From Housing to Banks to Revenue…

Friday, April 24, 2009   SOU Viewing Reminder  


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


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
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
married taxpayers, the credit begins phasing out for modified adjusted
gross incomes over $150,000 and is completely reduced once the income
$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.  




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


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,
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 4th
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
to shed capacity to adapt to the revenue environment.  Any up-tick in revenue will lead to significant earnings growth and market



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
short), even after Monday’s 4% decline. 


Until next time…



David S. Waddell  &  Mark A. Sorgenfrei, Jr.

Senior Investment
Strategist                Wealth Strategist, Investment


Media Mentions: 

David S. Waddell commentary, Fox Business,  Thursday, April 23,



More Information:

David S. Waddell, biography.

Mark A. Sorgenfrei, Jr., biography.

Click here for more information on Waddell and Associates.


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**This blog
represents the opinion of W&A and is for informational purposes
only. It is not intended to be construed as tax or legal advice by the
recipient. Past
returns of investment are no guarantee of future results.

reported in this blog has been compiled from the Wall Street Journal,
Morningstar, Investors Business Daily, or various other informational