CHICAGO, May 31, 2011 /PRNewswire/ -- Zacks.com announces
the list of stocks featured in the Analyst Blog. Every day the
Zacks Equity Research analysts discuss the latest news and events
impacting stocks and the financial markets. Stocks recently
featured in the blog include: Deere (NYSE: DE), Tractor
Supply (Nasdaq: TSCO), Potash (NYSE: POT),
Wal-Mart (NYSE: WMT) and Marvell Inc. (Nasdaq:
MRVL).
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Here are highlights from Friday's Analyst Blog:
Personal Income, Savings Both Rise 0.4%
In March, Personal Income rose 0.4%, matching from the 0.4% rise
in both February and March, but only after the March numbers were
revised down from a rise of 0.5%. The increase was in line with the
consensus expectation of a 0.4% increase.
Meanwhile, Personal Consumption Expenditures (PCE) rose by 0.4%,
lower than the consensus expectation of a 0.5% rise. That is a
deceleration from the 0.5% rise in March and the 0.8% increase in
February.
Of course, if spending is rising at the same rate as income, it
means that the savings rate is unchanged. The savings rate remained
at 4.9%, it was as high as 5.8% in September. The savings rate is
well above the dangerously low levels that prevailed from 2004 to
2008.
Over the long run, a higher savings rate is good for the
country, and is desperately needed as the savings rate has been in
more or less a constant secular decline for the last 30 years.
Without domestic savings, we have to borrow from abroad to invest
in the economy.
Capital imports are the flip side of the trade deficit. If we
sell less abroad than we buy, then we go into debt abroad. That is
the same thing as importing capital. The chronically low savings
rate has left the country trillions of dollars in debt to the rest
of the world.
Note that in the 1960's and 1970's the savings rate was normally
around 9 or 10%, and started a long secular decline after the
1982-83 recession. Prior to the 1980's the U.S. was the world's
largest creditor nation by a large margin. Now we are by far the
world's largest debtor.
The fall in the savings rate and the increase in our
indebtedness is not a coincidence -- it is a causal relationship.
The extraordinarily low savings rates in the five or six years
leading up to the Great Recession were a disaster for the country,
even though it made things seem good at the time.
A falling savings rate can give a very powerful boost to the
economy, but only as long as it continues to fall. A low savings
rate undermines the long term economic strength of a country. In
effect, it is a country having a feast on its seed corn. We are
paying the price for that party now.
In the short run, on the other hand, a rising savings rate slows
economic growth, and vice versa. If someone gets a raise, but does
not spend more, then that raise does not stimulate other economic
activity.
If the raise is not spent, then there is no increase in
aggregate demand. It either increases future potential demand, or
pays for demand that occurred in the past (i.e. debt is paid down).
On the other hand, if people are socking away less than they were
for a rainy day, it increases current demand. If people go out to
eat rather than stay home, it means that there is more work for
waiters and cooks.
Will the Savings Rate Stabilize?
The question is, will the savings rate stabilize here? The
desire of consumers to sit on their wallets and not spend increases
in income is very understandable. The collapse of housing prices
destroyed trillions of dollars of wealth. That wealth people had
been planning on using to finance their retirements or put the kids
through college.
Housing wealth is (or at least was when the country still had
it) far more "democratic" than stock market wealth. Personal
housing wealth does not form the basis for large plutocratic
fortunes. It is the stuff of which modest middle class nest eggs
are made. Now that money has to be replenished the hard way, by
spending less than you earn.
Note how the savings rate tends to rise during recessions. That
might seem counter intuitive, since it is very hard to save when
you are unemployed, but it really isn't. The very fact that more
people decide to save is one of the reasons recessions are, well,
recessionary.
"The Paradox of Thrift"
While on an individual basis, being thrifty is a good thing, and
so is paying down your debt. However, if everyone decides to do it
at the same time, it is a very bad thing. This is what Lord Keynes
called "The Paradox of Thrift." It is the change in the savings
rate, not the level that causes the pain. We need more domestically
formed capital rather than relying on importing capital from
abroad. Importing capital is the flip side of running a trade
deficit.
