The First of the Third

in August

Earnings Preview 9/10/10


The second quarter earnings season is over, and now we are getting the first of the third quarter. We define any fiscal period ending in August, September and October to be the third quarter.


Still, we are just talking about a trickle of reports, just a total of 47 companies will report. However, that includes six from the S&P 500, including Oracle (ORCL), Federal Express (FDX), Discover Financial (DFS), Pall Corp (PLL), Kroger's (KR) and Best Buy (BBY). That is an interesting cross section of companies and together they should give some interesting clues on the overall economy.


With little action on the earnings front, all eyes will be focused on the economic data, and we will have a fairly active week on the data front. We start with Treasury Budget on Monday, and end with the Consumer Price Index on Friday. In between we get news on Producer prices, Industrial Production and Retail Sales. Any of those numbers has the potential to move the markets.




* We find out how much red ink was spilled in Washington during August when the Treasury budget is announced. The data is highly seasonal, but is not seasonally adjusted, so the month-to-month changes are less than meaningless -- they are downright misleading to look at. The most interesting comparison is the year over year. The expectation is that the government spent $97.5 billion more than it took in through taxes in August. That is a small improvement over the $103.6 billion in red ink last August. The other thing to look at is the year-to-date deficit relative to the year to date in 2009. The trend has been for small year-over-year declines in the deficit, but still very large numbers in any absolute or historical context.




* Retail sales in August are expected to have increased by 0.2% in August, down from a 0.4% increase in July. This is a very broad based measure of consumer spending, and goes far beyond just sales at the malls. A big part of the increase in July was higher sales from gas stations -- reflecting higher prices, not more driving. That effect should be much more muted in August. Auto sales were on the soft side in August, so excluding Auto sales from the calculation is expected to result in a 0.3% increase in sales up from a 0.2% increase excluding Autos in July.




* The Empire State Manufacturing survey, which is sort of like a mini-ISM just covering New York State. Unlike the national ISM number, the dividing line between expansion and contraction is zero, not 50. The consensus is looking for a reading of 10.0 up from 7.1 last month. That would mean that the manufacturing side of the economy is not only expanding in New York, but doing so at an accelerating pace.

* Industrial Production is expected to have increased by 0.4% after a 1.0% increase in July. The overall Industrial Production number can sometimes be a bit misleading. It includes utility output, which is highly weather dependent. Thus it is important to look not only at the overall number, but the change in manufacturing output as well.

* Capacity Utilization is reported along with Industrial Production. This is a highly under-rated economic indicator, and deserves a lot more attention than it gets in the press. Effectively it is measuring the employment rate of our physical capital, the way the employment report measures the utilization of our human capital. Overall capacity utilization is expected to rise to 75.0%. That is much better than the below-70 reading we saw a year ago, but is still historically low and indicating recessionary conditions. A healthy economy has capacity utilization around 80%, so we are about half way back to normal on this measure. As with the Industrial Production number, it is important to look at the Manufacturing only utilization as well as the overall, since there can be weather related changes in utility utilization.




* Weekly initial claims for unemployment insurance come out. They fell 27,000 in the last week, to 451,000. The third straight week of declines. After a huge downtrend from mid-April through the end of 2009, initial claims have been locked in a tight "trading range." Look for them to fall modestly next week. We probably need for weekly claims (and the four-week moving average of them) to get down to closer to 400,000 to signal that the economy is adding enough jobs to make a dent in the unemployment rate. A rate of over 500,000 signals that the unemployment rate is probably headed back up and a high probability of a double dip.

* Continuing claims have also in a downtrend of late. Last week they fell by 2,000 to 4.478 million. That is down 1.557 million from a year ago. Most of the longer-term decline due to people simply exhausting their regular state benefits, which run out after 26 weeks. Federally paid extended claims rose by 29,000 to 5.47 million. Looking at just the regular continuing claims numbers is a serious mistake. They only include a little over half of the unemployed now given the unprecedentedly high duration of unemployment figures. A better measure is the total number of people getting unemployment benefits, currently at 9.948 million, which is up 27,000 from last week. The total number of people getting benefits is now 128,000 million above year-ago levels. Make sure to look at both sets of numbers! Many of the press reports will not, but we will here at Zacks.

* The Producer Price Index (PPI) is expected to rise 0.2% on a headline basis, equaling its 0.2% rise in July. Excluding the volatile food and energy components prices are also expected to be up 0.2% in August, but down from a 0.3% rise in July. The report will also give clues about future inflation trends from prices further up the production pipeline. In general, inflation pressures are very tame right now.




* Inflation at the Consumer level is also very tame. The Consumer Price index is expected to show a rise of just 0.1% in August after a 0.3% rise in July. Excluding food and energy prices, the CPI should also be up 0.1% matching the rise in the core CPI in July. Right now deflation is a bigger threat than runaway inflation. At any given level, deflation is a far more serious problem than inflation. If the CPI were to come in a tick our two higher than expected it would not be all that bad. If it were to come in negative, that would be troublesome.



Potential Positive or Negative Surprises

Historically the best indicators of firms which are likely to report positive surprises are a recent history of positive surprises and rising estimates going into the report. The Zacks Rank is also a good indicator of potential surprises. While normally firms that report better than expected earnings rise in reaction, that has not been the case so far this quarter. Given the very small number of firms reporting, there were no obvious candidates for ether positive or negative surprises this week.

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Dirk van Dijk has 1 articles online

Dirk van Dijk, CFA is the Chief Equity Strategist for With more than 25 years investment experience he has become a popular commentator appearing in the Wall Street Journal and on CNBC. Dirk is also the Editor in charge of the market-beating Zacks Strategic Investor service. For more information, visit

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The First of the Third

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This article was published on 2010/09/11