And So It Begins Again - Earnings Preview

Earnings Preview 7/08/11

Second quarter earnings season will "officially" kick off Monday after the bell when Alcoa (AA) reports. There will not be a lot of reports this week, the real flood starts next week, but the ones we will get are important ones that the street will be paying lots of attention to, and this week could well set the tone for the entire earnings season.

While there will only be 44 firms reporting, 11 of those are in the S&P 500. The firms reporting this week include: Alcoa (AA), Citigroup (C), Fastenal (FAST), Google (GOOG), J.P. Morgan (JPM) and Marriot (MAR).

That is an interesting cross section of U.S. business. While one of the smaller firms reporting, pay attention to how Fastenal does. It is the largest producer of fasteners, like rivets, nuts and bolts. As such, it is a supplier to almost all manufacturing businesses, and thus its results are a good barometer for the health of the overall economy.

We have a relatively heavy economic data calendar. We start out light but the pace of data will pick up as the week goes on. We start with the Trade Deficit on Tuesday, followed by the Budget Deficit on Wednesday. We will also get the FOMC minutes on Wednesday, which will provide clues to what the Fed is thinking. Thursday brings Retail Sales and the Producer Price Index. Friday will be busy with the Consumer Price Index as well as the Industrial Production/Capacity Utilization report.

Monday

Nothing of particular interest.

Tuesday

The Trade Deficit is expected to rise slightly to $44.0 billion in May from $43.7 billion in April. Falling Oil prices should help as out oil addiction is responsible for over half of our chronic trade deficit. Her we will probably see more of that effect in the June numbers than in the May numbers. The trade deficit is directly responsible for our increasing indebtedness to the rest of the world, not the budget deficit. A rising trade deficit slows economic growth and job creation. In the short term, a rising budget deficit increases economic growth, and job creation. As such, at lest in the short to medium term, the trade deficit is a far more serious economic problem than the budget deficit is.

Wednesday

The budget deficit is expected to come in at $45 billion in June, down from $68.4 billion a year ago. The budget deficit numbers are extremely seasonal, but are not seasonally adjusted, so looking at month to month changes is worse than useless, it is downright misleading. While the deficit is huge, expected to come in at about $1.5 Trillion this year, running a budget deficit when the economy is weak is a good thing. Both cutting spending and raising taxes in a slow economy will slow growth. The notion that cutting spending will not hurt the economy, or would even help it is just flat out wrong. Not all tax increases are economically damaging. It depends on which spending is cut, and which taxes are raised. The obsession in Washington about cutting the deficit fast and hard now is extremely misplaced, and threatens to send the economy back into recession.
The minutes to the most recent Federal Reserve Open Market Committee (FOMC) meeting will be released. This should give more insight into the thinking at the Fed, and also give the reasons for its recent downgrade of economic growth projections. Mostly it looks like the Fed will sit on the sidelines for the rest of the year, not changing the Fed Funds rate, nor embarking on QE3, but also not draining the liquidity it has already injected into the system with the first two rounds of large scale asset purchases.

Thursday

Weekly initial claims for unemployment insurance come out. They had a very nice decline early in they year, but then had a few months. Last week they fell by 14,000 to 418,000. A slight increase is expected next week, rising to 419,000. The four week moving average will probably stay well above the 400,000 level, where it has been for the three months. The sharp rise in initial claims were an early warning of the weak jobs report for June. Robust job expansion is generally associated with initial claims below the 400,000 level.
Continuing claims have also in a downtrend of late, but the road down has been bumpy. Last week they fell by 43,000 to 3.691 million. That is down 785,000 from a year ago. I would expect a small decline this week. The consensus is looking for a small increase to 3.700 million. Some of the longer term decline due to people simply exhausting their regular state benefits which run out after 26 weeks. Those however, don’t last forever either. Federally paid extended claims fell by 88,000 to 3.847 million, and are down by 758,000 over the last year. 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 7.460 million, which is down 61,000 from last week (there are some timing issues so the change in continuing and existing claims does not match the change in the total). The total number of people getting benefits is now 1.580 million 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. Given the differential between job growth and the decline in total people getting benefits, it looks like about 1 million people have simply run out of benefits, and have not found new work. Make sure to look at both sets of numbers! Many of the press reports will not, but we will here at Zacks.
The Producer Price Index (PPI) is expected to have fallen by 0.3%, down from a 0.2% increase in May. Most of the decline will be do to lower oil prices. Stripping out food and energy to get the core PPI, the index is expected to rise 0.2% in June, matching its rise in May. Those numbers refer to prices for finished goods. The report will also give data on price changes further up the production chain, which while more volatile than finished good prices, often indicate the direction prices for finished goods will be moving in a few months.
Retail Sales are expected to have fallen by 0.2% in June, matching the decline in May (seasonally adjusted). This is a broad measure of retail sales, not just activity at the malls. Most significantly, it includes auto sales. Excluding autos, retail sales are expected to have been unchanged after rising 0.3% in May. While the numbers are adjusted for seasonal variations like the number of shopping days, they are not adjusted for inflation. As such, some of the weakness in retail sales will probably come from gas stations, and not due to a sudden drop in the number of people eating hot dogs off the rollers and drinking 44oz fountain drinks.

