Wednesday, July 18, 2012
The market can't seem to make up its mind about interpreting Ben
Bernanke's comments, particularly with respect to the need and
timing for more QE. But the simplest explanation could very well be
that the Fed, like everyone else, is watching the economy slow down
and looking for confirmation of whether it's something temporary or
more enduring. But keeping aside the question of how effective more
QE will be in reversing the slowing trend, one can be reasonably
sure that the Fed will 'do something' should the slowing trend get
confirmed.
For many, myself included, the sub-par jobs and retail sales
reports of recent months provide plenty of evidence that the
economy has slowed. But perhaps the Fed needs to confirm this trend
with more data in the coming days. Bernanke will again be
testifying today, this time to the House, and will perhaps be a
little clearer today in building and anchoring the market's
expectations.
Bernanke aside, we got a mixed housing report this morning, with
Housing Starts better than expected and Permits coming in lower
than expected. This is a complete reversal of what we saw last
month when Permits were stronger than the Starts.
The June Housing Starts data came in better than expected, up 6.9%
to a seasonally adjusted annual rate of 760K, compared to the 4.8%
drop in May to 711K. Permits were down 3.7% to 755K, reversing the
strong 8.4% gain to 784K in May. The strength in Starts was both in
single family and multi-family starts, with most regions of the
country showing gains. This is the highest Starts level since late
2008 and further confirmation of the positive momentum on the
housing front.
We should keep in mind however that the improvement is from a
low base as the long-term historical average for Starts is around
double the current level, while Starts at the 'bubbly' peak were
north of the 2.2 million mark. We will probably never go back to
that level, but we do need to see a sustainable recovery in this
key sector of the economy. Sales and inventories have stabilized,
but a pricing recovery will like take much longer given the shadow
inventory of foreclosure pipeline and the recent loss of momentum
in the labor market.
The second quarter 2012 earnings season is in full swing and the
picture that is emerging appears to be less bad relative to
pre-season fears. Results for the big banks, including from
Bank of America (
BAC
) this morning, have met or exceeded earnings expectations. That
said, revenue gains are difficult to come by and the overall tone
of company guidance is on the weak side.
Intel's
(
INTC
) results after the close on Tuesday were far better than what we
saw from
Advanced Micro Devices (
AMD
) a few days back, but they nevertheless also have revenue issues.
It is hard to tell whether Intel's top-line 'problem' is a function
of the global economic slowdown or the secular demand shift from
PCs to tablets, but we are seeing many companies struggle with
revenue gains.
Total earnings for the 52 companies that have reported results as
of this morning are down 2.3% from the same period last year, while
earnings for these same companies were flat (up 0.5%, to be
precise) in the previous quarter. After a fairly weak start, the
ratio of companies beating earnings expectations has steadily
improved. As of this morning, 67% of the companies have beat
expectations, with a median surprise of 2.5%. This is weaker than
what we saw from these same companies in the first quarter, when
75% beat expectations and the median surprise was 3.9%.
Bottom line, the second quarter earnings season is weaker than
what we have been seeing in recent quarters, but corporate profits
are not falling off the cliff either. But all this could change in
the coming days as roughly 90% of the reports are still to come.
Sheraz Mian
Director of Research
ADV MICRO DEV (AMD): Free Stock Analysis Report
BANK OF AMER CP (BAC): Free Stock Analysis
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INTEL CORP (INTC): Free Stock Analysis Report
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