What will 1Q07 earnings tell us?

1Q07 earnings season kicked off in the US this week with Alcoa reporting a robust 9% increase in earnings. This is tipped to be the first quarter in 14 to register less than 10% growth across S&P500 stocks. Senior investment strategist at Standard & Poor's, Stan Stovall is expecting a 5% increase in earnings down from the 8% originally forecast whilst Thomson Financial expects earnings to rise only 3.3% for 1Q07. Whatever the number it is certain to be lower than the 12%+ recorded in 4Q07.

As important as the actual numbers will be the outlook given by companies for the rest of FY2007. The full impact of the sub prime story and the housing slowdown is yet to play out. Reassuring lines of containment continue to flow from the mouths of officals in high places whilst the data suggests otherwise.

Homebuilder D.R. Horton Inc. (DHI) provided the latest to piece of evidence suggesting the hoped-for housing recovery is still on hold. 1Q07 net sales orders slumped 37% from a year earlier whilst the rate of cancellations in 2Q07 were basically unchanged from the previous quarter at 32%. CEO Doanld Horton stated that the Spring sales season:

"has not gotten off to its usual strong start." "Market conditions for new home sales continue to be challenging in most of our markets as inventory levels of both new and existing homes remain high,"

Last week another homebuilder Ryland Group Inc.(RYL) warned that they expected to post a loss for 1Q07 citing asset writedowns of about $65m. CEO Chad Dreier stated:

"At the end of the fourth quarter, we were cautiously optimistic that pricing had begun to stabilize." "However, as the first quarter progressed, it became clear that aggressive pricing strategies persisted in several markets, requiring us to write down the value of some of our assets,"

Below are some more quotes from analysts in the last few weeks about the state of the housing market, earnings and the impact of the subprime meltdown that make for interesting reading.

"The severity of the subprime mortgage meltdown has increased our concerns about the outlook for the housing market," "Specifically, we are increasingly concerned that the combination of reduced credit availability and increasing foreclosures will put significant downward pressure on what we believe to be an already-unstable housing market," "Indeed, based on our analysis of current levels of excess supply, we believe housing prices need to fall at least 10% before the market can stabilize." - Stifel Nicolaus analysts.

The U.S. housing market is "out of balance, with substantial further adjustment to the inventory of new homes needed." - Citigroup

Key causes of lower orders in the housing market are:"A combination of tougher price competition, as more builders shift their pricing strategy to chase volume, and further deterioration in market conditions at the start of the key selling season." Also cancellations will continue to squeeze home prices "as home builders typically discount [speculative] homes more aggressively." - Daniel Oppenheim, Banc of America

"We expect [cancellation] rates to remain elevated in [2007], as the benefit from price reductions is offset by the negative impact from tighter credit standards." "In turn, this will generate further margin pressure and delay the timing for a recovery." - Margaret Whelan, UBS.

"Subprime concerns could affect a lot of industries." "That's why corporations are going to be very cautious in their outlooks." - Peter Cardillo, Avalon Partners.