Weekly PREcap & Outlook – 11.07.11

Tower Private Advisors

In lieu of a report last Friday, here’s a very brief look at the week ahead. It’s not looking good for a Weekly Recap & Outlook this Friday.


  • Q3 Earnings season wrapping up
  • Payrolls report not as bad as some characterized it
  • A look at the economic releases for the week

Capital Markets

 With 17 companies in the S&P 500 reporting earnings this week, the Q3 earnings season wraps up. Thus far, postive earnings surprises account for 69.2% of the releases. That’s not quite as good as the last quarter, when 71.1% of companies beat the estimates. On average, companies reported year-over-year earnings growth of 16.69%. That’s slightly better than the 16.22% pace of the second quarter, but it doesn’t look the disaster that one might have expected in the midst of the summer stock carnage.

Last Week

Last Friday, the market ostensibly declined because of a less-than-stellar Nonfarm Payrolls report. Economists had expected that 95,000 were added in October; instead, just 80,000 were added. Part of the miss had to be because of increased optimism by economists following Wednesday’s ADP Employment Change report. That report ostensibly sparked a rally that day, when it was reported that 110,000 private sector jobs had been added, above the 100,000 that economists had expected. The Unemployment Rate fell to 9.0% from 9.1%. For that 91st person of 100 who found the job, the 0.1% is clearly important. With respect to the economy, as a whole, cheerleaders need not apply.

There was, however, some good news buried in the release. First, payrolls for the last two months were raised by 102,000, which is better than an icepick to the forehead. Second, recall that there are two surveys conducted by the Bureau of Labor. The Establishment Survey canvases large employers, while the Household survey canvasses households, which, necessarily, includes smaller employers than in the former. While the Establishment Survey figure was the lowest in four months, the Household survey was virtually as high as anytime in the last 18 months.

This Week

There’s not a lot on tap this week in terms of economic indicators. Tuesday morning will give us a glimpse at the small business sector, with the release of the National Federation of Independent Business’ Small Business Optimism index. This should be one of our best gauges for hiring, as the small business sector is, of course, the engine of jobs growth in the U.S. Here’s an excerpt from the Small Business Administration’s FAQ:

Small businesses…

Represent 99.7 percent of all employer firms.

Employ half of all private sector employees.

Pay 44 percent of total U.S. private payroll.

Generated 65 percent of net new jobs over the past 17 years.

Create more than half of the nonfarm private GDP.

Hire 43 percent of high tech workers ( scientists, engineers, computer programmers, and others).

Are 52 percent home-based and 2 percent franchises.

Made up 97.5 percent of all identified exporters and produced 31 percent of export value in FY 2008.

Produce 13 times more patents per employee than large patenting firms.

The chart below gives a look at the overall Optimism index (top panel) and the Hiring Plans index (bottom panel). Not surprisingly, optimism waned through the summer, bottomed out at the end of August, and bounced a little. Hiring plans, however, didn’t. Still hiring plans remain in a gradual upward trend.

On Tuesday, the Bureau of Labor Statistics will release its monthly report on Job Openings and Labor Turnover (JOLTs) index. This indicator has been around since 2000, and it provides a wealth of information.

For example, here’s the broad index of Job Openings, along with its two components, Private Sector Openings and Government Sector Openings. As of August, there were 3,056,000 job openings, with 90% of them coming from the private sector. Of course, it’s not as high as in 2007, but it’s 50% higher than July 2009.

The JOLTs survey also produces statistics breaking down the folks who leave their jobs for various reasons. The categories are Layoffs, Voluntary Separations, and Other, which includes retirement, transfers, death, and disability. When we look at these categories (below), we can make at least one interesting observation: the rate at which folks are choosing to leave their jobs is as high as it was immediately before Lehman Bros. filed bankruptcy and the economy plunged into its deepest recession since the great one. That suggests, probably among other things, that current workers are increasingly optimistic about their job prospects. By definition, there is no job mis-match amongst those currently employed, but, clearly, as Occupy Everything evidences, there is a great mis-match in skills and other aspects since there are 3,056,000 jobs going unfilled. Otherwise, those folks would all be submitting resumes, right?

Anyway, here’s the Separation stuff.

Thursday will bring us the weekly Initial Claims for Unemployment Insurance report. Historically, 400,000 filings has been the demarcation between an expanding and contracting labor picture. Economists expect this week’s figure to tally 400,000, which, excepting 10 weeks in the first third of 2011, is the lowest that filings have been since mid-2008. Depending on if you’re a half-full kinda person or half-empty, you either see this as darn-good-why-it-hasn’t-been-this-good-since-W or see-it-just-can’t-get-any-better-even-with-two-b’jillion-dollars-of-so-called-stimulus, respectively.

On Friday, we get the preliminary November figures for University of Michigan Consumer Confidence. I thought about highlighting the blip up in the last U of M report (middle panel, below) versus continued downbeat assesments from the Conference Board (top) and ABC News (bottom) surveys, but when I looked at it relative to almost any sort of history it became a “what blip?” In the panels below I have indicated the last time the readings have been as downbeat as now–save for ’08-’09–and looked at the performance of U.S. stocks over the next two and a half and five years (table).

Much like the cover story phenomenon, consumers are great at extrapolating what they have experienced into what they think they will experience, but they’re quite poor at predicting what will happen. That’s what makes the consumer such a good contrary indicator.

“Very neat and clever, Mr. Obvious Insights,” you say, “but we’ve never been in a situation like this; we’ve never [INSERT OMEN HERE], and [INSERT FAVORITE DOUR POLITICAL OBSERVATION HERE], and, naturally, you’ve forgotten that [INSERT GEOPOLITICAL OBSERVATION HERE.]“

I would respectfully tell you that you are correct, but that–save, perhaps, for your political observation, which is arguably your opinion–there’s not a person alive who doesn’t know that, and that group includes all the survey participants included below. Thus, it’s unlikely that you could surprise a survey participant into liquidating his/her 401(k) on the basis of one of your observations, and that’s the nature of contrarian investing: investors’ portfolios reflect their present thinking.

Graig P. Stettner, CFA, CMT

Chief Investment Officer

Tower Private Advisors


Leave a Reply