Download Ed Yardeni - EuroCapital

Ed Yardeni
O Ed Yardeni είναι διεθνούς φήμης αναλυτής και σύμβουλος επενδύσεων
11 Νοεμβρίου 2010
MAJOR TOPICS: The Export President. Deficit Reduction. Free Trade.
BULLET POINTS: (1) A New “One” after the shellacking? (2) Is Barack morphing
into Bill? (3) The pro-business President goes to India with an entourage of business
execs. (4) The free-trade President. (5) What ever happened to PAYGO? (6) CoChairmen of deficit reduction panel go rogue. (7) Pelosi hates it. (8) How about
PAYCHOP? (9) Big trade surpluses for China and Germany. (10) Free trade vs.
protectionism. (11) Overweight transportation stocks.
NOTICE: Our Morning Briefings are now available on FactSet.
I) STRATEGY: A passage to India. President Barack Obama went to India after his
party took a “shellacking” in the midterm elections both in Congress and in many
state and local gubernatorial and legislative races. I believe that he might come back a
new man. This might be wishful thinking, but I think he may already be moving away
from the left toward the center of the political spectrum.
In other words, the President may be doing what Bill Clinton did after his midterm
shellacking in 1994: Bill, who had billed himself as a New Democrat, became a
Republican. Not really, but he did embrace policies that Republicans favored, and he
certainly distanced himself from the left wing of the Democratic Party. Despite his
party’s majority in both chambers of Congress, his effort to create a national health
care system ultimately died during August 1994. It was the first major legislative
defeat of Clinton's administration. Two months later, after two years of Democratic
Party control, the Democrats lost control of Congress in the midterm elections in
1994, for the first time in 40 years. Yet, Clinton left office with the highest end-ofoffice approval rating of any US President since World War II.
This time, the rout for the Democrats was even more devastating. A year ago, I started
predicting that there would be a decisive “regime change” in Congress. It was even
more dramatic than I expected, especially in the House where Republicans had a net
gain of more than 64 seats with eight seats still undecided. Of those eight, five lean
Republican; three lean Democrat. That surpassed the 1994 Republican Revolution’s
54-seat net gain, and was the biggest rout in the House since 1938.
At the state and local levels, the GOP held 12 and netted six gubernatorial seats,
giving Republicans a gubernatorial majority for the first time since 2006. Republicans
picked up more than 680 state legislative seats, more than double the typical flip in a
mid-term election, giving the GOP its greatest state legislative control since 1928. At
least 19 (and maybe as many as 23) Democratic held chambers flipped to the GOP,
meaning that Republicans could control as many as 59 of the 99 state legislative
chambers (every state except Nebraska has two chambers) with another one tied for
control.
Before the latest midterm elections, conservatives charged that President Obama is
anti-business and documented their accusation by listing lots of such policies he
supported and statements he made over the past two years confirming this bias. In
fact, the latest cover of Bloomberg Businessweek shows a picture of Tom Donohue,
the head of the US Chamber of Commerce, and is titled “Obama’s Tormentor.” He
has been one of the most vocal critics of the President’s anti-business policies. So
what was the President doing in India with an entourage of more than 250 business
executives and six presidents of American universities for a three-day visit aimed at
promoting some $10bn in cross-continental business deals, including India's expected
$5.8bn purchase of 10 Boeing C-17 transport aircraft?
Even more intriguing is that in Seoul today, the President confirmed that he is pushing
for a free trade agreement with South Korea. During his first two years in office, he
did nothing to advance the stalled Korean deal or other similar deals in the face of
union opposition. Could it be that Mr. Obama is repositioning himself as the Export
President? I think he is. He started to do so in his State of the Union message at the
beginning of this year when he stated that he wants to double US exports over the
next five years.
Of course, there are lots of US company executives who weren’t invited to join the
Obama entourage who must be miffed that their competitors were favored with such
an opportunity. The ones who were chosen may feel an obligation to support the
President next time he asks for it. The point is that in our capitalist system, it isn’t
appropriate for the President to promote the business of any one company. However,
if the anti-business Old One is transforming himself into the pro-business New One,
that’s bullish for stocks.
