Overall, we expect 2010 to be a shareholder-friendly year.
Strong earnings growth and conservative spending plans by corporate America should produce healthy levels of free cash flow that allow for increased stock buyback activity, dividend hikes, and a jump in M&A activity.
With the stock market having achieved its best year since 2003 during one of the most turbulent political and economic periods in U.S. history, it is fair to say expectations are on the optimistic side of things for 2010. (Can't believe that 2009 went that well for US equities after a near armageddon just a year before 2008)
It is very unlikely, though, that the stock market will have the kind of year like it did in 2009. Expectation is that the S&P 500 will achieve a low single-digit to low double-digit percentage return, with the first half of the year looking better than the second half of the year in terms of performance.
Easy earnings and economic comparisons will be sustaining factors in the first half of the year, as will low interest rates (the Good News). However, (a) the specter of interest rates eventually going up, (b) the extraction of stimulus measures, and (c) income and capital gains tax rates set to move higher as of Jan. 1, 2011, should be persistent headwinds that curtail the market's bullish bias as the year unfolds (the Bad News).
The economy will be on better footing in 2010, if it is not exactly on sound footing. We are projecting:
- 2.5% to 3.0% average real GDP growth for the year,
- unemployment rate, a little above 10.0% on average for 2010,
- total CPI, between 1.9%-2.2% y-o-y,
- core CPI, which excludes food and energy, between 1.8% and 2.0%.
Subdued inflation readings and the weak labor market should allow the Federal Reserve to refrain from raising rates in 2010. Inflation expectations, however, will be closely monitored and could force a tightening in 2010 even if CPI is in the Fed's comfort zone.
A weak labor market, continued credit losses, and regulation angst should be among the factors that leave banks feeling closely tied to their excess reserves.
Credit standards may not be as tight in 2010 as they were in 2009, but they are still expected to remain tight. That should help keep inflation at bay since money will be slow to turn over, yet it will be an impediment to a more robust economic recovery.
Continued excess capacity on both the labor and production fronts should keep inflation under control.
More importantly, corporate profit growth is anticipated to be robust in 2010.
With all of the cost-cutting done in late-2008 and throughout 2009, companies will have a good deal of operating leverage that can lead to double-digit profit growth with only modest increases in sales.
By way of example, S&P operating earnings for Q4 2009 are projected to spike 203% while revenue growth is expected to be up just 7%, according to Thomson Reuters.
The consensus operating earnings estimate for calendar 2010 is $77.56, which is a 30%increase from calendar 2009.
The forward four quarter consensus earnings estimate is $72.18. At current levels, we believe that leaves the market fairly valued at 15.4x forward four quarter earnings.
With the 10-year note yield at 3.84%, the current earnings yield of 6.5% still supports a value-based argument in accordance with the Fed model. However, with the risk premium in Treasuries expected to subside as the economy stays on a growth trajectory, supply issues lingering, and investment grade corporate bond yields at 5.86%, the relative value in stocks is less in our estimation than it appears based on the Fed model.
Consensus earnings estimates are generally expected to move higher, so further stock price appreciation is expected, yet we do not expect to see multiple expansion as price appreciation should be more closely aligned with the pace of estimate revisions.
Showing posts with label Briefing. Show all posts
Showing posts with label Briefing. Show all posts
Sunday, January 10, 2010
Weekly Market Round-Up: Friday, 8 January 2010
4:30 pm : (a) The latest monthly payrolls report and (b) a raft of analyst rating revisions made up for a lack of corporate headlines this session. Though the general reaction to those reports was negative, stocks still managed to make their way higher.
The early tone to trade was negative as participants pressured stocks upon learning that December nonfarm payrolls dropped by 85,000, which took many by surprise since the consensus called for no change to payrolls. However, nonfarm payrolls for November were revised upward to show an increase of 4,000 jobs. That marked the first payroll increase in two years and helped keep the unemployment rate at 10.0%, which was expected.
