Fiscal Cliff Resolution for Christmas? - Analyst Blog
17 Dicembre 2012 - 10:12AM
Zacks
‘Fiscal Cliff’ negotiators have reportedly made meaningful
progress over the weekend as the last full week of trading before
the Christmas holidays get underway. 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. Maybe 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. Maybe it’s just me,
but I find it hard to buy into these expectations.
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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