Friday

The Consumer Price Index is expected to have fallen by 0.1% in June, partially reversing a 0.2% increase in May. As with the PPI, most of the decline will be due to falling oil prices. With food and energy prices stripped out, the core CPI is expected to have risen by 0.2%, down from 0.3% in May. Inflation is not a serious problem right now, and it does not look like it will be any time soon. To really get inflation going, you need a wage/price spiral. With job growth extremely anemic, there is no way that wages are going to start to accelerate anytime soon. The Fed needs to be concentrating on the full employment side of its dual mandate right now, not on inflation.
The Empire State Index, one of the regional "mini-ISM's" covering New York State is expected to come in at 0.8, indicating very slight expansion of manufacturing activity in New York State in June. Last month it was much weaker than expected, coming in at -7.8. Unlike the ISM, zero, rather than 50 is the dividing line between growth and contraction in this survey.
Industrial Production is expected to have risen by 0.2% up from a 0.1% increase in May. This is a broad measure of Industrial Production, covering the output of not just factories, but also of Mines and Utilities as well. The utility part can lead to weather related distortions. Thus it is important to look at the Manufacturing only data as well. Hotter than normal weather in Summer or colder than normal weather in Winter will boost demand for electricity without reflecting a change in overall economic activity.
Capacity utilization is expected to have edged up to 76.6% in June from 76.7% in May. As with the Industrial Production side of this report, utilities can be weather distorted, and that can affect the overall picture. Thus it is important to look at the manufacturing only data. This report is much more important than the amount of attention it gets. As a general rule of thumb a level of 80% is about normal and indicates a healthy economy. A level of 85% indicates that the economy is overheating and inflation will soon become a serious problem, so the Fed should be lifting interest rates and Congress should be cutting spending and raising spending to cool the economy down. A level of 75 is what is hit in a normal recession. The low for this cycle was 67.3%. Factory utilization generally runs slightly lower than overall utilization. It was at 74.5% in May. The low for the cycle was 64.4%, the lowest on record.

Potential Positive or Negative Surprises

Historically the best indicators of firms which are likely to report positive surprises are a recent history of positive surprises and rising estimates going into the report. The Zack’s rank is also a good indicator of potential surprises. Similarly a recent history of earnings disappointments, cuts in the average estimate for the quarter in the month before the report is due and a poor Zacks rank (4 or 5) are often red flags pointing to a potential disappointing earnings report. Given the small number of firms reporting this week, there are not many candidates for potential positive or negative surprises, and so I will omit this section.

