Economic News
This week we received plenty of economic data. The Producer Price Index, which measures the average change in selling prices received by domestic producers of goods and services, was down more than the estimate at 0.5% . Consumer Food Products were down significantly, and weighed heavily on the index. Industrial Production was up slightly at 0.1% beating estimates, and Capacity Utilization was flat, staying at 74.1%. While flat, Capacity Utilization is up more than 6% for the year, so we still see this as an area for growth in our economy.
The Federal Open Market Committee released its minutes from the June meeting. While the committee lowered growth estimates slightly, we found it interesting that this was the first time they showed concern discussing inflation and our slowing economic growth. While we still do not think inflation will be a problem, it is still telling that this was the first time it was discussed at the meeting.
Retail sales were down for the second time month-to-month, but year-over-year, they are still up. These numbers generally report seasonally adjusted data, an adjustment that attempts to remove the seasonal variations in data so a more accurate comparison can be made month to month. Overall, sales are still up 4.8% from last year at this time.
Earnings Season Begins
We’ve been anticipating a strong earnings season, and this week’s kickoff did not disappoint. As of July 15, 2010, we have heard from 11 of the 497 Fortune 500 companies that report earnings. Just this week alone, those 11 companies averaged 493.81% growth, beating expectations handily. We saw a 31.3% surprise in growth and no negative surprises. The Industrial, Consumer Discretionary and Financial sectors have all reported growth.
Intel Corp. (NASDAQ: INTL), JPMorgan Chase (NYSE: JPM) and Alcoa (NYSE: AA) all reported stellar earnings. Alcoa beat expectations on all fronts—top line revenue, earnings and forecasts were all positive. Many Industrial sector companies also beat estimates, including W.W. Grainger, Inc. (NYSE: GWW), PPG Industries, Inc. (NYSE: PPG) and Fastenal Company (NASDAQ: FAST). We see these as very positive signs and a good litmus test for the overall economy. These companies operate in a derivative demand market, meaning everyone else must be doing well for them to do well, because they sell to suppliers and other industries, not to consumers.
YUM! Brands Inc. (NYSE YUM), the operator behind KFC, Pizza Hut and Taco Bell, also beat their estimates this week. Google Inc. (NASDAQ: GOOG) missed their numbers, which is a turn we predicted would happen. Apple Inc. (NASDAQ: AAPL) also took at bit of flack this week with Consumer Reports announcing they could not recommend the iPhone 4 because of an antenna issue that can result in dropped calls. The independent organization suggested that Apple offer a permanent and free solution to the problem before they could recommend it. We agree with the assessment because we feel Apple knew about the issue before the phone debuted.
Market Performance
Clients, friends and radio listeners have asked us why the “market hasn’t been doing anything.” If company profits are rising rapidly, why is the market not responding? Situations like this have happened before—most recently in 1993 through 1995. In that period, profits were reported up 15% annualized, but the markets only responded with a gain of 5.29%.
We feel we are seeing a similar pattern happening from fourth quarter 2009 through second quarter 2010. If profits are as strong as we think they will be—up around 35% and the markets should have returned about 12%. It is not unusual for the markets not to trust the growth until later when it has been proven after earnings season. That is when We suspect it we see the market respond.
Consider Intel’s recent record earnings. The company reported record sales, record profit margins and beat predictions. With the Sarsbane-Oxley Act, senior management has to certify the accuracy of the reported financial statement. Companies are playing it safe with their estimates, and that is part of why they are beating predictions.
Last week we discussed how Information Technology is our new defensive go-to sector. Many companies overspent in the early 2000s, and have been saving for the past several years. Now many corporations have cash, and are looking to make themselves more efficient and improve operations through technology. Intel is a company that is profiting from this trend.
When we compare the earnings to the economic pundits’ talk about a double dip recession, it just does not seem that it will be a reality. Employment is not increasing at a pace that will decrease our unemployment numbers, although many companies are reporting phenomenal sales. We expect the markets will eventually react in kind. We stick by our prediction that the S&P 500 Index will reach 1,300 by year-end.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