The rise in the savings rate during the Great Recession was very
rapid, and was one of the key reasons the recession was so severe.
We are still a long way from the sort of savings rate we had back
in the 1960's and 1970's, but we are a lot closer than we were a
few years ago.
Slowly people are making progress on repairing their balance
sheets, but the damaged caused by the Financial meltdown of 2008 --
and the resulting Great Recession -- was catastrophic. The process
is being undermined by the resumed decline in housing prices. That
decline in wealth does not show up in the savings statistics, but
savings have to compensate for it.
Components of Personal Income
The components of Personal Income are as important as is the
total number. In total, personal income rose by $46.1 billion, down from an increase of
$54.6 (revised down from $67.0) billion in March (seasonally adjusted
annual rates, as are all the subsequent numbers on the components
of personal income).
In April, private sector wages rose by $18.0 billion, up from a $20.6 billion increase in March. However, there
was an upward revision to the March number, they were originally
reported as an increase of $18.0
billion. Wages in the goods-producing sector rose by
$6.3 billion in April, down from a
$7.5 billion increase in March. March
was revised up from a rise of $6.0
billion.
Wages in the private service sector were up $20.9 billion versus an increase of $13.1 billion in March (revised up from
$11.8 billion). Overall government
wages, rose by $0.3 billion after
rising $1.3 billion in March. Private
wages and salaries are the most important -- and highest quality --
form of personal income.
Government wages have to be paid out of either taxes or
government deficits. Government workers do, however, spend their
money in the private sector, just like private sector workers do.
To keep the numbers in perspective, total private sector wages are
4.53x larger than total government wages.
Proprietors' Income
Another important source of personal income is proprietors'
income. In other words, what the self employed and small businesses
were earning. That increased by $4.4
billion in April, down from a $5.4
billion rise in March (revised up from an increase of
$4.4 billion). Farm proprietors
incomes fell by $2.1 billion, after
rising $0.2 billion in March (revised
down from a $1.6 billion
increase).
Strong commodities prices have led to a stunning increase in
farm incomes. The overall strength down on the farm helps explain
why the Great Plains states like the Dakotas and Nebraska are weathering the downturn so much
better than the rest of the country. It is also a good sign for
firms that are tied to the farm economy, such as Deere
(NYSE: DE), Tractor Supply (Nasdaq: TSCO) and Potash
(NYSE: POT).
Since September, farm incomes are up 5.1%. It also suggests that
perhaps Willie Nelson needs to find
a different recipient for his charity concerts. Also, at a time of
massive deficits, one has to ask why the taxpayers continue to
subsidize the farmers? The answer, of course, is that 15% of the
U.S. population gets to elect 50% of the Senators, and farmers are
concentrated in the least populous states.
Non-farm proprietors income rose by $4.4
billion, down from a $5.4
(revised up from a gain of $2.9
billion) billion rise in February. In other words, what we
normally think of as small business income is showing signs of
getting back on track, but is hardly booming the way farm income
is. Farm proprietors' income is tiny relative to non-farm at just
$55.3 billion versus $1.0524 trillion.
Since September, non-farm proprietors income is up a nice, but
hardly exciting 1.7%. Non-farm proprietors income actually peaked
back in December of 2006 at $1.1129
trillion, so small business income is still 5.4% below peak
levels. On they other hand, it bottomed out in May 2009 at $971.6
billion, so we are now 8.3% above the valley floor.
Other Forms of Income
Rental income rose by $3.1 billion
in April, down from an $8.4 billion
(revised from $8.7 billion) increase
in February. Rental income has increased every month since
November 2009. Given the still-weak
condition of the real estate market, this is somewhat surprising,
but a sign that it is slowly on the mend. Since September, rental
income is up 9.7%.
