Housing, Durable Goods & Personal Income On Tap

Earnings Preview 9/23/11

We are starting to see a few companies report their third-quarter results (period ending in August, September or October). Just a trickle so far, but those might provide some clues as to how well the rest of the market will fare in the upcoming earnings season.

There will be just 30 firms reporting, but 10 of those are in the S&P 500. The firms reporting include Accenture (ACN - Snapshot Report), Darden Restaurants (DRI - Analyst Report), Family Dollar (FDO - Analyst Report), Micron Technology (MU - Snapshot Report), National Semiconductor (NSM), Paychex (PATX) and Walgreen’s (WAG - Analyst Report). That is an interesting cross-section of the market, and may well provide some enduring insights.

It will be a moderate week for economic data. We start out with New Home Sales, followed by data on housing prices. Durable Goods orders and Personal Income and Spending data are also on tap.

In the category of "important" but “old news,” we get the final look at GDP growth in the second quarter. With few earnings and just a moderate amount of economic data, the focus of the market will likely continue to be on the other side of the Atlantic and the ongoing Greek Drama.

Monday

• New Home Sales are expected to slip ever so slightly to a 293,000 rate from an already super-weak 298,000 in July. That is a simply pathetic level, even if it is slightly off the record low set in January. The records go back to the Kennedy administration. If we do come in at 293,000, 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 -- the gold standard of housing price indexes -- is likely to show a year-over-year decline of 4.50% for July. In June the decline was 4.53%. On a month-to-month basis, the index was up on a non-seasonally adjusted basis, but flat when seasonally adjusted in both May and June. Given that there are now 8.5 months worth of used home inventories on the market -- when normal is about six months -- I think we are going to see a continuation of home price declines for the rest of the year. However, given very high levels of affordability due to low mortgage rates, and normal (as opposed to wildly inflated) prices relative to rents and incomes, the declines should be relatively modest. Continued weakness in used home prices is a big part of the reason that new home sales have been so weak.
• Consumer Confidence is expected to bounce to a reading of 46.7 from 44.5 in August. That is still a very weak reading, so don’t get to excited about the increase. Since the Consumer is 71% of the economy, this should be an important indicator. Unfortunately, what consumers say in the surveys and what they actually do, are often very different. Mostly it is a coincident indicator reflecting gasoline prices and the unemployment rate. Political gridlock and the debt ceiling fiasco also probably played a role in the very soft reading in August. I think that it, and the similar University of Michigan survey, are very overrated data points. Still, that is a very low level, and is consistent with the other data we have been seeing. The debt-ceiling circus and the S&P downgrade probably hurt confidence despite falling gas prices and a tick down in the unemployment rate last month.

Wednesday

• New Orders for Durable Goods are expected to be unchanged in August after rising 4.1% in July. Previous months are often revised significantly for this data, and those revisions can be just as important as the current month’s data. Much of the strength 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 fall 0.2% partially reversing last month’s 0.8% increase.

Thursday

• Weekly initial claims for unemployment insurance come out. They had a very nice decline early in the year, but have been recently in a trading range above 400,000. Last week they fell by 9,000 to 423,000. I would expect a small decline this week, but nothing big enough to really change the story of very weak job growth. The consensus is looking for 420,000. The 400,000 level is important psychologically in that it has historically been the inflection point, below which we tend to create enough jobs to bring down the unemployment rate. Thus the dip below that level was very good news and was greeted by the market with a big rise, the rebound above it was met with a big sell-off this week.  The four-week moving average will stay above the 400,000 level, and might again top the 420,000 level. The week-to-week numbers can be very volatile, so the four-week average is the thing to focus on. Keep an eye on the prior week’s revision as well as the change from the revised number. Continuing claims have been in a downtrend of late, but the road down has been bumpy. Last week they fell by 28,000 to 3.727 million. That is down 755,000 from a year ago. I would expect a small decline this week. The consensus is looking for 3.713 million, a very small decrease. Some (most?) of the longer-term decline due to people simply exhausting their regular state benefits which run out after 26 weeks. But those don’t last forever, either. Federally paid extended claims dropped by 103,000 last week to 3.504 million, but are down 1.664 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 6.889 million, which is down 256,000 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 3.030 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. Unless the program is renewed (unlikely given the current Congress) then all extended benefits will end in January. Make sure to look at both sets of numbers! Many of the press reports will not, but we will here at Zacks.
• We get the final look at GDP in the second quarter. The second read came in at just 1.0%. In the first read we also got massive revisions to prior quarters, including the first quarter being revised all the way down to just 0.4% growth from 1.9% growth. No revisions to prior quarters are likely this time, but the consensus is looking for the second quarter to be revised up slightly 1.2% growth. The make-up of GDP growth can be just as important as the overall growth level. We will provide a complete breakdown of which parts of the economy were adding to growth and which were drags on growth, as well as if there was a change from the first look.

