NEW$ & VIEW$ (23 APRIL 2013)


Led by declines in production- and employment-related indicators, the Chicago Fed National Activity Index (CFNAI) decreased to -0.23 in March from +0.76 in February. Three of the four broad categories of indicators that make up the index decreased from February, and only one of the four categories made a positive contribution to the index in March.

The index’s three-month moving average, CFNAI-MA3, decreased to –0.01 in March from +0.12 in February. March’s CFNAI-MA3 suggests that growth in national economic activity was very near its historical trend.

The CFNAI Diffusion Index moved down to -0.02 in March from +0.13 in February. Twenty-eight of the 85 individual indicators made positive contributions to the CFNAI in March, while 57 made negative contributions. Fifteen indicators improved from February to March, while 70 indicators deteriorated. Of the indicators that improved, six made negative contributions.

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These three assets are “very sensitive” when it comes to the growth/inflation story. Each of them has been making a series of lower highs since May of 2011. Now they are breaking support lines of rising wedges and pennant patterns.


Sales of previously owned homes in March fell 0.6% from February after adjusting for seasonal factors, the National Association of Realtors said on Monday. Sales were still up by 10.3% from a year earlier, marking the 21st consecutive month in which sales have increased from their year-ago levels.

The number of homes for sale in March totaled 1.93 million, up by 1.6% from February but down by 16.8% from one year ago. It was the lowest level of inventory for the month of March since 2000, according to the Realtors’ group.


The median home price in March rose to $184,300, up 11.8% from one year ago, but still well off the peak of $230,000 in July 2006. Median prices rose by 26% in the West, reflecting an increase in sales of more expensive homes. Homes are also selling more quickly: Some 37% of homes sold in March were on the market for less than a month, and half of all homes sold within two months, down from three months one year ago, according to the NAR.

On Monday, regular averaged $3.54, according to the EIA’s weekly survey of gasoline stations, down 33 cents from $3.87 a year ago. And with the most recent downdraft in crude-oil prices, gasoline may go lower still.

Since Americans use roughly 135 billion gallons of gasoline a year, the 33-cent decline would, if it persisted, save them about $45 billion a year. That comes to about 40% of the estimated $115 billion that will come out of paychecks this year due to the reversal of the 2011 payroll-tax cut.

Wealth effects also are providing a boost. Economists at Credit Suisse calculate that over the past two decades, every 10% increase in housing wealth led to a 0.33% increase in consumer spending, while every 10% increase in stock-market wealth led to a 0.11% increase in spending.

Economists polled by The Wall Street Journal estimate home prices will rise 5.3% this year, which would translate into a spending increase of about $20 billion. The stock market is up about 9% so far this year, which would translate to a further spending increase of about $10 billion. 

(Chart from Bespoke Investment)

  • Weekly sales bottoming out?


On Sunday, the Federal Aviation Administration, which is part of the Department of Transportation, started implementing the furlough, or leave of absence, of 47,000 workers, many of them air traffic controllers.

They will be required to take unpaid leave for one day out of each 11 until the end of the fiscal year, in September, as the FAA tries to cut $637m out of its budget, which is mainly personnel costs.



Germany Joins Low-Speed Europe

When even Germany stops motoring, you know you’ve got a problem.

The woes of Europe’s auto industry show no sign of abating: European Union auto sales were down 9.8% year on year in the first quarter. But within the data, there is an anomaly. In Germany, Europe’s supposed economic strongman, car sales fell 12.9% over the first quarter compared with 2012(…).

The latest 17% year-on-year drop in sales in March was partially attributed to there being two fewer working days this year. But German car manufacturers are generally at a loss to explain the sales slump, other than to cite weak consumer confidence amid continuing uncertainty around the European economy.

The concern is that Germany’s car market is simply now catching up with other depressed European markets. Germany’s car sales last year were still only 11% short of their 2006 peak, whereas Spain and Italy’s markets have shrunk about in half since precrisis highs. (…)

German Economic Indexes Show Unexpected Decline

A gauge of manufacturing from a survey by Markit Economics fell to 47.9 from 49 the previous month. For services, the index fell to 49.2 from 50.9.

Italy: a senior moment
Turn on the liquidity taps and look the other way

Since the inconclusive election in late February, the 10-year yield has fallen 80 basis points to a whisker above 4 per cent. Italy’s political and economic plight is arguably worse now than 18 months ago. Projections show that public sector debt will be 130 per cent of gross domestic product this year – 4 percentage points higher than its last forecast in September. The head of the Confindustria business lobby says the gridlock has cost the economy 1 per cent of output.

The other beneficiary of liquidity is Spain. Despite its banking and financial crisis, a party funding scandal and the bailing-in of bank depositors in the rescue of Cyprus, Spanish 10-year bond yields are 300 basis points lower than last July.

The fundamentals are deteriorating in both Spain and Italy, political events are discouraging and policy makers are dithering. But the fact is that they can afford to. Italy without a government? Why worry? Thanks to central bank liquidity investors can look the other way.


Spain’s Recession Eases as Rajoy Prepares Growth Plan

Gross domestic product fell 0.5 percent from the fourth quarter, when it dropped 0.8 percent, the most since 2009, the Bank of Spain said in its monthly bulletin today. That’s the seventh quarterly contraction. (…)

The International Monetary Fund last week cut its outlook for Spain, predicting the economy to shrink 1.6 percent this year before growing 0.7 percent in 2014.


