Farrell: Behind the 'Good' Headlines
Chief Investment Officer, Soleil Securities
The week started out with nothing but good looking news.
Overseas a bunch of countries reported their Purchasing Managers surveys (PMI) and they were almost uniformly good. Of the roughly two dozen reports, 90% are in expansion territory. China's fell to 55.8 (remember, 50 is the dividing line between expansion and contraction), but that was down a mere .8% from the prior month and still well above the 50 line. This report would be consistent with GDP growth of 10% or better if you knew nothing else. It is no surprise the PMI down ticked slightly with the clampdown on new lending and infrastructure spending moderating. The worry about China overheating is probably premature since there is yet no wage pressure, and it's hard to see inflation without it.
Strength in India's PMI continued in January. The "Markit" figured rate was 57.6 compared to last month's 55.6. That is the highest reading since August 2008. New orders rose a robust 5.5 points.
Despite all the problems that exist in Greece and potentially elsewhere in the Euro zone, the Euro PMI came in better than expected. The manufacturing index registered 52.4 from 51.6 in December. Surprising, and it's the fourth month in a row this number has been above 50. It is the highest reading since January 2008.
Back in the good old USA, the January Institute of Supply Management manufacturing index (the non-manufacturing index is released Wednesday) was a very surprising 58.4 versus the consensus of 55.5. That is a five and a half year high and would indicate 5% GDP growth. New orders rose to 65.9 (from 64.8), inventories improved to 46.5 (from 43 the prior month) and while still below the magic 50, it's a lot closer. The best news was the employment sub index rose to 53.3 from 50.2. Combined with last weeks blow out number from the Chicago PMI survey there is be hope for a better jobs number this Friday when the Bureau of Labor Statistics releases its latest. There will also be the effect of the beginning hiring of census workers, but we should factor that out to a great extent. Far more jobs are represented in the non manufacturing index and the labor component of that last month was just 50. It would be good to see it expand this month. There will be the annual benchmark revision to payrolls this Friday and will probably show that a lot more jobs were actually lost last year compared to the first cut. Why these revisions don't stir up more angst is beyond me.
Construction spending did fall a bit more than expected (and last month was revised down as well) so Q4's GDP number of +5.7% annual growth might be revised downward slightly.
December's personal income rose .4% and personal spending increased .2%. Income has now increased 6 months in a row. Even though "labor income" was up only .1% ( the rest coming from investments and government transfers) it was still up and if jobs were to start growing as we expect, this statistic will improve. The savings rate rose to 4.8% from 4.5%. The very long term average savings rate has been 7%.
About 45% of the S&P 500 has reported earnings and about 70% of those have beat on the revenue line. 78% have done better on the earnings line versus expectations. Two companies followed by analysts at Soleil are expected to report later this week. Pfizer (PFE, buy rated, recent price $18.60) is expected to release earnings this Wednesday, February 3rd according to Manoj Garg. Equally important will be the guidance the company offers says Manoj. He expects solid guidance (both Manoj and the Street are at $2.24 for 2010), an update on the Wyeth integration, and a review of research and development at the firm.
He believes the company's integration of Wyeth will proceed ahead of the goal of $4 billion in synergies. He believes the generic hurdles, especially with Lipitor, are understood and priced into the stock. At its current valuation of 8.3 times 2010's estimate, he feels the stock gets no value for its pipeline. Manoj has a buy on the stock with a target of $20, or 9 times his 2010 estimate.
News Corp (NWSA, buy rated, recent price $12.50) should report Tuesday after the close according to Soleil's Alan Gould. The key data point will be "how much management raises the FY June 2010 operating income guidance." He feels operating income will grow 20% with Avatar, the highest grossing movie in history, contributing 5% of that growth. News Corp has the lowest EBITDA multiple in the group. His $16.50 target implies NWSA shares could trade at 17 times his calendar year 2010 estimate of $.96, or 7 times his calendar 2010 EBITDA estimate. A 17 price to earnings multiple would be a premium to Viacom , similar to Time Warner and a discount to CBS and Disney .
Vincent Farrell, Jr. is chief investment officer at Soleil Securities Group and a regular contributor to CNBC.