Friday

• Personal Income is expected to show no change from July, after it rose 0.3% last month. Just as important as the total amount of personal income is the source of that income. Recently, growth in income from wages and salaries has been very weak (although July did show some improvement on that front), with most of the growth we have seen coming from government transfer payments, along with rental income and higher dividends. Personal Spending is expected to rise 0.2% after rising 0.8% in July. Of course, if spending rises by more than income, the savings rate will fall. Over the long term, the economy needs a higher savings rate. In the short-term, a falling savings rate tends to boost the economy. Given the loss of confidence lately, I think it is unlikely that the savings rate fell in August, as the consensus numbers imply.
• The Chicago Purchasing Managers Index, one of the regional "mini-ISM’s" is expected to drop to 54.0 from 56.5. It is a "magic 50" index where 50 is the dividing line between growth and contraction.  Thus it would mean slower, but still positive growth for manufacturing in the Midwest. Given how the other mini-ISM’s have been coming out of late, the risk is that it is even weaker than the consensus is expected.

Earnings Calendar

Company	Ticker	Qtr End	EPS Est	Year Ago EPS	Last EPS Surprise %	Next EPS Report Date	Time	Daily Price
CAL-MAINE FOODS	CALM	201108	0.11	0.09	-31.82	20110926	BTO	$30.31
FERRELLGAS -LP	FGP	201107	-0.41	-0.58	-40.74	20110926	BTO	$21.01
ACCENTURE PLC	ACN	201108	0.89	0.66	4.49	20110927	AMC	$50.36
COMTECH TELECOM	CMTL	201107	0.36	0.73	20.51	20110927	AMC	$26.79
JABIL CIRCUIT	JBL	201108	0.49	0.35	-2	20110927	AMC	$16.08
NEOGEN CORP	NEOG	201108	0.26	0.25	4.17	20110927	BTO	$33.90
OMNOVA SOLUTION	OMN	201108	0.05	0.23	-20	20110927	AMC	$3.39
PAYCHEX INC	PAYX	201108	0.38	0.36	0	20110927	AMC	$25.90
PROGRESS SOFTWA	PRGS	201108	0.24	0.31	-8.82	20110927	AMC	$18.28
SABA SOFTWARE	SABA	201108	-0.23	-0.03	-1200	20110927	AMC	$5.35
SEALY CORP	ZZ	201108	0.04	0.04	0	20110927	AMC	$1.60
STANDARD MICROS	SMSC	201108	0.21	0.51	87.5	20110927	AMC	$19.99
SYNNEX CORP	SNX	201108	0.89	0.86	7.59	20110927	AMC	$24.13
WALGREEN CO	WAG	201108	0.55	0.49	4.84	20110927	BTO	$35.23
ACTUANT CORP	ATU	201108	0.46	0.31	10.87	20110928	BTO	$18.14
AMER SUPERCON	AMSC	201106	-0.09	0.28	22.22	20110928	BTO	$4.47
DARDEN RESTRNT	DRI	201108	0.78	0.8	0	20110928	BTO	$44.56
FAMILY DOLLAR	FDO	201108	0.63	0.56	-3.19	20110928	BTO	$52.29
MCCORMICK & CO	MKC	201108	0.65	0.66	1.85	20110928	BTO	$45.65
MOSAIC CO/THE	MOS	201108	1.27	0.67	5.07	20110928	AMC	$60.11
TEXAS INDS	TXI	201108	-0.26	-0.2	-119.23	20110928	AMC	$33.77
THOR INDS INC	THO	201107	0.59	0.78	2.94	20110928	AMC	$19.01
AZZ INC	AZZ	201108	0.75	0.8	19.05	20110929	AMC	$39.67
CALAMP CORP	CAMP	201108	0.03	-0.03	200	20110929	AMC	$2.72
DEMANDTEC INC	DMAN	201108	-0.12	-0.09	-21.43	20110929	AMC	$5.73
MICRON TECH	MU	201108	0.03	0.32	-47.06	20110929	AMC	$6.43
NATL SEMICON	NSM	201108	0.25	0.36	11.11	20110929	AMC	$24.98
WORTHINGTON IND	WOR	201108	0.35	0.3	17.86	20110929	BTO	$13.21
XYRATEX LTD	XRTX	201108	0.16	1.19	-33.33	20110929	AMC	$8.22
SHENGKAI INNOV	VALV	201106	0.19	-0.46	-15.79	20110930		$0.91

Read the full analyst report on NSM

Read the full analyst report on ACN

Read the full analyst report on FDO

Read the full analyst report on MU

Read the full analyst report on DRI