First, the official S&P numbers as of last week: Of the 104 companies having reported on Apr. 18, 67% beat and 22% missed.

Q1 estimates are now $25.40, down from the Match 28 estimate of $25.49. Full year estimates are dropping markedly from $111.14 at the end of March to $109.52 as of Apr. 18, a 2.3% decline in lest than 3 weeks.

Factset calculates that of the 102 companies that have reported earnings to date for the quarter, 72% have reported earnings above estimates. This percentage is slightly above the average of 70% recorded over the past four quarters. However, only 45% of companies have reported sales above estimates. This percentage is well below the average of 52% recorded over the past four quarters.

Remember that aggregators use different methods to compile earnings. I stick with S&P`s, especially since they consider pension amortization as operating costs, unlike most others.

Pointing up  Bespoke Investment looks at the broad market:

Bottom-Line Average, Top-Line Bad

A little over 200 companies have reported earnings so far this season, and as shown below, 58% of them have beaten consensus earnings estimates.  This is the exact same “beat rate” we saw last earnings season.

Unfortunately, top-line revenue numbers haven’t been pretty.  As shown below, 43.9% of the companies that have reported have beaten revenue estimates, which would be the weakest reading seen since the financial crisis.  Last earnings season, we saw a big bounce in revenue beats after two very weak quarters, but it looks now like we’re reverting back to what we saw in the middle of 2012.

Here`s a good analysis from Zacks: Evaluating Q1 Results – Focus on Technology

As of Monday evening (4/22/13), we have Q1 results from 15 of the 69 Tech sector companies in the S&P 500. This is barely 1/5th of all Tech companies in the index, but keep in mind that these 15 companies include many of the industry heavyweights, like Google, Microsoft, Intel, Oracle, Texas Instruments and others. These 15 companies combined account for 47.8% of total Tech sector market capitalization and account for 43.8% of all Q1 earnings expected from the sector.

Total earnings for these companies are up +3.9% from the same period last year, with 66.7% of companies beating earnings estimates. Total revenues are up +4.8%, but only 33.5% of the companies have come out with positive revenue surprises. The growth rates look decent enough, but they will disappear following Apple’s report, which is expected to show a -16.8% year over year decline. The composite earnings growth rate for the sector, where we combine the results that have come out with those still to come, is for a decline of -5.9% from the same period last year. Excluding Apple, Tech earnings would be down only -2.3%.

But irrespective of the growth rates, the ‘beat ratios’ (the percentage of companies coming ahead of expectations) are weak, and are notably so on the revenue side. The earnings ‘beat ratio’ of 66.7% is weaker than the aggregate for the S&P 500 as a whole and relative to how these same group of companies performed in 2012 Q4, but the revenue ‘beat ratio’ of 33.5% is outright mediocre.

So, what’s going on with Tech earnings?

Investors have soured on Apple big time and hardly anyone is expecting fireworks from the company in tomorrow’s release, particularly following last week’s negative pre-announcement from Cirrus Logic. But Apple still matters – to the sector as well as the market. After all, even if it’s results came in-line with expectations (a decline of -16.8%) tomorrow, its earnings will account for more than 22% of the entire sector’s Q1 earnings. (…)

Apple’s problems may be company specific, but plenty of its Technology peers are faced with similar earnings challenges. In Intel’s earnings report last week, we saw how the weak PC demand picture is weighing on its outlook. The situation isn’t much different for other PC centric players like Hewlett-Packard, Dell, Microsoft and Advanced Micro Devices, to name just a few. Ironically, Apple played a leading role in bringing the PC market to its knees.

Others are faced with different headwinds that lead to the same earnings challenges. Companies with advertising-based business models like Google, Facebook, Yahoo and others are struggling with monetizing the secular shift from PC to mobile devices. This platform shift has material consequences for these companies’ margins, as do the headwinds facing Apple and the PC players.

A key driver of the Q1 earnings weakness for the sector is from margin pressures. Net margins in the quarter are expected to be down 177 basis points from the same period last year, which more than offsets the stronger-looking +3.3% gain in revenues, resulting in -5.9% decline in total earnings.

The first and third quarters are typically the seasonally weakest periods for the sector. As such, the market may be willing to cut the Tech companies some slack for a weak showing this reporting season. But a lot will depend on how they guide towards the coming quarters, as expectations, particularly in the second half of the year, are for a resumption of strong growth.

Current consensus expectations are for total Tech sector earnings to increase by +8.3% in the second half of the year after declining by -5.2% in the first half. The second half recovery is then expected to carry into 2014, resulting in total earnings growth for the sector of +13.2%. A big part of these earnings recovery hopes rest on margin expansion.

On a quarterly basis, net margins for the sector peaked in 2012 Q3 and have yet to get back to those levels. On an annual basis, the sector’s net margins have been essentially flat since 2011, but are expected to make strong gains later this year and next year after contracting in the first half of 2013. Hard to envision such margin gains given the multiple headwinds facing them.

What all this boils down to is that earnings expectations for the broader S&P 500 in general and the dominant Technology sector in particularly remain elevated. I am not talking about estimates for the currently underway first quarter of 2013, but the coming quarters, particularly the second half of the year and next year. Those estimates need to come down and they most likely will come down after we hear from management teams.


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