Morning Report: Earnings season is off to a rough start

Vital Statistics:

	Last	Change	Percent
S&P Futures	1994.0	10.0	0.50%
Eurostoxx Index	3230.5	38.9	1.22%
Oil (WTI)	45.66	-1.0	-2.10%
LIBOR	0.321	0.000	-0.08%
US Dollar Index (DXY)	94.55	0.618	0.66%
10 Year Govt Bond Yield	2.00%	0.03%
Current Coupon Ginnie Mae TBA	105.2
Current Coupon Fannie Mae TBA	104.5
BankRate 30 Year Fixed Rate Mortgage	3.8

Stocks are higher this morning after some strong economic data. Bonds and MBS are down.

Initial Jobless Claims fell to 255k last week matching the low set in July. That 255k print is the lowest since 1973. Pretty amazing number given how much the population has increased. 

However that is translating into weak real wage growth. Last week real average weekly earnings increased 2.2%, We definitely have a tight labor market in some areas but wage growth has been hard to come by. 

Inflation at the consumer level fell 0.2% in September on a month-over-month basis and is flat year-over-year. Ex-food and energy, consumer prices rose 0.2% on a MOM basis and are up 1.9% YOY.

The Bloomberg Consumer Comfort Index edged up last week to 45.2 from 44.8. 

The Philly Fed manufacturing index improved to -4.5 in October. 

The Fed Beige Book survey reported that the US continued to experience modest economic expansion during the August - October period. Pretty much all districts reported growth except for Kansas City. Labor markets tightened in most districts and some are reporting shortages of skilled labor and are seeing upward wage pressure. 

Earnings season is off to a rough start as Alcoa, JP Morgan, Goldman, and Netflix all missed and Wal Mart guided lower. Wal Mart was down 10% yesterday after they announced profit will fall as they retool their stores and face higher labor costs. The strong dollar is weighing on manufacturing and the volatility in the markets over the summer is hurting the banks. 

Americans are more sanguine about the real estate market, according to the National Association of Realtors. House prices are up, less and less people are underwater and the economy has improved. 

Corporate balance sheets are deteriorating, as many took advantage of the record low interest rates to lever up and fund buybacks. Interest coverage ratios are at the lowest since 2009, and companies are returning 35% of EBITDA back to shareholders via dividends and buybacks. Interestingly, the markets are beginning to punish companies with big buyback programs. One thing to keep in mind: when companies spend money on buybacks, they are making a statement about the opportunity set they see for expansion. The other place corporate funds are going: mergers. AB Inbev plans to issue $55 billion of debt to fund its purchase of SABMiller. Dell will issue something like $40 billion in debt to purchase EMC. 

Good breakdown of what the Fed will want to see in order to raise rates in December. Punch line:

• No further market volatility
• Two good jobs reports
• Solid consumer spending and further improvement in housing
• No further deterioration in exports
• No protracted government shutdown