Beware of Earnings
While the reported earnings for companies the 2nd quarter of 2011 was once again quite strong, with actual beating consensus forecasts by about 4%, be careful of mistaking history for future predictions.
- GOOD NEWS: Durable goods orders increased 4% in July from June 2011, a 9.2% increase from July 2010 (According to U.S. Census report from August 24th, 2011)
- GOOD NEWS: Industrial production capacity utilization hit 77.5% in July (0.8% increase from June and 2.9% increase by July 2010). While still below the peak of 81.3% in September of 2007, it is well above the dip of 67.3% in June 2009 and has been rather consistently rising. When capacity drops, increasing unemployment becomes more likely. (Source: Federal Reserve)
- NEUTRAL: Real Retail and Food Services sales in July were flat from June 2011, but up 4.8% from July 2011 (According to U.S. Census report from August 18th, 2011)
- MIXED NEWS: Auto and truck sales were up 6% in July from June 2011, and up 5.8% from July 2010. How’s that mixed news? Sales peaked for the year in February and were back to August 2010 levels in June. (Source: U.S. Federal Reserve of St. Louis)
- BAD NEWS: PMI Composite Index drop 8% from June to July, reaching 50.9%, which is a drop of 7.6% from July 2010. A PMI of less than 50 is a potential recession indicator. PMI peaked in February 2011 at 61.4 and has been falling since. (Source: Institute for Supply Management)
- BAD NEWS: One rather robust indicator of economic activity is railroad freight. The chart below shows continued slowing in both the U.S. and Canada for 2011 (Data from RBC Capital Markets as of mid-August)
The Chart below gives an idea of annual trends and shows that while total carloads are above the 2009 lows, the downward trend is noteworthy.
- BAD NEWS: Add to this that US weekly chain store sales declined 1.0% last week, a big drop that follow a bigger 1.5% drop the previous week. Chain store sales jumped some 3.5% in July but are now down 3% in the first 3 weeks of August. (Data courtesy of News to Use and International Council of Shopping Centers)
Bottom Line: Warning signs abound that the economy is slowing. We’ve seen plenty to indicate considerable slowing in the Eurozone and China as well. If this slowing will reach recessionary levels is yet to be seen, but investors need to be aware of the risks and protect their portfolios from what could be a significant market downturn and considerable volatility.
