Brouwer & JanachowskiApril 15, 2016
A penny here. A penny there. The first fifty or so or of the S&P 500 companies reported this week. There were a few highlights, such as Citibank and Wells Fargo earning a few pennies more than expected. But this is the game the Street plays. Management guides lower. Analysts revise down. Companies come out ahead. We get more “beats” than misses and a rally. But we’re more interested in the year-over-year numbers and what they're saying about the future.
On the banks’ side (we had more than usual banks reporting), the story is that earnings are way down, as in 25% down, from last year but the outlook is brighter. It was a case of expecting the worse and getting not so bad. For the rest, we saw quality companies like Nike report well. That means the dollar overhang from last year will be less of a problem. Elsewhere, it’s a mixed bag with about an equal number of positive and negative surprises. The S&P 500 is up 15% from its lows and less than 2% off its July 2015 highs. Here's what caught our eye:
- U.S. Inflation: a headline rate of less than 1% for the year. Fuel and energy prices led the way down. Gasoline prices, at a forecast average of $2.04 this summer, are their lowest since 2004. But buried in the details are two interesting points. Here’s the first:
This is transportation inflation and it’s been running negative for a year. But that means we enter a period of lower base effects. In other words, the price level is low but accelerating. Here’s another:
This is medical inflation, which saw a large drop following Obamacare, but is now up to its long-term average growth of over 3%. These two components are around 12% of the CPI. And if they start to move, we may see some core inflation numbers coming in at over 2% later in the year. That’s above the Fed’s target.
- Treasuries: the key Ten-Year rate remains at 1.7% pretty much where it was at the last payroll date, two weeks ago. The market is not making any big decisions. Growth indicators from the Atlanta Fed and the new similar model from the New York Fed, are at around 0.3% to 0.8% for the quarter, well down on New Year estimates. This week’s economic data didn't help much with weak reports on industrial production number and consumer sentiment.
- And a triple: i) China growth was better than expected, so the local market rallied. But ii) a major coal producer filed for Chapter 11. It had a debt-to-equity ratio of 12:1 and lost $2bn on $5bn of revenue. And iii) the Federal Deposit Insurance Corporation said that some big banks’ resolution (i.e. stress) plans were not “credible”. If we were in the ranks of senior management of those banks, we might want to push that to the top of the “to do” list.
Bottom Line: it’s all earnings now. For the next two weeks we have a blackout period for stock buybacks. If we get some respite from the energy companies and some indications that the U.S. consumer is back at work, the market could drift higher.
via GIPHY Other:
Toby ruined his daughter’s career
Giant sinkholes (not a metaphor)
Say America’s bankrupt one more time
More trouble at Theranos
--Christian Thwaites, Brouwer & Janachowski, LLC
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