Why would Barack Obama abandon his left-wing base? The answer is obvious: To
get reelected for a second term. I had my doubts about whether he wanted another
term, but now I am convinced that he does. The left wing won’t get him reelected
after the drubbing that the Democrats took in the midterm elections. The Republicans
are now especially well positioned at the state and local levels of government to
redistrict the voters to their advantage in time for the elections two years from now.
This is why Mr. Obama is already taking his cues from Clinton’s playbook.
If he plays by the book, he has a good chance of getting reelected. That’s assuming
that the economy improves. Ironically, it may very well do so because the Democrats
got shellacked. Now businesses may finally start to hire at a faster pace because the
new Congress is extremely unlikely to enact lots of new regulations and may reverse
some of the worst ones passed over the past two years. Now off the table are Cap and
Trade and Card Check. To increase the odds of better economic activity, the President
is bound to support a two-year extension of the Bush tax cuts. After last Tuesday’s
rout, he now must realize, “It’s the economy, stupid!”
* S&P 500 Q3 Earnings Season Monitor (daily): With 90% of the S&P 500
companies finished reporting Q3 earnings so far, it’s clear that this will be yet another
good earnings season! More companies have reported higher y/y earnings and
revenues in Q3, and the revenue surprise is higher than in Q2, but the earnings
surprise is smaller. With results in for 451 of the 500 companies, earnings and
revenues are 6.9% and 0.7% above the analysts’ forecasts. Earnings for the 451
companies are 39.3% higher than a year ago and revenues are up 8.9% y/y. Excluding
the Financials sector, the y/y earnings growth rate falls to 24.0%, but the revenue
growth rate rises to 10.3%. More than 72% of the companies have a positive earnings
surprise, but only 61% have a positive revenue surprise. Seventy-five percent have
higher earnings y/y, but 81% have higher revenues. All 10 sectors have a positive
earnings surprise so far, but three sectors have missed their revenue forecast:
Consumer Staples, Health Care, and Industrials. Consumer Staples and Telecom are
the only sectors with lower earnings y/y, but all 10 sectors have higher revenues. With
earnings more than 90% complete for seven of the 10 sectors, Q3 is sure to mark the
S&P 500’s seventh straight positive earnings surprise following six negative surprises
in a row through Q4-2008.
* S&P 500 Sectors Forward Earnings & Valuation (weekly): What’s the latest
direction in weekly forward earnings per share and valuation for the 10 S&P 500
sectors? In the week ended November 4, forward earnings rose for 9/10 sectors, and
valuation rose for 8/10 sectors. Forward earnings at a record high for Consumer
Discretionary, Consumer Staples, Health Care, and Tech. Forward earnings at or near
a cyclical high for most of the rest: Financials (23-month high), Industrials (23-month
high), and Materials (24-month high). Three sectors are down from their recent
cyclical high: Energy (21-month high in September), Telecom (12-month high in
September), and Utilities (19-month high in September). S&P 500 P/E steady at 12.7
last week, and up from a 16-month low of 11.5 in early July, but is down from a 27month high of 15.1 in October 2009. P/Es for the 10 sectors up from cyclical lows in
July, but relative valuation is near a 14-year low for Tech, and a six-year high for
Telecom. For detailed charts including squiggles, see Earnings Week (with Squiggles)
on our website.
* S&P 500 Sectors Quarterly Earnings Growth Trends: Any big changes recently
to the S&P 500 quarterly earnings and revenue growth forecasts for Q4? Analysts
have increased their earnings and revenue growth forecast slightly in the past month.
