Ahead of Wall Street - December 17, 2012 - Ahead of Wall Street
17 Dicembre 2012 - 9:46AM
Zacks
Monday, December 17, 2012
‘Fiscal Cliff’ negotiators have reportedly made meaningful
progress over the weekend as the last full week of trading before
the Christmas holidays get underway today. While we are a bit light
on the data front today, but the rest of this week brings a number
of top-tier economic and earnings reports. But the focus will
remain on the ‘Fiscal Cliff’ question.
Housing is a major component of this week’s data, with Tuesday
bringing the December homebuilder sentiment index, Wednesday the
November Housing Starts numbers, and Existing Home sales data on
Thursday. The expectation is for Housing Starts to pullback
modestly from the prior month’s level, while the homebuilder
sentiment index is expected to be essentially unchanged from the
month earlier level. Other major reports this week include the
November Personal Income & Outlays and Durable Goods reports on
Friday and the final read on third quarter GDP on Thursday.
Expectations for GDP growth in the fourth quarter have been
steadily coming down in recent weeks and currently stand a little
under 1.5%, with the growth pace not much better in the first
quarter of 2013 either.
Expectations for the back half of 2013 are for much higher growth
pace, though it’s hard to envision how the momentum will shift. A
Wall Street Journal report today quoting a Dow Jones Newswires
survey shows major Wall Street firms expecting treasury bond yields
to rise in 2013. Most prominent among these major brokerage firms
are the 21 primary dealers, who underwrite treasury bond sales and
deal directly with the Fed. The median 10-year Treasury bond yield
forecast for the primary dealers is for a roughly 50 basis point
rise by the end of 2013 – from the roughly 1.71% as of Friday’s
close 2.25% by the end of the year. Yield on the same security was
at 1.88% at the end of 2011.
This makes perfect sense, for two reasons. First, yields have been
so low for so long that the only direction they should be moving
going forward is – higher. Second, if anyone in the market has a
good understanding of the Treasury bond market, it is most likely
the firms that underwrite the securities – meaning the primary
dealers. The only problem is that the primary dealers had come out
with similar forecasts in 2011 and 2010, but unfortunately things
turned out differently. May be the third time is the charm. But
it’s not easy for anyone, even the primary dealers, to ‘fight the
Fed’. With the Fed committed to adding more than a $1 trillion
worth of treasury and mortgage bonds to its balance sheet in 2013,
it is perhaps reasonable to be skeptical of Wall Street’s treasury
yield forecast for 2013 as well.
These economic growth questions have a direct bearing on the
corporate earnings outlook for 2013 as well. The fourth quarter
earnings season gets underway this week with
Oracle’s (ORCL) quarterly report after the close
on Tuesday, though we are still a few weeks away from the
‘unofficial’ start of the earnings cycle with
Alcoa’s (AA) release on January 8th. Other major
reports this week include FedEx (FDX),
Discover Financial (DFS), and
Nike (NKE). Earnings expectations for the fourth
quarter have been steadily coming down over the last three months,
with total earnings expected to be up 1.2% from the same period
last year. This is a sharp drop from the roughly 7% earnings growth
expected just three months ago. But even as expectations for the
fourth quarter have come down, we haven’t seen much downward
adjustment to expectations for 2013, which still shows earnings
growth rate of more than 10%.
The same thinking that is looking for the economy and treasury
yields to start rising in the second half of 2013 appear to also at
play in looking for 10%-plus earnings growth. May be it’s just me,
but I find it hard to buy into these expectations.
Sheraz Mian
Director of Research
ALCOA INC (AA): Free Stock Analysis Report
DISCOVER FIN SV (DFS): Free Stock Analysis Report
FEDEX CORP (FDX): Free Stock Analysis Report
NIKE INC-B (NKE): Free Stock Analysis Report
ORACLE CORP (ORCL): Free Stock Analysis Report
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