Comstock Partners, Inc.April 25, 2013
The Noose On The Economy Is Tightening
As the evidence of an economic slowdown continues to mount, corporate revenues are feeling the pressure and the effects of the sequester are beginning to seep into the economy.
Last week we enumerated the overwhelming majority of economic reports that declined or fell short of expectations. These included payroll employment, the ISM manufacturing and non-manufacturing indices, retail sales, the University of Michigan consumer confidence survey, the NAHB housing market index, single-family housing starts, the NFIB small business index, the Empire State index and manufacturing production. Since then, additional releases have shown a meager 0.2% increase in March core capex orders following a drop of 8% in February. The Philadelphia Fed Index dropped in April, while the Richmond Fed index was down in both March and April. Overall, the ISM weighted composition was the lowest since November. Existing home sales have been about flat since November. The Chicago Fed National Activity Index was also down in March.
At the same time corporate earnings are flattening while revenues and guidance are disappointing. With 47% of the S&P 500 companies having now reported 1st quarter results, it appears that 69% have beaten their recently downward revised estimates, which are significantly under the projections made just a few months ago. Overall, first quarter earnings are tending toward an increase of about 3% over a year-earlier after being down in the prior two quarters. Importantly, however, only 35% of the companies beat their revenue estimates, compared to an average of 62% since 2002, and 52% over the last four quarters. Equally or even more troubling is the fact that negative guidance for 2013 exceeded positive guidance by a ratio of 14:1, compared to the historical average of 2:1. This indicates the probability of a lot of earnings problems in coming quarters.
The political controversy over the air controller furloughs and related airline delays are the canary in the coal mine indicating that the effects of the sequester are starting to be felt in the economy. The protests over the cuts are an indicator of what will happen as the pain and inconvenience spread through the economy. But, after all, this is just what the sequester was supposed to do----make the cuts so onerous that the authorities couldn’t let it happen. Unfortunately they did let it happen and unless something is changed, the economy will feel the dire effects.
All in all, we believe that economic growth and corporate earnings will be highly disappointing in coming quarters and that investors will drop the pretense that the Fed can fix everything that ails the economy. Although Bernanke, himself, has been virtually begging for help from fiscal policy, it does not seem likely that he will get it anytime soon.