Hutchens Investment Management: “Odds and Ends”

CONCORD, N.H. - April 30, 2013 - PRLog -- As we move beyond earnings season the results are better-than-expected for 1Q2013, said David Minor of Hutchens Investment Management.

According to Bespoke Investment Group, of the 805 companies reporting 59% have “beat” analysts’ consensus earnings estimates.  Although near the lows for the current bull market, the percentage has risen over the past few weeks.  The revenue beat rate at 49% remains low going back to 4Q2001 with only four quarters below the current level.  Despite the mediocrity of the earnings and revenues, the S&P 500 index is up 2.7% since April 5th.  Guidance for 2Q2013 remains at best subdued, but more often negative.  Why then is the stock market, long believed to be a discounting mechanism, not more reflective of future quarterly earnings, falling revenues, and a softening economic environment?  

We mentioned prior to earnings season that it may be a “shootout” between lackluster earnings and guidance versus the obvious liquidity benefits of Quantitative Easing (QE).  Although a lagging indicator, the most recent GDP data confirmed the slowdown in 1Q2013.  Without a reversal to an inventory buildup, the GDP data mirrors the minimal growth experience in 4Q2012.  The stock market has not reacted as would have been expected of the weak economic data released over the past two months.  QE by the Fed continues unabated, purchasing monthly approximately $85 billion of mortgage bonds and Treasuries.  The Fed balance sheet has swelled to $3.2 trillion and at the current rate will reach $4 trillion by year-end 2013.  Internationally, Japan recently embarked on “Abenomics,” a stimulus package focusing on sharply increasing money supply and broadening the range of assets the Bank of Japan will purchase.  Abenomics by any other name is QE.  Since the beginning of the year, the Nikkei 225 has risen 36.6%, so much for earnings and the economy.  It would seem that QE wins the “shootout.”

The bright spot in the US economy is housing.  Single-family home prices rose more than expected in February.  The widely followed S&P/Case-Shiller Composite Index of 20 metropolitan areas gained a seasonally adjusted 1.2% over January, beating estimates by 0.9 percentage points.  This index rose 9.3% year-over-year, the largest 12-month increase since May 2006.  Inventory levels at 4.4 month supply are contributing to the price rise but also a limiting factor for overall home sales. The current high affordability level is a major contributor to home sales.  In March, new home sales were 18.5% higher than during the same period a year ago.  Month-to-month existing home sales declined slightly in March 2013, but rose 10.3% over the prior year level.  For those who had been looking for the double-dip in real estate, the current situation looks like a bubble, which means we have much further to go in the housing market.  In conclusion, a combination of slow economic growth, neutral to slightly positive earnings, and a large dose of QE seems the right environment for equities.

Our investment strategy is a full position in equities.  The recent run-up since the beginning of the year and a more bullish sentiment for equities opens the possibility of a correction.  However, the impact of Fed expansionary policy on asset values has more than offset any correction to date.  Longer term earnings growth should rebound later in the year and along with a dose of inflation may be the ultimate catalyst for a sustainable bull market and deficit reduction.