but the majority now forecast continued growth and profitability into the end of the year.
And investors are finally starting to agree with the positive business assessment. Not only is the VIX index on a steady decline, but stock markets finished the first week of August up nearly 2 percent for the week and over 6 percentage points year to date.
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By Eldon Mast, on July 26th, 2010
U.S. stocks surged last week following yet another strong batch of earnings.
Earnings results from heavy weights such as Caterpillar (CAT), 3M (MMM), UPS (UPS) and AT&T (T) all topped earnings estimates and raised their outlooks.
Some economists pointed to data that seemed to show some weakness. Weekly jobless claims jumped, but it may have been due to seasonal factors.
The markets have been trying to sort out all the data and it seems that for now investors have decided that the positive corporate earnings from so many sectors do not indicate a slowdown in the economic recovery. And even if there is some weak elements, those are not affecting companies’ profits in general.
For the week the S&P 500 index was up nearly 3%.
By Eldon Mast, on July 6th, 2010
Earnings for members of the Standard & Poor’s 500 are expected to increase another 27% from a year earlier and their associated revenues are seen to also rise — perhaps another 9%, said Thomson Reuters last week. Actual earnings season for Q2, begins shortly…
In the first quarter of 2010, S&P 500 firms’ earnings increased 57%. It was the second quarter in a row that the S&P 500 recorded earnings growth. If the predictions are correct, it will represent three quarters in a row of year over year increases. Those increases follow a record nine straight quarters of year-over-year declines prior to that.
Industry sectors like materials, energy, information technology and consumer discretionary segments are all predicted to have very healthy earnings growth rates.
By Claus Vistesen, on June 23rd, 2010
One of my good friends who runs a small investment boutique pointed me towards today’s chart of the day from Bloomberg showing the flight phoenix of US corporates’ profit margins.
I know that the chart is difficult to read but you only really need to look at the trend and thus the fact that profit margins recently have defied gravity. However, the old tale of Icarus may turn out to be cautionary here and the coverage by Bloomberg (and the reason my friend put it forward) also flags the fact that the current level of corporate margins essentially is a lagging indicator and the real issue is that profit margins tend to be mean reverting over time.
(quote Bloomberg)
Profit margins for U.S. companies are likely to tumble from last quarter’s record, a decline that will lead to much lower earnings than analysts expect, according to economist Andrew Smithers. “The corporate sector’s outlook is extremely bad,” Smithers, founder and chairman of the investment-advisory firm of Smithers & Co., said last week in an interview. “I can’t see any way out of it.”
As the CHART OF THE DAY shows, profit before interest, taxes and depreciation — accounting adjustments for wear and tear on buildings and equipment — amounted to 36.4 percent of U.S. corporate output in the first quarter. The calculation was based on data compiled by the Commerce Department. The percentage was the highest since the department’s quarterly data started in 1947, as the chart depicts. Smithers, whose firm counsels more than 100 clients on international asset allocation, included a similar illustration in a June 18 report.
So, what is the problem here? Well it makes sense if you think a little about it that profit margins might be in for a correction since much of the gain in the past 1 1/2 years has been due to cost cutting. Market pundits have had this debate before as stock markets soared in 2009 while unemployment kept on climbing. In this sense, the underlying point is quite simple. The first leg of the recovery for corporates (and thus in some sense their stock value) came through trimming the cost side and now, the second leg should start to kick in in the form of increasing final demand to beef up margins , but If the underlying demand is not there, well; herin lies the rub.
In this way, it was always going to be an issue as to where final demand would come from once government stepped back its spending binge and companies had exhausted their initial trimmings on the cost side. As such, we are only now returning to “normal” where we will see what the cruising speed of our economies (in this case the US economy) really is and what Mr. Smithers really points to here is that this implies a much slimmer margin on earnings and thus, strictu sensu, a lower stock price. Personally, I don’t expect a double-dip in the US in 2010, but there might well be one in 2011 which would square off nicely with the points made above. The meta theme I am working with here is that we are going to experience lower trend growth and higher volatility of growth going forward which, by definition, means more frequent moves into negative territory. Coming back to the issue of mean reverting profit margins, my friend makes the following remark;
I think the process has to do with the fact that companies did slash costs right away, faster than selling prices. Now reality catches up. Either final demand does not recover enough and companies are forced to lower prices and compete with little further room for cost cutting or demand recovers and companies have to replenish part of their cost.
Now, based on this argument and coming back to the main rule of thumb, profit margins should start to trend down on mean reverting alone and this remains a very strong empirical fact to think about in this context. Recently, Edward Harrisson made a similar point worth pointing out in the context of a slowdown or perhaps even a recession in 2011.