Analysts expect the S&P 500 to record double-digit percentage earnings growth and
single-digit revenue growth from Q3-2010 to Q2-2011. The S&P 500’s y/y earnings
growth forecast for Q4-2010 is up to 35.2% from 34.8%, and the revenue forecast
edged up to 6.1% from 6.0%. Just two sectors had a rising Q4 earnings growth rate in
the past month: Consumer Discretionary and Tech. But five sectors had their Q4
revenue growth forecast rise: Consumer Discretionary, Consumer Staples, Tech,
Telecom, and Utilities. Y/Y earnings growth expected to be positive in Q3 and Q4 for
all except Telecom in Q3 and Utilities in Q4. Revenue growth is expected to be
positive in Q3 and Q4 for all except Utilities in Q3. Earnings growth expected to edge
higher q/q in Q4 for the S&P 500, but only two sectors are higher: Financials and
Telecom. Q4 revenue growth expected to slow q/q for the S&P 500, but improve for
Consumer Staples, Financials, Telecom, and Utilities.
II) CREDIT: PAYGO was originally passed in 1990 under President George H.W.
Bush and again in 1997 under Bill Clinton. PAYGO laws force Congress to find
revenue sources for any spending or tax cuts, but the last PAYGO legislation expired
in 2002. After the 9/11 attacks, Washington lost any interest in fiscal discipline. The
crisis was used as an excuse to cut taxes, provide more tax credits, exempt more lowincome earners from paying any income tax at all, and ramp up spending not only on
defense, but also on everything else.
In our Social Welfare In America chart book (linked below), Figure 7 shows
government benefits received by individuals vs. the payroll taxes collected from
employers and employees to pay for them since 1960. The data are included in the
monthly personal income release. Figure 8 shows the difference between the two.
Until 2001, the revenues tended to pay for the outlays. Since then, the social benefits
deficit has swelled to a near record annualized $789.2bn through September of this
year, accounting for 61% of the overall federal deficit over the same period.
Of course, some of the recent swelling of the deficit is attributable to the recession
and the weak recovery. Nevertheless, the official forecasts from both the OMB and
CBO project deficits totaling roughly $10tn over the next 10 years, and that’s
assuming a resumption of more normal and better growth in the years ahead. The
official forecast will be even bigger if the Bush tax cuts are extended for another year
or two as seems increasingly likely.
The GOP-controlled House in 2011 will focus, right out of the gate, on returning
discretionary spending back to 2008 levels in an effort to lower the $1.3tn deficit for
the just ended fiscal year. There is historical precedence for a divided government
successfully attacking an out-of-control deficit. After the Republicans, led by thenSpeaker of the House Newt Gingrich, took control of the House in 1994, midway
through Democratic President Bill Clinton’s first term, the result was a budget surplus
at the end of Clinton’s second term in 2000.
Meanwhile, the co-chairmen of the President’s bipartisan deficit-reduction
commission surprised everyone by releasing a detailed draft outline of their proposal
for a package deal to reduce the deficit (linked below). The final proposal is due out
on December 1 and will require that 14 of the panel’s 18 members vote for it. I am
still studying it, but I like it already because Nancy Pelosi hates it: Her immediate
reaction is that the commission chairmen's recommendations are “simply
unacceptable.”
I like the proposal to reform the tax code by dramatically lowering and simplifying
individual rates to 8%, 14%, and 23%. For businesses, the controversial plan would
significantly lower the corporate tax rate from 35% currently to as low as 26%. The
quid pro quo would be the elimination of a number of deductions, including the one
for mortgage interest. Extending the retirement age for Social Security to 68 by 2050
and to 69 by 2075 makes sense, but should be done sooner.
If Congress can’t agree on the deficit reduction committee’s package deal, I propose
that our legislators consider adopting PAYCHOP. All federal spending should be
chopped by 10% across the board.
* Federal Budget: Another $1tn plus budget deficit? Maybe not, though the CBO is
projecting a gap of almost $1.1tn. For all of FY 2010 the deficit was $1.3tn, second
only to FY 2009’s record $1.4tn. During the first month of the current fiscal year, the
deficit was $140.4bn narrowing from $176.4bn during the first month of FY 2009.
That was a high for the month of October, and the fifth largest monthly gap on record.
