AET Aetna Inc. (delisted)

Saying that next week will be a busy one for earnings is a bit like Noah’s observation that is "looks like we might get some rain". We are off to a good start on earnings season, but next week will probably be the most active. A total of 932 firms are due to report, including 181 from the S&P 500. Of the 932 firms reporting, 610 or 65.5% are expected to post higher EPS than a year ago. Among the S&P 500 firms, 130 or 71.8% are expected to show positive growth. The firms that are reporting read like a who’s who of the U.S. economy. The firms reporting this week include: Aetna (AET), Caterpillar (CAT), Conoco Phillips (COP), Chevron (CVX), Ford (F), Coca Cola (KO), 3M (MMM), Merck (MRK), Proctor & Gamble (PG), and Exxon Mobil (XOM). That is a pretty good cross section of the economy.

It will also be a busy week for economic data. The focus will be on housing as we start the week with New Home Sales, then get the Case Schiller housing price data. The focus broadens with new Orders for Durable Goods, and Personal Income and Spending, data on Consumer Confidence. We will get a first look at how much the economy grew in the fourth quarter when the GDP is released. Along the way we also get a Fed Meeting and policy statement. In other words the market is going to be in information overload mode next week.

Monday

• New Home Sales are expected to bounce to a seasonally adjusted annual rate of 280,000 from 250,000 in February. While a 12% improvement might look impressive, it is coming off an all time record low, and the records go back to the Kennedy administration. If we do come in at 280,000, that is still lower than any month prior to 2010. Unlike used home sales, each new home sold represents a lot of economic activity. Thus this is a very important report. Normally, new home sales are what leads the economy out of recessions, but they have been a huge drag this time around.

• Tuesday

• The Case Schiller home price index is expected to show a 3.2% year over year decline in housing prices in February, versus a 3.06% decline in January. I suspect it will be somewhat worse than that, with about a 3.5% decline. Declining home prices are putting a serious dent in the wealth of most Americans, and forcing more homes underwater. Being underwater on the mortgage is a necessary, but not sufficient condition for a foreclosures to occur.
• Consumer confidence is expected to rise to 64.4 in April from 63.4 in March. I’m not a huge fan of this as an economic indicator. That is not because consumer spending is not important, it represents over 70% of the economy, but because what consumers say in these surveys (goes for the University of Michigan survey later in the week as well) does not always match up well with what consumers actually do. Mostly it reflects the direction of unemployment and gasoline prices. Given prices at the pump, I’ll take the under on this one.

• Wednesday

• New Orders for Durable Goods are expected to rebound by 1.9% after falling 0.6% in February. Previous months are often revised significantly for this data, and the recent trend has been for upward revisions. Much of the weakness last month came from the highly volatile transportation equipment segment. Since they are so high priced, a few orders for jetliners can really push around the total number, but the orders tend to be lumpy. Excluding transportation equipment, new orders are expected to rise 1.6% after falling 0.3% last month.
• The Federal Reserve releases its policy statement after its meeting (and before the first ever post meeting news conference). It is almost universally expected that the Fed Funds rate will remain in a range between 0 and 0.25%. The big issue will be if QE2 will be finished, and finished on time. I think it will be, but that there will be no QE3.

• Thursday

• Weekly initial claims for unemployment insurance come out. After being extremely erratic over the holidays, they have started to fall significantly, but are still bouncing around a bit. Last week they fell, but by a disappointing 13,000 to 403,000. A further rise from that level would be extremely disappointing, and the market would not like it at all. Fortunately, that is not expected to happen. The consensus is looking for initial claims to fall back to 390,000. A level of 390,000 seems pretty good compared to the experience of the last few years. After a huge downtrend from mid April through the end of 2009, initial claims were locked in a tight "trading range" for most of 2010. We now appear to have broken out of that trading range to the downside. This could well indicate that the economy is about to start producing a significant number of new jobs. The four week moving average (which smoothes out the week to week noise) was under the 400,000 for the seventh week in a row. Historically that has been an inflection point at which the economy starts to add significant numbers of jobs. If it breaches that threshold again, it will be very bad news.
• Continuing claims have also in a downtrend of late, but the road down has been bumpy. Last week they fell by 7,000 to 3.680 million. That is down 992,000 from a year ago. I would expect a further decline this week. The consensus is looking for a level of 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 70,000 to 4.201 million, but are down by 1.332 million 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 8.300 million, which is down 218,000 from last week (there are some timing issues so the change in continuing and existing claims does not exactly match the change in the total). The total number of people getting benefits is now 2.346 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. Make sure to look at both sets of numbers! Many of the press reports will not, but we will here at Zacks.
• The most important report of the week is the GDP report. The consensus is expecting growth to slow to just 1.7% from 3.1% in the fourth quarter. Just as important as the overall level will be where the growth is coming from. Net exports should turn into a drag on growth in the first quarter after being a big contributor growth in the fourth quarter. I suspect we might do a bit better than the consensus is looking for, but only due to inventory restocking, which is a very low quality source of growth.

• Friday

• Personal Income is expected to have increased by 0.4% in March up from a 0.3% increase in February. This is a broad measure of income, not just wages and salaries. The composition is important, as over the last year or so, much of the growth in income has come from transfer payments, not from wage growth. Personal Spending is expected to have slowed to an increase of 0.5% from 0.7% last month. That is still more than the increase in income. Meaning some more downward pressure on the savings rate. A falling savings rate boosts the economy in the short term, but a low savings rate is not healthy over the long term. The U.S. still has a very low savings rate relative to both history and the rest of the world.
• The University of Michigan consumer sentiment survey is expected to be unchanged at 69.6, That is a lot better than where it was a year ago, but not exactly a robust reading.

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. In the Earnings calendar below, $999.00 should be read as N.A.

Potential Positive Surprises

AK Steel (AKS) is expected to report EPS of $0.01, down from $0.25 a year ago. Last time out, AKS posted a 22.2% positive surprise. Over the last month, analysts have raised their expectations for this quarter by 52.4%. AKS is a number 1 rated stock.

Caterpillar (CAT) is expected to report EPS of $1.31, up from $0.50 a year ago. Last time out, CAT posted a 14.8% positive surprise. Over the last month, analysts have raised their expectations for this quarter by 4.09%. CAT is a number 2 rated stock

Mead Westvaco (MWV) is expected to report EPS of $0.23, up from $0.11 a year ago. Last time out, MWV posted a 2.5% positive surprise. Over the last month, analysts have raised their expectations for this quarter by 7.17%. MWV is a number 2 rated stock.

Potential Negative Surprises

Masco (MAS) is expected to report a loss of $0.03, vs. a loss of $0.02 a year ago. Last time out, MAS posted a 300% disappointment (loss when profit was expected). Over the last month, analysts have slashed their expectations for this quarter by 116.6%. MAS is a number 5 rated stock.

Leggett (LEG) is expected to report EPS of $0.21, down from $0.27 a year ago. Last time out, LEG posted a 8.7% disappointment. Over the last month, analysts have cut their expectations for this quarter by 6.06%. LEG is a number 4 rated stock

MEMC Electronic Materials (WFR) is expected to report EPS of $0.12, up from a loss of $0.02 a year ago. Last time out, WFR posted a 21.9% disappointment. Over the last month, analysts have dropped their expectations for this quarter by 1.50%. WFR is a number 5 rated stock.

Earnings Calendar