Earnings Calendar

ALCOA INC (AA): Free Stock Analysis Report

CITIGROUP INC (C): Free Stock Analysis Report

FASTENAL (FAST): Free Stock Analysis Report

GOOGLE INC-CL A (GOOG): Free Stock Analysis Report

JPMORGAN CHASE (JPM): Free Stock Analysis Report

Zacks Investment Research

Company	Ticker	Qtr End	EPS Est	Year Ago EPS	Last EPS Surprise %	Next EPS Report Date	Time	Daily Price
ALCOA INC	AA	201106	$0.34	$0.13	3.7	20110711	AMC	$16.49
INFOSYS TEC-ADR	INFY	201106	$0.64	$0.57	0	20110711	BTO	$68.25
JOES JEANS INC	JOEZ	201105	$0.00	$0.01	0	20110711	AMC	$0.85
MATERIAL SCI CP	MASC	201105	$0.13	$0.32	80	20110711	AMC	$7.40
NOVELLUS SYS	NVLS	201106	$0.76	$0.66	0.97	20110711	AMC	$36.81
ADTRAN INC	ADTN	201106	$0.53	$0.44	13.04	20110712	AMC	$42.55
FASTENAL	FAST	201106	$0.30	$0.23	3.85	20110712	BTO	$36.55
HEALTHCARE SERV	HCSG	201106	$0.15	$0.13	-14.29	20110712	AMC	$17.47
MILLER ENERGY	MILL	201104	($0.08)	($2.18)	0	20110712	AMC	$7.08
WOLVERINE WORLD	WWW	201106	$0.46	$0.39	9.09	20110712	BTO	$42.81
ASML HOLDING NV	ASML	201106	$1.34	$0.68	15.04	20110713	BTO	$38.64
BANK OZARKS	OZRK	201106	$0.83	$0.64	14.49	20110713	AMC	$53.71
CAE INC	CAE	201106	$0.16	$0.15	11.76	20110713	BTO	$13.42
MARRIOTT INTL-A	MAR	201106	$0.37	$0.31	-3.7	20110713	AMC	$37.55
NORTHERN TECH	NTIC	201105	$0.22	$0.20	4.76	20110713	BTO	$19.80
UNIVL FST PRODS	UFPI	201106	$0.15	$0.70	-2000	20110713	AMC	$24.68
YUM! BRANDS INC	YUM	201106	$0.61	$0.58	-1.56	20110713	AMC	$55.59
ANGIODYNAMICS	ANGO	201105	$0.10	$0.15	0	20110714	AMC	$14.48
CDC CORP	CHINA	201106	($0.01)	($0.09)	-250	20110714	AMC	$2.14
COMMERCE BANCSH	CBSH	201106	$0.72	$0.68	4.55	20110714	BTO	$43.81
CUBIST PHARM	CBST	201106	$0.41	$0.45	25.93	20110714	AMC	$36.92
FAIRCHILD SEMI	FCS	201106	$0.40	$0.40	8.33	20110714	BTO	$17.51
GOOGLE INC-CL A	GOOG	201106	$6.78	$5.71	-1.4	20110714		$546.60
HUNT (JB) TRANS	JBHT	201106	$0.53	$0.40	5.26	20110714	AMC	$49.10
IGATE CORP	IGTE	201106	$0.18	$0.20	-11.54	20110714	BTO	$16.78
JPMORGAN CHASE	JPM	201106	$1.21	$1.09	10.34	20110714	BTO	$41.32
MEDTOX SCIENTIF	MTOX	201106	$0.18	$0.11	12.5	20110714		$19.00
MISSION WEST	MSW	201106	$0.13	$0.16	36.36	20110714		$8.80
NATL BEVERAGE	FIZZ	201104	$0.22	$0.20	14.29	20110714	AMC	$15.02
NATL BNKSHRS VA	NKSH	201106	$0.60	$0.58	3.57	20110714	AMC	$25.28
NEXEN INC	NXY	201106	$0.47	$0.45	-104.92	20110714		$23.04
OCEAN POWER TEC	OPTT	201104	($0.27)	($0.61)	-10	20110714	BTO	$3.82
OXYGEN BIOTHERA	OXBT	201104	($0.10)	($0.13)	-10	20110714		$2.65
PEREGRINE PHARM	PPHM	201104	($0.16)	($0.16)	-7.69	20110714	AMC	$1.96
RESOURCES CNCTN	RECN	201105	$0.09	$0.05	-71.43	20110714	AMC	$12.69
TEXAS INDS	TXI	201105	($0.26)	($0.16)	2.6	20110714		$41.78
TORTOISE CAP RS	TTO	201105	$1.29	($0.80)	-98.21	20110714		$8.61
VALMONT INDS	VMI	201106	$1.46	$1.09	2.11	20110714		$104.26
WASH FEDL INC	WFSL	201106	$0.25	$0.11	-8	20110714	BTO	$16.91
CITIGROUP INC	C	201106	$0.97	$0.90	11.11	20110715	BTO	$42.63
FIRST HRZN NATL	FHN	201106	$0.11	$0.01	275	20110715	BTO	$9.58
GENUINE PARTS	GPC	201106	$0.89	$0.78	5.26	20110715	BTO	$57.37
MATTEL INC	MAT	201106	$0.15	$0.14	0	20110715	BTO	$28.00
WEBSTER FINL CP	WBS	201106	$0.35	$0.03	17.24	20110715	BTO	$21.65