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Thursday, January 31, 2013

Stocks will likely remain in a tentative mood today ahead of Friday’s non-farm payroll, with this morning’s Jobless Claims data reversing the gains of the last two weeks. The Personal Income & Outlays data this morning appears to be on the positive side, but the report’s internals likely have some transitory factors that should make us a bit skeptical of the strength, particularly on the income side.

On the earnings side, we got solid positive surprises from oil companies like Marathon (MPC - Analyst Report), Philips 66 (PSX - Snapshot Report), Valero (VLO - Analyst Report), ConocoPhillips (COP - Analyst Report), but Dow Chemicals (DOW - Analyst Report) came short of expectations. Overall, we have a relatively mixed picture on the data front ahead of market open, with the Chicago PMI coming out a later that is expected to give us a preview of Friday’s manufacturing ISM reading.  

I had been skeptical of the sharp drop in initial Jobless Claims numbers the last two weeks and this morning’s data confirms that view. The data shows an almost complete reversal of the last two weeks’ gains, with initial claims going up 38K to 368K; initial claims were at 355K two weeks back. The four-week average remained essentially unchanged at 352K.

Seasonal adjustments are problematic at this time of the year and that was the primary reason for the wild swings in this series the last few weeks. That said, the overall tone of labor market appears to be favorable, as indicated by Wednesday’s ADP reading. I am looking for a positive surprise in tomorrow’s January non-farm payroll report, with consensus looking for something in the 160K vicinity. A jobs reading in the 190K to 200K range will provide a solid catalyst for this market to mount a fresh bid to scale the fall 2007 peak.


The other data we got this morning was for the December Personal Income & Outlays, with Personal Income coming in way better than expected, while Outlays (or personal spending) a smidge weaker than expected. On the Personal Income front, the strength is no doubt welcome, but it likely reflects income being pulled forward in the month in the run up to expected tax hikes due to the ‘Fiscal Cliff’ issue. There was a flood dividend announcements by companies in the month and bonuses also likely got paid out early, which will likely show up as a sharp drop in January data. The Outlays data doesn’t carry as much informational value since we got the fourth quarter consumer spending numbers in Wednesday’s GDP report (up +2.2%), but this morning’s monthly spending gain was a bit on the weak side.

On the earnings front, we now have fourth quarter reports from 223 S&P 500 companies, or 56.4% of the index’s total market capitalization, as of this morning. Total earnings for these 206 companies are up +2.5% from the same period last year, with 66.4% of companies beating earnings expectations with a very healthy median surprise of +3%. On the revenue side, total revenues for these companies are up +0.4%, with 57.8% companies beating top-line expectations with a median surprise of +0.9%. The composite growth picture for the fourth quarter, where we combine the result from the 223 companies that have come out with results already with the 277 still to come, is for growth rates of +1.5% for earnings and +0.3% on revenues. This would be an improvement over the essentially flat performance in the third quarter.

This has been a decent enough earnings season, particularly relative to the very low expectations in the run up to the start of the reporting season. The stronger looking beat ratios and surprises relative to the third quarter reflect those low expectations. But the quality of guidance hasn’t been that worrisome either. While guidance was invariably negative in the third quarter, it has been less so this time around. That said, expectations for 2013 have started coming down, particularly for the first half of the year. But they still seem to be on the elevated side and will need to come down more. It is interesting to see the market at multi-year highs with earnings estimates coming down. But who says the market is always right.

Sheraz Mian
Director of Research

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