Friday, November 16, 2012
The ‘Fiscal Cliff’ debate is all the rage at present as negotiations between Congress and the White House get underway today. But the two sides remain poles apart, notwithstanding their conciliatory postures and a resolution, even a temporary one, may not emerge for quite some time. Importantly, the odds of going over the ‘cliff’ are non-trivial, which means that we shouldn’t expect this issue to go away anytime soon.
‘Fiscal Cliff’ aside, we get the October Industrial Production report a little later, with expectations of a moderation in the growth pace from last month’s level. Given the soft international backdrop, any level of positive growth in the industry sector is welcome. But one has to be wary of the sustainability, if not the prospect for improvement, of this trend given how much international demand has been behind sector’s momentum.
The monthly ISM survey, which is basically a sentiment indicator, appears to have started improving after showing persistent weakness in the summer months, assuming Thursday’s weakness in the Philly Fed and Empire State readings were Sandy-related. But the monthly Durable Goods orders, which reflect actual ground reality, has been far less inspiring.
Recent data on China’s factory sector show signs of life, but the picture in Europe, Japan and elsewhere remains downbeat. This goes on to show that while the Fiscal Cliff uncertainty is a big deal in the near term, it is hardly the only issue on the horizon.
Dell’s (DELL) travails, as reflected in its quarterly earnings report after the close on Thursday, is due mostly to the secular shift in demand for desktops and laptops due to the popularity of tablets. Hewlett-Packard (HPQ) is essentially in the same boat as well. That said, it would not be correct to put the entire blame on this phenomenon and not acknowledge the subdued corporate capital spending picture that has repeatedly come out from the earnings reports of such bellwethers as Microsoft (MSFT), Intel (INTC) and IBM (IBM).
The Tech sector’s third quarter earnings performance clearly tells this story. Total third quarter earnings in the Tech sector are down 7.9% from the same period last year, while revenues in the sector are down 9.1%. Only 60% of the sector’s companies have beat earnings expectations, which is weaker than the aggregate average for the S&P 500 as a whole (the ‘beat ratio’ for the index is 62.6%, as of this morning). Given the Tech sector’s status as the largest earnings contributor to the S&P 500 and its profile as the perennial growth driver, this state of affairs raises doubts the current quarter and beyond.
There isn’t much to write home about the earnings picture beyond the Tech sector, either. As of this morning, we have third quarter earnings reports from 476 companies in the S&P 500, or 95.2% of the index’s total membership. Total earnings for these 476 companies are down 4.7% from the same period last year, with 62.6% of the companies beating earnings expectations.
The growth rate looks even weaker when Finance is excluded from the aggregate numbers. Excluding Finance, total third quarter earnings are down 9.8%. Estimates for the fourth quarter have come down by more than half since the start of the third quarter reporting season, but full-year expectations for 2013 still remain elevated and likely need to come down.
What this means is that while the Fiscal Cliff debate is dominating everything else at present, it is by no means the only issue that we need to be concerned about.
Director of Research