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Early S&P Earnings Beat Lofty Expectations
By Louis Navellier
First-quarter earnings for the S&P 500 companies reporting so far are up 68.6%, or 9.6% above analysts' lofty expectations. Top-line growth also beat expectations: First quarter sales were up 9.5%, exceeding analysts' estimates by 2%. But that's tame compared with China, which just reported that its economy grew at a sizzling 11.9% annual pace in the first quarter, the fastest quarterly GDP rate in almost three years. This rapid recovery should help push markets higher, despite deficits in Greece and elsewhere.
Stat of the Week: Retail Sales Up 7.6% (annually) and 1.6% in March
The best economic news last week happened Wednesday, when the Commerce Department announced that retail sales rose 1.6% in March, the fifth gain in the past six months. In the past year, overall retail sales are now up by an impressive 7.6%. Sales of autos and car parts rose by 6.7% in March. Other hot spots in March retail sales were clothing stores (up 2.3%) building materials and garden supplies (up 3.1%, the largest gain since November 2007) and furniture sales, which rose 1.5% in March.
The most surprising news last week was that U.S. industrial production rose by just 0.1% in March, weighed down by a 6.4% drop in utility output, due to warmer weather. Economists had estimated that industrial production would rise 0.8%, and maybe they were right, since factory production (which is what most people think of as "industrial" production) rose by 0.9% in March. For the full quarter (January to March), industrial production increased at a 7.8% annual rate, with the factory sector rising by 6.6%. This, plus stronger consumer spending, bodes well for first-quarter earnings and first-quarter GDP.
And there was finally some good news about federal finances last week. Specifically, the U.S. Treasury announced that March's budget deficit was only $65 billion, down from over $200 billion in February, due mostly to a $115 billion reduction in the Troubled Asset Relief Program (TARP). Even without this TARP reduction, the operating budget deficit in March was $175 billion, lower than the $192 billion deficit a year ago (March 2009). The most positive news is that tax collections rose 19% to $153 billion, due to an improving economy. For the first six months of fiscal 2010, the deficit stands at $717 billion.
The Fed's Beige Book Sees "Moderate Recovery"
On Wednesday, the Fed released its Beige Book survey, concluding that "overall economic activity increased somewhat since the last report across all Fed districts except St. Louis, which reported 'softened' economic conditions." All 12 Fed districts reported increases in retail sales and car sales. The factory sector was seen as a particular source of strength. Additionally, many Fed districts reported increased activity in residential housing markets, while commercial real estate remained weak.
Reports from the bank sector were grimmer, since loan volumes and credit quality decreased. According to the survey, there were no signs of wage pressures or rising prices for consumers. While some prices rose in the manufacturing stage, companies were not able to pass these price increases on to consumers.
The Beige Book report is designed to help Fed officials prepare for their upcoming policy meetings, so these ongoing problems in the banking sector should convince the Fed that it must keep key interest rates low. (The next Federal Open Market Committee FOMC meeting will be held next week, April 27-28.)
The Beige Book's results were also reflected in Wednesday testimony by Fed Chairman Ben Bernanke, who said "On balance, the incoming data suggest that growth in private final demand will be sufficient to promote a moderate economic recovery in coming quarters." Bernanke said that consumer spending could rise in coming months, aided by a gradual pickup in jobs and the recovery of household wealth.
In his best Fed double-speak, however, Bernanke also stressed that the economy still faces significant challenges. In particular, the Fed Chairman noted that the housing market appears soft and that state and local governments are grappling with severe budget shortfalls. Additionally, Bernanke pointed out that banks are still not extending much credit, despite the fact that financial conditions continue to strengthen.
Deflationists Fight Inflationists to a Tie
On Thursday, The Wall Street Journal released its survey of 56 economists, who were evenly divided between those who fear inflation and those who see deflation as a bigger risk. On average, therefore, economists expect relatively tame inflation, forecasting that consumer prices will rise just 1.8% in 2010.
When asked what presents a bigger risk over the next year, 23 economists said accelerating inflation and 23 said slowing inflation! This split mirrors the divergence on the Federal Reserve Board. Fed Chairman Bernanke seems to think that inflation is no immediate threat, while other Fed Governors fear re-inflation.
There is some evidence for both arguments, of course. Inflationists cite higher commodity prices and higher import prices. Last week, the Labor Department announced that import prices rose in March for the seventh of the last eight months. Import prices rose 0.7% in March, after a revised 0.2% drop in February. As a result, for the past year, import prices were up 11.4%, mostly due to a weak dollar.