Capital income, or income from dividends and interest, rose by
$5.0 billion after it fell by
$2.1 billion in March. There was a
massive downward revision to this category for March. It was
originally reported as an increase of $8.9
billion.
This income is particularly important to retirees. Most of the
increase was due to the dividend side, not interest. Interest
income rose by $0.8 billion. Dividend
income rose by $4.3 billion.
Government Transfer Payments
The final big component of personal income is government
transfer payments. Like government salaries, this source of income
has to come from either taxes or increased deficits, and so it is a
less desirable source of personal income from the point of view of
the economy as a whole.
However, it is still income that gets spent in the economy.
Wal-Mart (NYSE: WMT) really doesn't care if the money spent
in its stores is from the elderly using their Social Security
checks or the dividends they get from their investments -- or even
if it is retirees shopping there or people still in their working
years spending their wages or their unemployment benefits. Transfer
payments rose this month by $5.5
billion, down very sharply from a $20.1 billion in March (revised down from a
$24.1 billion increase).
Over the long-term though, the economy cannot simply grow
through ever-increasing amounts of money being handed out by the
government. Those payments are very useful in the short run to help
hold up overall consumer spending when the economy has turned
soft.
In the long run, the economy needs income from wages and
salaries, and from small businesses earning profits. It is those
earnings and profits that pay the taxes that support the transfer
payments. It is then worth looking at personal income excluding
transfer payments, as shown in the second graph.
Since it is a long-term graph, inflation plays a much bigger
role over time, and the graph is based on real personal income
rather than nominal (which the rest of the numbers in this post are
based on). Not that during most recessions (and the immediate
aftermath) incomes excluding transfer payments flatten out, but do
not fall significantly.
The blue line (left scale) shows we have not yet surpassed the
level of total personal income ex-transfer payments we were at
before the Great Recession. The red line shows that the
year-over-year decline in such income was by far the steepest in
modern history during the Great Recession. (Unfortunately, the
chart is not updated with the April data).
Marvell Misses, Guidance Firm
Marvell Inc. (Nasdaq: MRVL) reported first quarter fiscal
2012 adjusted earnings per share (EPS) of 24
cents, which was 2 cents shy
of the Zacks Consensus Estimate of 26
cents. The ongoing volatility in the mobile computing
market, which is affecting chip demand, is the chief cause for the
quarter's underperformance. Despite the miss, shares increased
8.86% in after-market trade on encouraging second quarter
guidance.
Second Quarter Outlook
Marvell Tech expects second quarter revenues in the range of
$870.0 million to $910.0 million.
Revenue from the mobile and wireless end market is expected to
grow more than 20% driven by growth at existing mobile customers,
the growth in TD chips and seasonal increases in wireless
connectivity. In the networking end market, revenues are projected
to increase sequentially from new design wins at existing and new
customers. For the storage end market, Marvell expects revenues to
increase low to mid single digits sequentially.
Non-GAAP gross margin is projected in the range of 58% to 58.5%.
The company anticipates non-GAAP operating expenses of roughly
$285.0 million (+/- $5 million). Research and development (R&D)
expenses are estimated at approximately $225.0 million and selling, general and
administrative expenses at approximately $60.0 million. Marvell expects operating margin
of approximately 26% (+/- 1.0%). Net interest expense and other
income are expected to be approximately a $2
million benefit.
The diluted share count is projected at 630 million. Considering
all the above expectations, non-GAAP EPS is estimated at
37 cents. GAAP EPS is expected to be
lower than the non-GAAP estimate by about 7
cents (+/- $0.01).
Overall, management remains optimistic about their investment in
TD-SCDMA and SSD and expects it to result in improved results
throughout the year.
Our Take
The quarter's results were disappointing, as both the top and
bottom lines were below the Zacks Consensus Estimates. But the
second quarter guidance reflects an improving demand situation and
product adoption. Marvell's endeavor to expand its chip sales in
China through the establishment of
an R&D centre there is encouraging.
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