Long-story short: high margins mean-revert as do P/E ratios. That means share prices will be doubly under pressure in the next recession. Moreover, with households also likely to pull back given still high debt levels, there is a lot of downside for shares going into that downturn which I believe could begin as early as 2011.
Not very comforting this and as a final perspective on this topic I thought that I would mention a recent report by Fitch (login required) in which the rating agency is much less sanguine about a record low high yield default rate in 2010 attributing it to much of the same reasons above.
Fitch Ratings finds that fundamental and rating trends support the contraction in defaults, but the extent to which defaults have fallen is also a product of other dynamics. These include the timing of the recession’s impact on corporate credit quality; the strong demand for yield product in a low interest rate environment which has greatly benefited corporate borrowers seeking to refinance debt; and the deliberate and quick action on the part of U.S. companies to cut costs and boost liquidity in response to the downturn and deep fears of a prolonged period of sluggish growth.
The perspective from credit markets is interesting since it remains one transmission through which mean reversion of profit margins would materialize. In the end then, it seems that while profit margins for now may be defying gravity they, like the proverbial apple, will eventually come down to earth with a corresponding effect on stock prices.
By Eldon Mast, on May 12th, 2010
Back in July 2009, Intel asserted that the young recovery of 2009 would be anything but lackluster.
On Tuesday, the leaders of the chip giant re-asserted their claims for 2010 and beyond.
Paul Otellini, Intel’s CEO, told analysts that its earnings per share and revenue should grow at an average annual rate in the “low double-digits” over the next few years. “We are on top of a growth engine,” Mr. Otellini said.
You may remember that last year — in the face of a global financial crisis — Intel chose to spend $7B in new U.S R&D facilities, while competition retrenched in the face of credit woes. Intel can now exploit those technological advantages and continue to deliver new products with much higher performance and lower power consumption. Otellini stated that those advances now drive the company’s products into a plethora of new devices such as cellphones, digital TVs, car electronics, cameras, and other consumer electronics.
“Intel has a unique set of attributes that no one can replicate,” Mr. Otellini said. “This stuff gets harder to do and we are going to get better at it.”
For Intel, it looks like 2010 (and perhaps 2011) will also be anything but lackluster.
By Eldon Mast, on April 27th, 2010
All last week we pointed to the strong earnings numbers released by U.S. corporations. The overall results are in and point to a measure that confirms our sector by sector reports.
Expected growth in first-quarter earnings for companies in the S&P 500 index has now jumped to 50% from 39% in the prior week according to Thomson Reuters.
As we reported last week many companies like Citigroup Inc. (C), Bank of America Corp. (BAC) and Goldman Sachs Group Inc. (GS) each reported earnings growth far above analysts’ estimates.
In this coming week the Q1 earnings season culminates with six of the 30 Dow Jones Industrial Average components and a third of the S&P 500 companies scheduled to post their operating results.
In the S&P 500 through Friday, 83% have already posted results above analysts’ expectations. In an average quarter only 61% of companies beat the street estimates.
And companies are not sacrificing revenue growth in order to improve their bottom lines. Revenue too has also bested most analyst estimates. Thomson Reuters said 69% of those companies that have reported thus far have topped their revenue views.
Q1 will now mark two quarters in a row where the S&P 500 has recorded earnings growth. It adds additional evidence that when the government reports overall GDP growth estimates next Friday, those initial measurements will register stronger than Q4.
By Eldon Mast, on April 22nd, 2010
Q1 2010 earnings season is in full swing and businesses continue their flurry of better than expected reports to start the new year.
Bank sector earnings continued strong with Morgan Stanley reporting strong profits. The New York-based investment firm posted a first-quarter profit of $1.78 billion compared with a loss of $177 million a year ago. Sales more than tripled to $9.08 billion.
Coffee profits were steaming in Q1 for Starbucks. The firm reported on Wednesday that quarterly profit rose more than eight-fold, as more customers visited its U.S. locations — and on average spent more on each visit. “I think the trends we’re seeing in the business are real and sustainable,” CFO Troy Alstead told The Associated Press.
Netflix continued its winning ways Wednesday, reporting first-quarter financial results that handily beat expectations. The company’s net income grew 44% to $32.3 million on revenue that rose 25% to $493.7 million. Netflix ended the quarter with nearly 14 million subscribers — up 35% compared with a year ago — and said it expects to end the year with as many as 17.3 million, up from its previous estimate of 16.3 million.