* Mortgage Market (weekly): What’s happening in the mortgage market? (1) The
MBA applications for new purchase index rose for the third straight week, climbing
5.5% during the first week of November and 11.2% over the three-week period. That
followed a two-week loss of 14.6% and a two-week gain of 11.9%. The 4-wa rose
1.0%, following a four-week drop of 4.7%. (2) The refinancing index volatile the past
few weeks, rising 6.0% during the latest reporting week, following a 6.4% loss, a
2.0% gain, an 11.2% loss, and a 21.0% gain the prior four weeks. The level is more
than double the reading at the start of the year. (3) The rate on 30-year fixed mortgage
(FRM), based on Freddie Mac data, edged up to 4.24% during the week ending
November 5 from 4.19% three weeks ago, which was a new low for the series going
back to 1972. The spread between the FRM and the 10-year Treasury yield is around
its historical average, while FRM remains high relative to the federal funds rate.
III) WORLD TRADE: The leaders of the G-20 are meeting to discuss how to reduce
global imbalances without resorting to competitive devaluations, capital controls, and
trade protectionism. Those imbalances were highlighted by recently released trade
data showing that China’s trade surplus rose to $27.2bn during October and
Germany’s rose to 15.6bn euros during September. The US trade deficit was $44.0bn
during September. Treasury Secretary Tim Geithner’s proposal to cap these surpluses
and deficits at 4% of GDP has been shot down by both the Chinese and the Germans,
and he has backed off on pushing it.
The G-20 leaders will most likely leave Seoul with an agreement in principle that
something must be done to balance global trade, without any specific plan for doing
so. The G-20 finance ministers will be asked to continue studying the matter. So
currency and trade tensions will persist. However, I don’t expect that they will lead to
significant protectionism. There is simply too much money at stake in the free trade
system.
I like the German finance minister’s recent suggestion that the best way to relieve
trade tensions is to negotiate more free trade agreements. He advocates reviving the
Doha Round of trade negotiations to do so. As discussed above, President Barack
Obama seems to be positioning himself to promote US exports by promoting free
trade. That’s a good thing.
* World Trade: Is the global economy expanding at a solid pace? That’s what
industrial commodity prices are confirming. The CRB Raw Industrials Spot Price
Index, which is one of our favorite indicators of global economic activity, is soaring
after turning down earlier this summer. It’s rallied 20.3% since mid-July to a new alltime high. The Baltic Dry Index (BDI) coincides with the trend and volatility of
commodity prices. The BDI is up 45.1% since its recent low on July 15, though is
down the past nine sessions, the longest losing streak in almost four months. The
volume and value of world trade, along with global production, are up sharply from
2009 lows and remain on uptrends. Keep watching commodity prices for confirmation
of strength or signs of weakness in the global boom.
* Emerging Economies Exports: A recovery in exports of Emerging Markets? A big
one since early 2009, though many stalled around recent highs. In dollar terms,
recoveries are most impressive in Brazil and South Korea, with exports up 91.8% and
81.6% from their respective lows and climbing. There are a host of countries with
exports up 50%-60% from their respective lows--Singapore, India, Argentina, China,
Taiwan, Indonesia, and Chile, with only the first three on uptrends. Exports in the
Czech Republic moving out of recent flat trend, 43.4% above their June 2009 low. On
the weak side, exports in Romania and Russia are down sharply from their recent
peaks, though both turned up in September. Venezuelan exports are fluctuating
around recent lows.
* US Merchandise Trade: What’s the latest on the trade front? Trade likely
subtracted less from Q3 GDP growth than the 2pps previously estimated, and may add
to growth this quarter. The nominal US goods deficit narrowed from $46.5bn to
$44.0bn in September, while the real goods trade deficit narrowed from $51.5bn to
$49.9bn. Nominal exports rose to more than a two-year high in September, while
imports dropped by 1.3%. On a 3-month basis, merchandise exports outpaced imports
for the first time this year, increasing 9.0% (saar) in the three months ending
September versus 6.5% for imports. If September’s improvement continues into this
quarter, trade could add to GDP growth for the first time since Q3-2009.
* US Exports to New vs. Old World: Are US companies finding more customers for
their exports in Emerging Markets? That's what the data show. Since the start of 2000,
their share of US exports has increased from 30.5% to 40.5% through September.
