The green shoots keep splashing. Markets rallied around 9% last week after better-than-expected earnings from companies such as Intel, IBM, and Goldman Sachs. Additional positive housing and manufacturing data also helped fuel the rally. And today, Monday (July 20, 2009), the U.S. markets went up another 1%+ on the news that CIT Group was bailed out by its creditors.
I do believe this recent rally could have legs, but let us put on our critical goggles:
Earnings Vs. Revenues
Last week, 70% of the companies that reported earnings beat consensus estimates. As a result, markets went on fire for a 9% rally.
However, a lot of companies beat earnings estimates (or profits) while missing revenue (or top line) estimates. This is a concern because it means that companies increased/beat earnings not from increased sales or demand but rather from cost-cutting.
And you can’t cut costs forever. Revenue has to eventually increase for these positive numbers to be “sustainable”.
Fake Numbers
If you don’t follow economic data in detail, you’ll be surprised that a lot of the numbers you see in the news are somewhat meaningless.
Example: (the quotes were taken from a post at The Big Picture)
BUILDING PERMITS: Privately-owned housing units authorized by building permits in June were at a seasonally adjusted annual rate of 563,000. This is 8.7% (±3.0%) above (revised) May rate, but is 52.0% (±3.6%) below the June 2008.
HOUSING STARTS: Privately-owned housing starts in June were at a seasonally adjusted annual rate of 582,000. This is 3.6% (±11.3%)* above the revised May estimate but is 46.0% (±4.3%) below the June 2008.
Alright, the emphasis here is on the housing starts number. It was up 3.6% with a margin of error of ±11.3%. It’s easy to see that with such a wide margin of error the number could easily be negative.
Nevertheless, the media wants to tell people economic recovery is at hand, so this is how we frame the number in every major business news outlet:
WSJ: “Housing starts increased 3.6% to a seasonally adjusted 582,000 annual rate compared to the prior month, the Commerce Department said Friday.”
Bloomberg: “Housing starts in the U.S. unexpectedly rose in June as construction of single-family dwellings jumped by the most since 2004, signaling the market is stabilizing. The 3.6 percent increase brought starts to an annual rate of 582,000.”
Marketwatch: “Housing starts rose 3.6% to a seasonally adjusted annual rate of 582,000, the highest figure November.
Reuters: New housing starts and permits jumped more than expected in June, propelled by a rise in single-family homes, a government report showed on Friday. Housing starts climbed 3.6 percent to seasonally adjusted annual rate of 582,000 units, from May’s upwardly revised 562,000 units, the Commerce Department said.”
As economist Barry Ritholtz from The Big Picture mentions, the reporting was “not just a little wrong, but totally, embarrassingly incorrect.”
Beware.
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