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Philly Fed Survey Suggests Earnings Peaked?

  • Written by Syndicated Publisher No Comments Comments
    November 18, 2011

    philly-fed-survey-netprices-111711Now I admit that the title is a bit of a mental stretch but hang with me for a minute.   First, the Philly Fed survey weakened substantially with todays report from 8.7 in October to 3.6 in November.   This decline in the past month followed a sharp, and very suspicious, rise in the index in September when it jumped from a -17.5 read to 8.7.   The next couple of months will give us a much clear picture about the actual state of the Philadelphia Fed Reserve manufacturing region.

    The internal components of the index were primarily all soured with New Orders declining from 7.8 to 1.3, Unfilled Orders falling from 3.4 to -1.5 and Shipments slowing by almost 45% from 13.6 to 7.3.  While employment showed a temporary increase from 1.4 to 12 which was a good sign for the jobs market unfortunately rises in Delivery Times from -0.5 to 2.5, Inventories from -7.7 to 6.6 and Prices Paid lifting from 20 to 22.8 don’t bode well for future strength.

    What is concerning is that the prices paid versus prices received by manufacturers in the region (net prices) recently peaked above 42 which has only occurred 4 other times in the history of the index.   Those peaks in net prices have generally coincided with earnings cycle peaks.   With forward earnings estimates already on the decline from 15% growth in the next quarter to 11%, only 2/3 of the companies that have reported actually beating their estimates and fewer showing improvements in operating profit margins it is likely that we have seen the current peak for this cycle.

    This will make it tougher for the index to climb higher as earnings slow and makes it a much riskier bet to be invested on the long side of the market.  Income generation, total returns and hedged investments reign in this type of cycle.

    Images: Flickr (licence attribution)

    About The Author

    Lance Roberts – Host of Streettalk Live

    lance robertsAfter having been in the investing world for more than 25 years from private banking and investment management to private and venture capital; Lance has pretty much “been there and done that” at one point or another. His common sense approach has appealed to audiences for over a decade and continues to grow each and every week.

    Lance is also the Chief Editor of the X-Report, a weekly subscriber based-newsletter that is distributed nationwide. The newsletter covers economic, political and market topics as they relate to the management portfolios. A daily financial blog, audio and video’s also keep members informed of the day’s events and how it impacts your money.

    Lance’s investment strategies and knowledge have been featured on Fox 26, CNBC, Fox Business News and Fox News. He has been quoted by a litany of publications from the Wall Street Journal, Reuters, The Washington Post all the way to TheStreet.com as well as on several of the nation’s biggest financial blogs such as the Pragmatic Capitalist, Zero Hedge and Seeking Alpha.