Turkey with a Side of Data - Analyst Blog
November 21 2011 - 1:54AM
Zacks
Wednesday marks the deadline of the “super committee” to come up
with its recommendations to cut at least $1.2 Trillion from the
budget deficits over the next 10 years. In reality, though,
the deadline is on Monday, since the CBO needs time to score it.
As I predicted as soon as the debt-ceiling agreement which created
the committee was reached, this effort has been a total failure.
The two sides are simply too far dug in. The GOP put a few
deduction limitations on the table, but only if all the Bush tax
cuts are made permanent. The Democrats have offered significant
cuts to entitlements, but only if the GOP gives in on higher
effective taxes on the upper income brackets.
As a result of the failure, the word of the year for 2012 is going
to be “sequestration.” Those are the automatic cuts of
$1.2 Trillion that go into effect starting in 2013. About half of
the spending cuts would come from Defense, and half will come from
non-defense discretionary spending. Social Security and food stamps
are protected from the cuts, and Medicare and Medicaid are largely
protected.
This is simply a meat cleaver approach, and was designed to be as
unpalatable as possible, so that the members of the “super
committee” would have an incentive to come to an agreement. There
will be a lot of action on Capital Hill in 2012 trying to defuse
the trigger that Congress set up for itself.
Any such effort, though, would probably have to go through the
Senate under ordinary rules, meaning that a filibuster could, and
probably would, stop it. Thus the most likely outcome is that the
sequestration will go into effect. While there is a lot of fat that
can be trimmed from the Pentagon, the meat-cleaver approach is not
a wise one from a national security point of view.
Some Taxes Would Go Up, and the Deficit Would
Worsen
The failure of the committee to come to an agreement probably also
means that the effort to extend the payroll tax cut into 2012 will
fail. That means a 2% reduction in the after tax incomes of anyone
earning less than $106,800 in 2012 relative to 2011.
If nothing is done, fiscal policy is going to become very
concretionary in 2012. Even if Europe somehow miraculously gets its
act together, the impact of the higher taxes and other austerity
measures has the potential to stop all of the positive economic
momentum we have been seeing in the recent numbers.
It would probably reduce overall economic growth by about 1.5% for
2012, which would mean that we would be skating very close to a new
recession in early 2012. If the financial system freezes up
due to Europe as well, it will be a one-two punch that will knock
the economy out. And a new recession would lead to higher, not
lower, deficits.
Other Data to Digest
In addition to the super committee news, there will also be some
very important economic data to digest this week before we get to
the turkey. Existing home sales are expected to slip a bit more in
October. There the real key is not the level of sales, but the
level of sales relative to inventories. That will tell us if the
slide in used home prices is coming to an end.
We get the second look at the GDP data for the third quarter on
Tuesday. While there is not expected to be a change in the overall
growth rate of 2.5%, the composition of the growth will probably
shift, and shift for the better, with more coming from net exports
and consumer spending, offset by an even bigger drag from inventory
investment. The minutes of the November 2nd Fed meeting also come
out on Tuesday, which could provide some insight into why the Fed
decided against doing anything at their last meeting.
On Wednesday we get the Personal Income and Personal Spending
report. Both are expected to rise by 0.3%, meaning that the savings
rate will stabilize at the very low level of just 3.6%. A falling
savings rate gooses the economy in the short term, but is not
healthy over the long term, and in recent months has fallen
significantly.
Eventually spending growth has to be supported by income growth. In
September income rose just 0.1% and spending was up 0.6%. The
sources of income are almost as important as the total growth of
income, and of late the sources have not been great. What meager
income growth there is has been flowing to the top of the income
distribution, and is not widely dispersed.
We also get New Orders for Durable Goods, which are expected to
decline by 1.0% on top of a 0.6% decline in September, but mostly
due to the very volatile transportation equipment sector. Excluding
transportation, orders are expected to be unchanged after surging
1.8% last month. Next month, though, it is likely that the
transportation equipment segment will surge as
Boeing (BA) just got some very large orders from
the Middle East.
The rest of the week is free of economic data, just food and
football on Thursday and crazy shopping on Friday. I hope everyone
has a tasty turkey and is safe in their travels.
I’m still holding on to my 1325 forecast for a year-end S&P 500
level. That is the forecast I made back in late July, down from my
start of the year forecast of 1400. We will most certainly not get
there in a straight line. But a 9.1% move is worth playing for, so
I would be buying the dips along the way.
Valuations are simply too compelling at these levels and at
least for now, the economic picture is improving here at home. If
we got evidence that Europe is going to actually get ahead of the
curve or if it looks likely that the payroll tax cut is going to be
extended, I would get much more bullish.
Based on the current expectations of $104.95 worth of earnings for
2012, that level would only be a P/E of 12.6x, or an earnings yield
of 7.92%. That is more than twice the yield you get on the 30-year
T-bond, and more than three times what you get on the 10-year. Of
the 392 S&P 500 firms that pay a dividend (and hence where
yield is a valuation criteria) 58.2% pay more than the 10-year, and
32.7% pay more than the 30-year.
Dividends tend to grow over time; the coupon payments on a
T-note never do. Long-term investors should feel like a kid in a
candy store in this environment, even if we do face substantial
macroeconomic uncertainties.
BOEING CO (BA): Free Stock Analysis Report
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