Date: July 24, 2011 00:29: CEST
Two for the price of zero: first, we present David Kostin’s weekly chartology, which once again focuses on the only good thing to discuss these days: US corporate earnings which have now seen 45% of companies report (note: not European ones which as we pointed out on Friday have been abysmal so far). Here, among other things we learn that Apple now accounts for 40% ($0.23/share) of the $0.57 aggregate in EPS surprise beat for the S&P 500. Said otherwise, and the cumulative trailing “beat” for all the remaining companies in the S&P would have been 40% lower. In summary: “Three key numbers: 18% year/year EPS growth, 13% revenue growth, and 64 bp of margin expansion” Another notable observation which is in line with our prediction from mid May that staples will outperform discretionary: “Market participants will be surprised to learn that Consumer Staples growth is stronger than Consumer Discretionary growth for both sales (8% vs. 4%) and earnings (7% vs. 5%). Philip Morris International (PM) is a key contributor to growth in Consumer Staples. Actual results together with consensus expectations indicate slight margin declines in Telecom Services and Consumer Staples relative to 2Q 2010.” Some may indeed be surprised, others not so much. Lastly, Kostin still sees 1450 on the S&P by the year end despite Hatzius’ cut to estimates last week. Second, also included is last week’s key event summary.
Here is the one chart that summarizes corporate earnings so far:
The full presentation is below, but first, last week’s key bullish and bearish events courtesy of Rational Capitalist Speculator
+ IBM, Microsoft, and Intel earnings results point to continued business spending and expanding operations. Meanwhile, a very positive report from GE points to credit demand making a come back. Businesses are preparing for increased global demand led by China. Meanwhile, growth in offshore earnings will ensure that S&P500 companies maintain steady earnings growth and keep the bull market chugging. (Don’t own nor am I shorting any of these companies)
+ This week’s rally was set off by the inevitable solution to the Eurozone debt crisis. For all who were chicken-littling, you missed a great opportunity to buy. The Nasdaq and S&P were up almost 4% this week, while the Dow was up roughly 3%. Markets like to climb a wall of worry and that’s exactly what they did.
+ The slowdown in the global economy is transitory as Japan, the main victim of the exogenous shock that was the earthquake and nuclear disaster, just reported a trade surplus and signals that supply is making its way back online. Their economy is recovering and will translate to a global rebound in the second half of the year. The Eurozone is also bouncing back with manufacturing orders for May zooming higher by 3.6% vs. expectations of a 0.8% rise; the increase was led by Spain, Italy, and France.
+ Slowly but surely, the construction sector is getting back on its feet. The US Housing Starts report posts a surprise gain and its best result since the beginning of the year. Another indicator, the Buildfax Residential Remodeling Index just turned in its highest reading in the index’s history. Housing affordability is at its best in 3 decades. Construction affects large swaths of the economy, so these news-bits deal a double bull effect.
– China’s HSBC flash PMI for July just hit its lowest level in over 2 years and is signaling contraction for the first time in over a year. Speaking of China being in contraction, didn’t Premier Wen say that inflation was conquered just a month ago? So what’s this? This goes to show you that officials have no idea what they’re up against. They are way behind the curve. More tightening to come. Pssst….the Shanghai Composite notched a lower close in 4 of the past 5 days; it looks to be rolling over again.
– So Europe decides to turn the EFSF into a TARP Clone/Quasi-QE Machine. They also declare that Greece will undergo a “transitory” default (I’m glad “transitory” isn’t Pee Wee’s word of the month or I’d be deaf). Now that the US has stopped QE, here comes the EU. Now the American consumer will be held hostage by the Europeans as oil just hit $100 a barrel….again.
– Sentiment is slowly turning. If China is contracting, Europe is a hair away, and the US is perilously close, any negative event at this point will tip the scale. Confidence can be fickle. Just look at the follow through from the Eurozone deal rally on Thursday, not very good.
– The recent good news in housing is…”transitory”. Purchase applications to buy a home have been flat to down in the past 2 months, while existing home sales “unexpectedly” declined. As long as the job market remains depressed, don’t count on any rebound in housing anytime soon. The same can be said for commercial real estate.
And now, the complete David Kostin chartology.