And it is not just Intel, that is enjoying a surge in semiconductor chip demand. Hynix, the world’s second-largest producer of computer memory chips posted a net profit of 822 billion won ($742 million) in the three months ended March 31, sharply reversing from a net loss of 1.18 trillion won a year earlier.
The the montra in this earnings season is clear. Companies are consistently demonstrating that the economic conditions driving their businesses are improving, and that their forecast data points to an ongoing theme of accelerated growth in 2010.
By Eldon Mast, on April 15th, 2010
What a difference a year can make. The improving economy in 2010 now has J.P. Morgan Chase & Co.’s (JPM) growing earnings again, with loan delinquencies declining, and steadily decreasing allocations for bad loans.
On Wednesday the second-largest bank in the U.S. said that its net income rose by 55% from a year earlier and that its provisions for credit losses on all the loans it manages shrunk by 30% — an improving metric that helped overall results in several of its business units.
“There is clear and broad based improvement” in the economy in the U.S. and around the world, possibly resulting in a “strong recovery,” said JPM Chairman Jamie Dimon. “Chances of a double dip [recession] are rapidly going away.”
But perhaps the best news for the battered financial sector was Dimon’s announcement that J.P. Morgan has plans to hire at least 9,000 new staff in the U.S., and aims for further additions worldwide.
With these types of results, it is not hard to imagine an economy that is on track to net more than 4M new jobs by year end.
By Eldon Mast, on February 1st, 2010
To round out the first month of 2010, reports this past week all painted positive business signs for the year to come.
As we’ve been predicting for quite some time, GDP for Q4 was anything but lackluster. The gross domestic product rose at a 5.7% annual pace, the Commerce Department reported Friday, up from a 2.2% rise in the third quarter. The growth rate was the fastest pace reported in six years.
Another regional manufacturing report out from Chicago-land showed additional expansion in January. Their index rose to a healthy 61.5% in January from 58.7% in December. Any readings above 50% indicate business expansion and it is clear now in that region that expansion continues to accelerate.
And in further good news for the retail sector, the University of Michigan consumer sentiment survey beat expectations moving higher to a reading of 74.4 for January. The reading is now at a two-year high and a full point and one half better than economists’ consensus expectations.
Also on Friday, President Obama proposed a $33 billion package of tax credits for small businesses as part of his plan to boost job creation.
Obama wants to give small businesses a $5,000 tax credit for each net new employee they hire this year and companies that reduce their payrolls at any point this year would not be eligible for the any of the hiring credits and or wage bonuses.
Further, earnings reports for Q4 and positive business expectations for Q1 continued to roll in this week during company earnings releases and conference calls.
On Friday, Honeywell (HON) said it earned $698 million, or 91 cents per share, beating expections by a penny per share. The firm reaffirmed a full year 2010 profit forecast of between $2.20 and $2.40 per share on revenues of $31.3 billion to $32.2 billion. Their CEO, Dave Cote said, “we are encouraged by the improving order trends and stabilization in many of our end markets.”
Microsoft also beat by a penny this week. Late Thursday, Microsoft said it earned $6.66 billion, or 74 cents per share, up from $4.17 billion, or 47 cents a share, in the same period a year earlier. Their revenues rose 14% to $19.02 billion.
But perhaps the strongest of company news came from Apple Computer (APPL) on Wednesday. The firm reported earnings that surged well past Wall Street estimates.
The iMaker said it earned $290 million, or 34 cents per share (a dime above estimates), on sales of $3.24 billion (250M above estimates) in the three months ended March 26. In the same quarter a year ago, Apple earned only $46 million, or 6 cents per share, on revenue of $1.91 billion.
As everyone now knows Apple released the iPad later in the week, but speaking specifically to earnings on Wednesday, CEO Steve Jobs noted, “Apple is firing on all cylinders.” The comments were indeed in line with our observations of PC shipments that rocketed higher in Q4.
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By Eldon Mast, on January 22nd, 2010
Google says that the advertising market is beginning to return to normal. And normal for them means close to a $2B quarterly profit.
 Their latest earning release also highlighted a 17% year on year growth in revenues — now up to $6.67B per quarter — from $5.7B per quarter during the same period in 2008. Chief executive Eric Schmidt continues to make optimistic assessments of the current state of affairs.
“Given that the global economy is still in the early days of recovery, this was an extraordinary end to the year,” he said. “Our performance in 2009 underscored the strength of our management team, the resilience of our business model and the pace of innovation within our product and engineering teams, which continued unabated throughout the downturn.”
In a sign that consumers are increasingly willing to spend, more Internet users clicked on ads. The number of paid clicks on ads served on Google’s Web sites rose 13% from last year and 9% from the third quarter of 2009.
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