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Earnings Season in Full Swing


Clear and present danger is still deflation.


The following is the April 19 edition of The Lavery Insight. We share it with you for the economic forecasts for today and tomorrow. For more information or a FREE two week trial of The Lavery Insight, click here.

The economic framework I envision suggests that corporate operating profits after-tax are going lower. Fundamental equity analyst earnings forecasts need to be brought down further in aggregate to comport with my economic construct. This earnings season will bring some upside surprises, but this will be more the result of very conservative company guidance, and should not be misread as a generalized improvement in underlying business conditions. Needless to say, some earnings disappointments will doubtlessly eventuate as well.

I expect corporate operating profits after-tax on a National Income Accounts basis to be down roundly 30% in the first quarter of 2009 from the comparable quarter of the prior year. I further expect that corporate operating profits after-tax will show negative year-over-year comparisons in the second and third quarters of this year in magnitudes similar to the first quarter.

Banks have been escalating their foreclosure activity. The reasons for this may lie in part with growing loan losses on consumer credit card activity and on other consumer loans as well. Consumer deleveraging is a process that will continue into 2011. Mortgage re-financings help in this regard.

The reality is that foreign and domestic demand prospects are decidedly underwhelming. Corporate pricing flexibility is limited in such a climate. And, there is appreciable slack in the labor markets, plus operating rates in manufacturing and overall plant utilization are very low. These conditions leave the economy with a major gap between actual and potential output.

Despite the fiscal stimuli, Federal Reserve balance sheet expansion and quantitative easing, and all the bailout activity, the clear and present danger is deflation. The public policy initiatives could over time lead to a cyclical escalation of inflation. But, that risk is well down the road. Public policy is focused on avoiding a major deflationary downdraft.

Indicator expectations for Thursday & Friday:

April 23 8:30 a.m. Initial Unemployment Claims for the week ending April 18 will likely rise to an annual rate of 680,000 from the prior week's 610,000. My estimate is a good bit higher, (worse) than the consensus, which is looking for initial claims to rise to only 630,000. Continuing claims should jump from 6.0 million to 6.25 million, marking the 12th consecutive week with a record high. Labor market deterioration is intensifying. Layoffs are not slowing. As I said last week, I expect non-farm payroll employment to fall 725,000 for April, when reported on May 8.

April 23 10:00 a.m. March Existing Home Sales likely moved up to 4.78 million annualized. The consensus sees a decline to 4.65 million unit sales from the February level of 4.72 million. Low mortgage rates, the first-time homebuyer credit of $8,000, and the rise in purchase applications bode well for my higher expectation. Rising foreclosure filings suggest foreclosures will account for at least 45% of existing home sales. With high inventories (9.1 months supply at current selling rates for single family and between 14.5 and 15 months for multi-family), and with foreclosures accounting for so much of the sales activity, home prices will continue to recede.

April 24 8:30 a.m. March Durable Goods Orders likely fell close to 4%, following a 3.5% gain in February. The consensus sees a decline of 1.5% in March. Motor vehicle orders look flat. Civilian aircraft orders are very weak. On a year-over-year basis, durable goods orders in March will likely be down roundly 25%, the 13th consecutive month of decline versus the comparable month of the prior year.

April 24 10:00 a.m. March New Home Sales likely rose to 345,000 annualized from 337,000 in February. The consensus call is for 340,000. Bargain prices and record low mortgage rates argue for my higher number. Large inventories and foreclosure sales will keep year-over-year price declines intensifying.

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