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Earnings Season Brings Pain…Earnings misses from UPS and others, a light report for Apple, and a loss from Amazon have dragged down markets, giving investors pause over what lies ahead. So far, 59% of companies
reporting have missed their earnings estimates.
What it means – What took so long? The economy is not falling apart, but it’s also not shooting higher. There is a slowdown at hand. Things are difficult. Earnings had grown from 2010 through 2011, but now we are looking at an earnings decline. Why were stocks near all-time highs? It appears investors are now recognizing what we have discussed for a long time – the Fed’s activities are not leading a recovery, and the global economy is dealing with a lot of issues at the same time. Volatility remains the name of the game right now. Be cautious.
New Home Sales Move Up… Following on higher housing starts, new home sales rose from 373,000 to 389,000, on an annual basis.
What it means – Inventory is down (4.5 months), and sales are moving up. This is good, not because it signals a recovery, but because it means we are at least moving sideways for a while. New home sales of 389,000 is still just 25% of the sales recorded at the peak in 2005. While returning to the level of 2005 is not in the cards, the main points is that we have a modest bounce from a very low level. With banks still sitting on inventory, this bounce could be short lived.
But Pending Home Sales Stay Flat… Month over month pending home sales were up 0.3%, which follows a 2.6% fall last month.
What it means – This is part of the reality that housing still stuck in the mud. It’s no longer sinking in quicksand, but not rising to the moon either.
Durable Goods Up 2%… Durable goods, the sale of items that last more than three years, rose 2% last month, after falling just over 2% the month before.
What it means – Durable goods is a volatile number, so any given month is not particularly enlightening. What is telling though is the trend. The negative 2%+ last month was followed by a 2% rise, giving an average of zero. The sluggish economy and disappointing earnings confirm what this number suggests –things are slowing down.
Jobless Claims Fall from 392,000 to 369,000 … The weekly measure of new jobless claims fell back a bit to the middle of the recent range, 370,000.
What it means – After the huge drop two weeks ago to 339,000, then the incredible rebound up to 389,000 last week (later revised to 392,000), we are now back to the middle of the range, 370,000. This is exactly what we expected. Employment is not getting much better. We are simply marking time, waiting for the economy
3rd Quarter GDP Advance Estimate Is 2%… The growth rate of the US economy in the 3rd calendar quarter was estimated at 2%, but this number will be revised twice in the months ahead (2nd estimate at the end of November, and the final number will come out in December).
What it means – Another head-shaker, as if we needed one. Companies are missing earnings, exports are slowing down, Europe, China, and Japan are all suffering, jobless claims remain elevated, labor force participation is low, and the part of employment that is growing is temporary work. The outcome? GDP is estimated to have increased from the 2nd Quarter rate of 1.3% (annualized) to 2.0%. Sure it did. Of course, in the details
are the facts that exports slowed down, business investment in IT fell, and government spending was the largest component of the gain, adding 0.71% to the number. That’s no way to build a recovery.
Europe Is In Massive Slowdown Mode… European Banks lent 1% less than last year, Daimler Benz sales are slowing, Germany is lowering pension funding, Greece did not meet its bailout requirements, and Ireland wants cash.
What it means – There was a lot of hoopla and fanfare about ECB President Draghi’s pledge to do “whatever it takes” to backstop the euro, and then again about the Outright Monetary Transaction (OMT) that is an openended bond buying plan. These efforts might funnel needed euros to failing governments at the expense of euro zone savers, but they do not cause end demand to increase. With the euro sitting near $1.29-$1.30, look
for euro weakness and dollar strength in the months ahead.
Japan’s Debt Bubble Rises… Japan needs to sell another $470 billion of bonds to fund its deficit, but there is political opposition. If the debt does not get placed, then the Japanese government faces a fiscal crisis, which could affect the valuation of existing government debt. Bondholders are very, very nervous.
What it means – The Japanese have the most debt per GDP (230%) of any developed nation. What allows them to keep selling more debt is the fact that most of their bonds are bought internally by pension funds, Japanese investors, and Japanese corporations. Today there is dissension in the government over selling more debt, which is causing tension with current bondholders. If interest rates rise in Japan it would cause the valuation of existing debt to fall, sending shockwaves through a country where most everyone has a lot of exposure to government bonds.
Gold and Oil Fall…Commodity prices fell over the last week and last month, with gold falling almost $100.
What it means – This is the part of the story we have tried to warn people about for some time. As the global economy stalls, even after Herculean efforts by central banks, commodities should tumble. While we think the current fall is temporary, look for an even larger drop in the spring after the relief of the US elections has evaporated
and we are fully in the throes of the tax and spend arguments.
Next Week – 10/29-11/02 – Next week we have housing, Case-Shiller, manufacturing, Chicago PMI and ISM, and jobs, the monthly Employment Report.
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