On the deflationary side, a lack of household formation in the U.S. has caused apartment and housing prices to stagnate. Since the housing component accounts for over 40% of the Consumer Price Index, the March CPI rose only 0.063%. "Owners Equivalent Rent" fell 0.1%, suppressing the overall CPI. The core CPI, excluding food and energy, rose by only 0.039% in March, so the Fed will likely keep key interest rates super-low.
Jobs & Housing Remain Weak
The Wall Street Journal survey (cited above) also reported that the average of 56 economists expect the unemployment rate to fall to 9.3% by December, even though the U.S. economy will add around 1.9 million jobs this year. The economists also expect the U.S. economy to expand at about a 3% annual rate.
Jobs and housing are closely related to consumer expectations, so it was disturbing to see that new unemployment claims rose for the second straight week, increasing 24,000 to 484,000. Economists had expected new claims to fall to 430,000. The four-week average of new unemployment claims rose by 7,500 to 457,750. The only good news in the jobs data was that the four-week moving average of continuing claims dropped by 13,750 to 4.64 million, the lowest rate since January 2009.
The other bad news last week was that RealtyTrac announced on Thursday that a record number of U.S. homes were lost to foreclosure in the first quarter, up 35% vs. the first quarter of 2009. In fact, more homes were taken over by foreclosure than in any other quarter in RealtyTrac's five-year data history.
Despite this dismal news, housing starts rose for a third straight month in March according to the U.S. Commerce Department. Housing starts increased 1.6% to a seasonally adjusted 626,000 annual rate in March (vs. February). On a non-seasonally adjusted basis, March housing starts rose to 54,100 compared with 41,300 in February. Apartment construction rose 18.8% in March, to 95,000, while single-family starts slipped 0.9%. Regionally, March housing starts rose 18.2% in the South but fell in other sectors.
Meanwhile, California's unemployment rate hit a modern record of 12.6% in March, according to the state's Employment Development Department. However, there is hope, since non-farm payroll jobs increased by 4,200 in March, the third consecutive monthly rise. In the first quarter, California added 32,400 jobs, but over 2.3 million Californians remained unemployed. Michigan had the highest March jobless rate at 14.1%, followed by Nevada at 13.4%. California and Rhode Island were tied for third.
A Greek Tragedy
While Northwestern Europe suffered under a four-mile-high cloud of volcanic debris, shutting down airports in England and much of the continent, Southeastern Europe is suffering its own Greek tragedy.
The two crises are now related, as the volcanic cloud sabotaged travel plans of European economic and finance ministers who were due to meet in Madrid on Friday to discuss the Greek crisis. Most of the participants were stranded en route, including Olli Rehn, EU commissioner for economic and monetary affairs. In fact, flight cancellations may continue for months, due to volcanic debris in the jet stream.
The situation in Greece is growing worse. On Friday, 10-year Greek government bond yields rose to 7.3%. With Greece required to raise 16-23 billion euros by the end of May, the pressure is on. As long as yields remain above 7%, high borrowing costs will severely hamper Greece's ability to service its debts.
On Friday, The Wall Street Journal took us behind the scenes in Greek's fiscal nightmare, introducing us to two key words, "fakelaki" and "rousfeti." Fakelaki means "little envelopes" (bribes), while rousfeti refers to political favors. One egregious example is when senior government officials apparently helped a politically-connected Greek Orthodox monastery claim ownership of a lake, which they swapped it for a large portfolio of public land at valuations favorable to the monks, but costing Greek taxpayers over $133 million. Small-time corruption happens every day, as when ordinary citizens hand cash-filled envelopes (fakelaki) to get driver's licenses, doctor's appointments, building permits or a favorable tax cut.
Friedrich Schneider, an economist at Austria's Linz University, who studies global tax evasion, said that one-quarter of all taxes owed in Greece aren't paid, explaining, "You split your tax payment with the tax inspectors, and get a discount." A senior government official says some Greek tax officers operate a "4-4-2" scam: If an individual or company owes $10,000 in taxes, they slip $4,000 to the inspector, embezzle $4,000 for themselves and pay $2,000 to the state. This may explain why, in a rich country of 11 million people, only 15,000 individuals declare an annual income of 100,000 euro ($135,000) or more.
Stavros Katsios, a professor at Greece's Ionian University who specializes in economic crimes, said "The core of the problem is that we don't have a culture of civic society." Katsios added, "In Greece, complying with the rules is a matter of dishonor. They call you stupid if you follow the rules." Until that generally-accepted culture of corruption changes, this Greek Tragedy will not have a happy ending.