(i) Financials caught the brunt of the early selling effort and trailed for most of the session, but trimmed their losses to finish 0.5% in the red. News that analysts at Citigroup cut their estimates for Goldman Sachs (GS 174.31, -3.36), Morgan Stanley (MS 32.25, -0.67), and JPMorgan Chase (JPM 44.68, -0.11) triggered some profit taking after the financial sector had climbed 6.4% during the previous four sessions. Financials still netted a weekly gain of nearly 6%.
(ii) Analysts at JP Morgan hit Coca-Cola (KO 55.15, -1.04), Colgate-Palmolive (CL 81.51, -1.49), and Alberto-Culver (ACV 29.14, -0.55) with downgrades, which weighed on the defensive-oriented consumer staples sector and sent it to a 0.5% loss.
(iii) Retailers had to contend with some downgrades, too, but they were able to cut their loss for the session to 0.1%. Still, Macy's (M 16.92, -0.57) wasn't so fortunate; news of a downgrade by analysts at Goldman Sachs sent the company's shares sharply lower, which reversed the gains that came when the company increased its earnings outlook in the previous session.
(iv) Tech stocks bounced back from a recent fit of weakness. Tech was the best performing sector in 2009, booking a 60% annual gain, but it has lagged in the new year. However, renewed support for large-cap issues helped drive the sector to a 0.8%gain this session. They also helped the Nasdaq outperform its counterparts.
(v) Industrial stocks made up this session's best performing sector. Their 1.5% advance added to the 1.3% gain that they booked in the previous outing. Despite the move, the sector lacked the influence to make it a legitimate leader for the broader market.
Bottom line, a worse-than-expected nonfarm payrolls number resulted in a significant sell-off in the dollar, with after-effect on materials and resources as follow:
(a) Strength among steel stocks combined with gains from other raw materials stocks, thanks partly to a 0.6% drop by the dollar, to drive the materials sector to a 1.0% gain.
(b) Precious metals were trading lower this morning as the dollar index was higher. Then, Non-Farm disappointed; Gold and silver futures soared. Although the dollar index attempted to pare losses, it ended the session 0.5% lower, allowing gold and silver futures to end in positive territory. February gold finished 0.5% higher at $1139.90 per ounce and March silver finished 0.7% higher at $18.47 per ounce.
(c) Natural gas futures opened the pit trade moderately lower and traded relatively flat for most of the session. February natural gas closed down 1.2% at $5.74 per contract.
(d) Crude oil futures finished marginally higher at $82.75 per barrel. After opening the pit trade lower, February crude oil spiked mid-session as the dollar weakened. After reaching the $83.48 per barrel mark, the February contract sold off and dipped into negative territory before closing slightly higher.
(e) Orange juice futures closed limit-up for the third time this week on concerns that unseasonably cold weather will hurt this year's harvest. The March orange juice futures closed 7.1% higher at $1.512 per pound.
Still, the stocks were able to catch a late bid that helped the broader market break free from an afternoon of sideways chop. The support helped stocks finish higher for the fifth straight session and gave the stock market a weekly gain of 2.7%, which marks its best weekly performance in two months.
Advancing Sectors: Industrials (+1.5%), Materials (+1.0%), Tech (+0.8%), Energy (+0.5%), Health Care (+0.3%)
Declining Sectors: Financials (-0.5%), Consumer Staples (-0.5%), Telecom (-0.5%), Utilities (-0.1%)
Unchanged: Consumer Discretionary
DJ30 +11.33 NASDAQ +17.12 NQ100 +0.9% R2K +0.4% SP400 +0.6% SP500 +3.29
Earlier in the morning, the mood and pre-opening started out this way
09:05 am : S&P futures vs fair value: -4.00. Nasdaq futures vs fair value: -5.00.
U.S. stock futures continue to trade with weakness in the wake of some disappointing monthly payroll numbers. Europe's major bourses have also retreated in the wake of the data, unhelped by news that unemployment in the euro zone hit 10% for the first time in the history of the euro currency, according to reports. The EuroStoxx is down 0.2% and the FTSE is currently down 0.5%.
Some banks and miners have gained, though.
Barclays (BCS) has been helped by an upgrade from analysts at UBS.
In Germany, the DAX is down 0.6% at the moment, though Deutsche Bank (DB) has shown strength, thanks partly to an upgrade from analysts at UBS. Its shares are at their highest level since October.
