Friday, April 24, 2009

SOU Viewing Reminder

To view the 2009 State of the Union videos on Youtube click here.

From Housing…

We concluded last week’s edition of the Strategic Insight with the following:  “We will need other areas of the market/economy to join the party to build on this momentum.  Our most important invite outstanding is to the housing industry, and they appear to be considering it.”

The housing data released this week proved inconclusive.  On Thursday, the National Association of Realtors released data on existing home sales.  Those sales declined by 3% from February to March, while the median selling price of existing homes fell 12% from a year earlier.  February existing home sale figures were also adjusted downward.  In addition, half of the March home sales were byproducts of foreclosure. 

Today, the Commerce Department revealed that sales of new homes declined by a mere 0.6% during March.  That downturn was much milder than economists’ expectations, and February new home sales data was adjusted upward. 

First-time homebuyers are moving into the market.  In fact, those first timers represented half of the existing home sales in March.  President Obama’s tax credit appears to be gaining traction with the intended target, and we have personally encountered people in the Memphis area who are making their first purchase with the tax credit in mind.

We have also had questions posed to us regarding the mechanics of the tax credit.  Here is a snapshot, but please consult with your personal tax professional to see if you might be eligible.  Married filing jointly taxpayers are eligible for a tax credit if they make a first-time home purchase between 1/1/09 and 11/30/09.  The tax credit is equal to the lesser of 10% of the purchase price or $8,000.  For those married taxpayers, the credit begins phasing out for modified adjusted gross incomes over $150,000 and is completely reduced once the income reaches $170,000.  As a general rule, you are a first-time homebuyer as long as neither you nor your spouse owned a principal residence in the 3 year period preceding the date of your current purchase.  If you maintain the home as your principal residence for 3 years going forward, you never need to pay back the tax credit.  

…To Banks…

Oh, to be a fly on the wall in major bank offices today!  Federal regulators are meeting privately with the bank brass to give them the results of the infamous stress tests.  The Fed recently applied those tests to the nation’s 19 largest banks.  One test applied current economic conditions to the bank balance sheets, while another test factors in a much bleaker economic picture.  The goal is to separate those banks that might need continued capital infusions from Washington from those that are able to stand under their own power.  The Fed will publicly release parts of the stress test results on May 4.  Until then, expect leaked information to have a large impact on financial stock performance. 

…To Revenue

It surprises no one that business conditions for the first quarter were dreadful.  Tepid credit markets, fearful consumers and defensive corporations simply remove revenue potential from the economy.  This revenue evaporation has been non-discriminatory.  In fact, revenues have fallen 11% on average across the first 30% of the S&P 500 companies that have already reported.  Earnings have fared worse, falling 18% below this time last year.  Yet, to date, these reports have added credibility to this most recent market rally.  Why?  Because analysts expected earnings to be 20% worse.  Corporate America has adapted their operations quickly to the revenue shortage.  While unemployment and delays in investment spending please no one upon announcement, they do indicate that corporations are “right-sizing” quickly to the operating environment.   If corporations can scale to the new revenue environment, earnings can stabilize.  It’s the delay between shrinking revenues and shrinking expenses that harms earnings most.  Earnings will trough once companies can align expenses with revenues.  Based upon the cautious guidance that corporations are issuing, and the continued displacement of workers, we are not there yet.  But we are moving rapidly closer.  What will truly astound investors will be the earnings momentum that will return with even modest upticks in revenue.  Current forecasts for 4^th quarter 2010 earnings, if realized, would provide earnings growth of 70% from today’s levels.  While that may sound optimistic, that absolute level only takes us back to the earnings environment in the first quarter of 2006.  The market P/E that quarter was 16.35.  Doing the math, that amounts to 1,359 for the S&P or roughly 63% higher from here.  The bottom line is that companies have shed capacity and continue to shed capacity to adapt to the revenue environment.  Any up-tick in revenue will lead to significant earnings growth and market returns. 

The market has shown tremendous resiliency lately.  Ford released encouraging numbers today.  Those figures, combined with the better than expected new home sales data referenced earlier, have allowed the S&P 500 to scratch and claw today towards a seventh straight week of gains (closing just 0.4% short), even after Monday’s 4% decline. 

Until next time…