Microsoft reported an 11% decline in fiscal second-quarter earnings, missing both street forecasts and its own guidance. The company stated it will cut 5,000 jobs over the next year-and-half, the first substantial round of layoffs in its history.
Fifth Third Bancorp apparently threw in the kitchen sink regarding write-downs and provisions jumped – in its latest profit release. We’ve heard that kitchen sink story plenty of times now from the industry only to see substantially higher levels of write-downs in the subsequent quarter, so we’ll see if this is in fact true. The adverse feedback loop due to the current accounting regime makes this an endless story.
The day’s economic reports, which we’ll get to below, offered no help as housing starts fell to another new low and building permits illustrated residential construction activity may make another new low when the January figures are released next month.
Financials led the market lower, falling 5.84% and the tech-sector was the next worst performer, although the hardware and equipment component of the sector gained ground, which cushioned the blow.
Utility and industrial shares performed well on a relative basis; however, if not for a 1.00% gain within the transportation component industrials would have been down more. Health-care was the only positive sector for the session.
Market Activity for January 22, 2009
Jobless Claims
The Labor Department reported initial jobless claims came in well-above expectations, jumping 62,000 to 589,000 for the week ended January 17 – so much for the wish of holding below the 550k level. This is the week that corresponds with the employment survey for January, suggesting we’ll see another big month of payroll losses.
The four-week average of claims was unchanged, at 519,250, but that will rise next week after this latest increase.
Continuing claims jumped 97,000 to 4.607 million for the week ended January 10 (there’s a one-week lag on this data), after falling 102,000 in the prior week.
It will be interesting to watch what occurs within continuing claims as there are reports California and New York are running out of jobless insurance funds. Maybe they should have run things more responsibly when state tax revenues were flooding in 2005-2007. Of course, the federal government will step in to bail them out, which means all of us in other states are bailing them out.
The insured unemployment rate (jobless rate for those eligible for benefits), which generally tracks the direction of the overall unemployment rate, held steady at 3.4%.
Again, this data suggests the January payroll report will post another outsized loss, we’re calling anything greater than down 350,000 outsized.
However, one of the best economists out there – John Ryding – believes the seasonal adjustment factors in retail may provide a boost to the overall jobs report. That adjustment subtracted a large 615,000 jobs from the retail industry to adjust for temporary seasonal hire. Yet, the unadjusted employment for the industry rose by only 381,000 last quarter (compared to a more typical increase of 700,000, meaning less temp.work was employed) so the seasonal adjustment overshot. Still, we’ll likely see a January payroll loss of at least 400,000 as the claims, ISM employment and layoff data all suggest.
Housing Starts
Residential starts plummeted 15.5% in December to 550,000 units – hitting a new low (and a low low it is) – from 651,000 at an annual rate for November. Separating the components, multi-family starts fell 20.4% last month and single-family declined 13.5%. For perspective, single-family starts are down nearly 80% from their January 2006 peak.
Building permits plunged too, down 10.7% in December to 549,000 units (annual rate) from 615,000 in November. This suggests the January starts figure is going to make a new low (the data goes back 50 years). In addition, we endured severe weather across the country this month so that curtailed activity even more. Although, one would think it will provide a nice rebound for February assuming improved weather.
The level of housing construction is now extremely low relative to average activity and by definition below demographic fundamentals. The intensification of the credit crisis, and resultant economic blowback, is also doing a trick on housing. So, as we’ve stated before it appears several aspects of the housing sector are showing the necessary reversion to the mean, and then some, after several years of outsized growth has taken place. The other factors, such as the credit situation and deep economic contraction of the past quarter will not last a terribly long time. When this foot is taken from the throat of the sector the rebound should be strong, but delayed due to the weak labor market.
In terms of GDP, with housing so weak, even this substantial degree of deterioration will not weigh on the figure as it once had. These declines were subtracting a full percentage point from real GDP, now it will be something like 0.5%.
Pre-Market Activity
Stock-index futures are down big this morning after the U.K. economy shrank more than expected and U.S. earnings reports show things really shut-down last quarter – while we all knew this, it still has an effect on sentiment.
Outside of the financial sector, Q4 profits for the S&P 500 are only down 2.4% with 20% of members reporting thus far. This figure will get much worse, probably falling 8-12% when it’s all said and done as the industrial and tech sectors were hit hard, but certainly major issues within financials, exacerbated by accounting standards put in place just 14 months ago, are making the overall profit picture look much worse than it is.
The areas that appear to offer the most promise over the next few years are industrials and tech.. The industrial sector carries a 4.00% yield and trades at a single-digit multiple. The tech sector trades at 13 times earnings, the lowest multiple in at least 16 years, and even carries a small dividend yield of 1.34%.
While we’re on the subject, the broad market, as measured by the NYSE Composite, offers a 4.76% yield and trades at a 12 times trailing earnings. Assuming normal earnings growth over the next five years, the index can rise 40% over this period and the multiple would remain at the currently low level.
But we must get past some real hurdles first. The economy will eventually take care of itself and indeed the private sector will become increasingly streamlined during this downturn. However, since the Fed and Treasury have helped to calm the credit market chaos, at least from levels seen in October/November, they need to lay off now and make sure the unintended consequences of policy actions do no more harm.
Have a great weekend!
Brent Vondera, Senior Analyst
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