In France, the CAC is currently off by 0.2%. Banks are also limiting losses there.
In Asia, the MSCI Asia Pacific Index added 0.6%, but Japan's Nikkei climbed 1.1% to hit a 15-month high. Carmakers were boosted with help from a weaker yen. However, the yen had actually pared losses from a four-month low against the dollar after Japan's Prime Minister Hatoyama said rapid moves in the currency market were "not good." Japan Airlines continued to flounder amid bankruptcy worries. In Hong Kong, the Hang Seng eked out a 0.1% gain, but that was good enough to erase early losses. In mainland China, the Shanghai Composite also closed just 0.1% higher.
08:35 am : S&P futures vs fair value: -3.00. Nasdaq futures vs fair value: -1.80.
Both stock futures and the dollar have pulled back as a result of some disappointing monthly payroll figures. Specifically, nonfarm payrolls for December decreased by 85,000, which is worse than the flat reading that had been expected. However, nonfarm payrolls for November were revised upward to reflect an increase of 4,000 jobs -- that marked the first increase in two years. The unemployment rate still stands at 10.0%, as expected. Average weekly hours worked also went unchanged at 33.2, as expected.
08:00 am : S&P futures vs fair value: -0.80. Nasdaq futures vs fair value: +3.30. The dollar has modestly extended its gain from the previous session, but stock futures remain flat. The tepid tone among premarket traders precedes the official December payrolls report, which is due at the bottom of the hour. Economists, on average, expect nonfarm payrolls to be flat for the month and that the unemployment rate will remain unchanged at 10.0%. Wholesale inventory data for November follows at 10:00 AM ET, then November consumer credit at 2:00 PM ET, but for broader market concern those reports are secondary to the jobs report.
The early tone to trade was negative as participants pressured stocks upon learning that December nonfarm payrolls dropped by 85,000, which took many by surprise since the consensus called for no change to payrolls. However, nonfarm payrolls for November were revised upward to show an increase of 4,000 jobs. That marked the first payroll increase in two years and helped keep the unemployment rate at 10.0%, which was expected.
(i) Financials caught the brunt of the early selling effort and trailed for most of the session, but trimmed their losses to finish 0.5% in the red. News that analysts at Citigroup cut their estimates for Goldman Sachs (GS 174.31, -3.36), Morgan Stanley (MS 32.25, -0.67), and JPMorgan Chase (JPM 44.68, -0.11) triggered some profit taking after the financial sector had climbed 6.4% during the previous four sessions. Financials still netted a weekly gain of nearly 6%.
(ii) Analysts at JP Morgan hit Coca-Cola (KO 55.15, -1.04), Colgate-Palmolive (CL 81.51, -1.49), and Alberto-Culver (ACV 29.14, -0.55) with downgrades, which weighed on the defensive-oriented consumer staples sector and sent it to a 0.5% loss.
(iii) Retailers had to contend with some downgrades, too, but they were able to cut their loss for the session to 0.1%. Still, Macy's (M 16.92, -0.57) wasn't so fortunate; news of a downgrade by analysts at Goldman Sachs sent the company's shares sharply lower, which reversed the gains that came when the company increased its earnings outlook in the previous session.
(iv) Tech stocks bounced back from a recent fit of weakness. Tech was the best performing sector in 2009, booking a 60% annual gain, but it has lagged in the new year. However, renewed support for large-cap issues helped drive the sector to a 0.8%gain this session. They also helped the Nasdaq outperform its counterparts.
(v) Industrial stocks made up this session's best performing sector. Their 1.5% advance added to the 1.3% gain that they booked in the previous outing. Despite the move, the sector lacked the influence to make it a legitimate leader for the broader market.
Bottom line, a worse-than-expected nonfarm payrolls number resulted in a significant sell-off in the dollar, with after-effect on materials and resources as follow:
(a) Strength among steel stocks combined with gains from other raw materials stocks, thanks partly to a 0.6% drop by the dollar, to drive the materials sector to a 1.0% gain.