These exports are up 22.7% from 2009 low, based on 12-month sum, and 48.0%
based on actual monthly data. US exports to all regions except Japan and Europe
climbed to 72.8% of all exports, the highest since the summer of 1978 and near April
1976’s record high of 73.5%.
IV) FOCUS ON S&P 500 TRANSPORTATION INDUSTRY (overweight): The
stock price index for the S&P 500 Transportation Composite is up 25.7% ytd and
trading 14% above its still rising 200-dma. It’s at a record high for the first time since
June 2008. This overweight rated composite is performing better than the Retail
Composite stock price index and all 10 S&P 500 sectors so far in 2010. Forward
earnings up in October for a fourteenth straight month and in a U-shaped recovery,
and at a record high since August for the first time in three years. Analysts expect
earnings to rise 46.2% in 2010 and 18.2% in 2011 after falling 27.1% in 2009 for the
first decline in eight years. Valuation is still relatively high and 26% above the
market, but suggests that the earnings recovery will continue to roll along. NERI
down slightly to 30.4% in October from 31.2% and from a record high of 36.8% in
May, but positive for a thirteenth straight month and at the seventh highest reading
since 1995.
* S&P 500 Transportation, Railcar Loadings & Truck Tonnage: A recovery in
train and truck traffic? Yes, though the latter has been sluggish recently. Railcar
loadings continue to climb, hitting a 21-month high during the final week of October,
up 17.7% from June 2009 bottom. September truck tonnage recovered part of August
loss, up 1.7% for the month. It remains near April’s 19-month high, up 8.1% from
April 2009 bottom. ATA Chief Economist Bob Costello said that truck tonnage over
the last few months fits with an economy that is growing very slowly. “While I am
glad to report that tonnage grew in September, the fact remains that truck freight
volumes leveled off over the summer and early autumn. This is a reflection of an
economy that is barely growing.”
* Air Freight & Logistics (overweight): Overweight-rated Air Freight & Logistics
has risen 18.4% ytd and was at a new bull market high last week. Earnings forecasts
rose at a faster pace in October, and valuation edged higher as earnings continued to
recover from their 10-year low in August 2009. Forward earnings up 2.2% m/m in
October, but is still down 15.7% from the record high in 2007. Analysts expect
earnings to rise 41.6% in 2010 and 18.6% in 2011 after falling in 2008 and 2009. The
P/E ratio was up to 18.2 in October and at a 43% premium to the market, but both
should fall if the V-shaped recovery in forward earnings persists. Air freight pricing
includes surcharges for higher fuel costs and has been positive y/y since April after 16
months of negative readings. Pricing edged down to 9.5% y/y in September from
9.6%, but is up from a record low of -25.8% in August 2009. It edged down m/m in
July for the first time in 11 months, but was back up to a cyclical high in September.
* Railroads (overweight): Overweight-rated Railroads’ stock price index is up 33.0%
ytd and was at a record high again last week for the first time since July 2008.
Forward earnings is rising at a faster pace recently along with the consensus forecasts
for 2010, and surged 3.0% m/m in October to a record high. Analysts expect earnings
to rise 42.9% in 2010 and 16.3% in 2011, after falling 25.4% in 2009. P/E up to 14.0
in October, but its relatively expensive 10% premium to the market suggests investors
expect earnings to keep rising for a while. NERI down slightly to 36.6% in October
from 39.5% and a record high of 56.4% in May, but positive for an eighth straight
month following 15 negative readings in a row through March. Y/Y percent change in
the 26-week ma of railcar loadings at a record high and positive since mid-April for
the first time since early 2007. Freight rate pricing down to 4.7% y/y in September
from a 21-month high of 7.2% y/y in July, but positive since January after 12 straight
negative readings. Freight rate pricing has correlated well with changes in forward
earnings in the past.
V) UPDATES & LINKS: We have updated Social Welfare In America, US Federal
Finance & Yield Curve, Analyst's Handbook: Transportation, and Earnings Week
(with Squiggles) chart books on our website. Questions, comments, downloading
problems: [email protected] or call 480-664-1333.