America: a time for optimism?

11th September 2012

But it looks as though that is a luxury they can't afford. For despite the S&P 500 trending at or near a four year high, the market is full of fear and indecision.

It has to deal with:

As Shaun Richards pointed out recently in Mindful Money, "the latest numbers for those receiving the snappily named Supplementary Nutritional Assistance Programme or what is more commonly known as food stamps has risen to a new high in the United States at 46,670,373."  That's around than one in seven of the US population.

The Snap programme brings together strange bedfellows. The Republican controlled House Agriculture Committee wants cuts – while health campaigners who complain the stamps help profit junk food producers, causing obesity and effectively discouraging recipients from work, lobby for major changes in focus.

The campaigners have a point. For the Financial Times reports that Kraft, owners of the Cadbury brand as well as coffee labels Kenco, Carte Noire, Maxwell House and Café Hag, is pleading against any reductions.  Tony Vernon, the new Kraft chief executive told the FT that he opposes any cutbacks in the $75bn a year programme at least a sixth of the firm's revenues comes from Snap.

US fast food companies have argued for the stamps to be valid in junk food outlets while manufacturers have fought for the right to provide sugary and other "non-nutritional" food to Snap recipients.  But if the Republicans have their way and cut Snap back, profits could fall at a number of food firms.

Expectations hit low points

Earnings could be under stress at more than food firms, however.  The latest edition of Lookout Report, a biweekly research note from S&P Capital IQ 's Global Market Intelligence (GMI) unit, says:

"Although consensus S&P 500 2012 and 2013 earnings expectations have dropped to new lows for the year this week — suggesting analysts have made substantial progress adjusting to the reality of 1.7 percent U.S.GDP growth at mid-year 2012 rather than the 4 percent growth recorded at year-end 2011 — the U.S. is nowhere near the point of discounting the prospect of recession. In our view, in addition to real progress in Europe, it is absolutely imperative that the U.S. economy continues to generate healthy rates of monthly job creation, as in July (163,000), if the "risk-on" trade is going to continue through the balance of the year."

The conclusion sounds bearish. It says that while "many North American companies have reported earnings well ahead of expectations during the second-quarter reporting season, companies have also tended to miss revenue estimates. Currently, the number of companies that have surpassed analysts' estimates stands at 65 percent, but only 40 percent of companies beat revenue expectations. The surprise ratios for these measures are drastically different as well, with companies beating earnings estimates by an average of 4.3 percent and only beating revenue expectations by 0.02 percent."

There are bullish pointers, however.  At the same time a dividends are at a record.

SAccording to S&P Dow Jones Indices, increases in dividends less decreases hit $12.0bn in the second quarter of 2012, a new record for U.S. domestic listed common stocks. There were 505  increases during the second quarter, a 13.7% gain over 2011. Just 37 of the approximately 10,000 U.S. traded issues, decreased their dividend in the second quarter of this year compared to 21 this time last year.

Corporate payouts hit all time highs

"Dividends had another great quarter, with actual cash payments increasing over 14% and the forward indicated dividend rate reaching a new all-time high," says Howard Silverblatt, Senior Index Analyst at S&P Dow Jones Indices. "At this point, we expect to see double-digit growth in actual dividend payments for the remainder of 2012, which would equate to a 16% gain over 2011."

One explanation is that companies have accumulated cash and have few investment plans so they return money to investors.  So they can grow dividends leading to stock price increases even if earnings look shaky. But whatever the reason, Silverblatt adds:   "Dividends are back in style with investors looking for yields during a time when companies can afford to give more and want to satisfy shareholders — all of which makes for a very positive outlook for dividends."

The big unknowable is the degree by which natural catastrophes could derail this scenario. Hurricanes, floods and other disasters have an immediate impact on municipal credit. If that weakens, then markets as a whole could feel the impact.

Hurricanes – here today, history tomorrow

Eric Friedland, Head of Municipal Research at Schroders reckons any effect will be short rather than long term as the US hurricane season gets into full swing.  Hurricane Isaac could cost $40 billion, a big sum but far short of  Hurricane Katrina, which caused an estimated $100-200 billion of damage.

He says:  "In addition to hurricanes, municipal issuers are exposed to tornadoes, earthquakes, fires, and flooding. While these events have certainly caused financial and operational pressure, the general credit quality of municipalities typically has not been meaningfully diminished. This is because the stress tends to be short term in nature and is often relieved through funds received later on. In some extreme cases, there have been rating downgrades, but a default as a result of a natural hazard event is rare."

The Federal Emergency Management Agency (FEMA), which will typically cover no less than 75% of the related damage costs, is the most prominent source of help but it is currently under financial pressure.
But this funding is to decline due to the deficit reduction plan while the cost of flood damage is exceeding insurance premiums.

Friedland adds: "Flood insurance is typically not covered by private providers and areas with the lowest income levels are most likely to include households with the lowest levels of private insurance coverage."

The biggest problems could be for investors in municipal leases or certificates of participation who may find debt service payments more likely to be interrupted if the leased and encumbered project is unoccupied or damaged.

"As non-essential projects are the least likely to be rebuilt if damaged, the municipal leases supporting these projects are the most likely to run into problems," Friedland concludes.


More on Mindful Money:

Is Mark Cuban right to blame investors for Facebook IPO?

The US economy only added 96,000 jobs in August

Financials fall out of Footsie

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