(b) Precious metals were trading lower this morning as the dollar index was higher. Then, Non-Farm disappointed; Gold and silver futures soared. Although the dollar index attempted to pare losses, it ended the session 0.5% lower, allowing gold and silver futures to end in positive territory. February gold finished 0.5% higher at $1139.90 per ounce and March silver finished 0.7% higher at $18.47 per ounce.
(c) Natural gas futures opened the pit trade moderately lower and traded relatively flat for most of the session. February natural gas closed down 1.2% at $5.74 per contract.
(d) Crude oil futures finished marginally higher at $82.75 per barrel. After opening the pit trade lower, February crude oil spiked mid-session as the dollar weakened. After reaching the $83.48 per barrel mark, the February contract sold off and dipped into negative territory before closing slightly higher.
(e) Orange juice futures closed limit-up for the third time this week on concerns that unseasonably cold weather will hurt this year's harvest. The March orange juice futures closed 7.1% higher at $1.512 per pound.
Still, the stocks were able to catch a late bid that helped the broader market break free from an afternoon of sideways chop. The support helped stocks finish higher for the fifth straight session and gave the stock market a weekly gain of 2.7%, which marks its best weekly performance in two months.
Advancing Sectors: Industrials (+1.5%), Materials (+1.0%), Tech (+0.8%), Energy (+0.5%), Health Care (+0.3%)
Declining Sectors: Financials (-0.5%), Consumer Staples (-0.5%), Telecom (-0.5%), Utilities (-0.1%)
Unchanged: Consumer Discretionary
DJ30 +11.33 NASDAQ +17.12 NQ100 +0.9% R2K +0.4% SP400 +0.6% SP500 +3.29
Earlier in the morning, the mood and pre-opening started out this way
09:05 am : S&P futures vs fair value: -4.00. Nasdaq futures vs fair value: -5.00.
U.S. stock futures continue to trade with weakness in the wake of some disappointing monthly payroll numbers. Europe's major bourses have also retreated in the wake of the data, unhelped by news that unemployment in the euro zone hit 10% for the first time in the history of the euro currency, according to reports. The EuroStoxx is down 0.2% and the FTSE is currently down 0.5%.
Some banks and miners have gained, though.
Barclays (BCS) has been helped by an upgrade from analysts at UBS.
In Germany, the DAX is down 0.6% at the moment, though Deutsche Bank (DB) has shown strength, thanks partly to an upgrade from analysts at UBS. Its shares are at their highest level since October.
In France, the CAC is currently off by 0.2%. Banks are also limiting losses there.
In Asia, the MSCI Asia Pacific Index added 0.6%, but Japan's Nikkei climbed 1.1% to hit a 15-month high. Carmakers were boosted with help from a weaker yen. However, the yen had actually pared losses from a four-month low against the dollar after Japan's Prime Minister Hatoyama said rapid moves in the currency market were "not good." Japan Airlines continued to flounder amid bankruptcy worries. In Hong Kong, the Hang Seng eked out a 0.1% gain, but that was good enough to erase early losses. In mainland China, the Shanghai Composite also closed just 0.1% higher.
08:35 am : S&P futures vs fair value: -3.00. Nasdaq futures vs fair value: -1.80.
Both stock futures and the dollar have pulled back as a result of some disappointing monthly payroll figures. Specifically, nonfarm payrolls for December decreased by 85,000, which is worse than the flat reading that had been expected. However, nonfarm payrolls for November were revised upward to reflect an increase of 4,000 jobs -- that marked the first increase in two years. The unemployment rate still stands at 10.0%, as expected. Average weekly hours worked also went unchanged at 33.2, as expected.
08:00 am : S&P futures vs fair value: -0.80. Nasdaq futures vs fair value: +3.30. The dollar has modestly extended its gain from the previous session, but stock futures remain flat. The tepid tone among premarket traders precedes the official December payrolls report, which is due at the bottom of the hour. Economists, on average, expect nonfarm payrolls to be flat for the month and that the unemployment rate will remain unchanged at 10.0%. Wholesale inventory data for November follows at 10:00 AM ET, then November consumer credit at 2:00 PM ET, but for broader market concern those reports are secondary to the jobs report.
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