Tower Private Advisors
- Another slimy company
- What, me worry?
- Dismal employment report
Capital Markets Recap
The Slimy Company Award this week goes to Duke Energy. It recently completed its acquisition of Progress Energy, an amicable sort of deal. When the deal was announced, the CEO of Progress Energy was annointed to fill the role of CEO of the combined company. That was 18 months ago. He signed the contract five days ago. A few hours after he started the job, the board decided he wasn’t right for the position and gave the role of CEO back to Duke’s CEO.
With the passing of last week the second quarter of the year was concluded. That means the earnings reporting season is just around the corner. Alcoa, always the first S&P 500 company to report, will do so on Monday, July 9. We should hope that the season doesn’t unfold like Alcoa’s earnings estimates, which are shown below in red.
Speaking of earnings estimates…our mid-year letter to clients pointed out one of the major things that will confront investors and markets between now and the end of the year is the so-called Fiscal Cliff. That refers to the cliff that fiscal policy will fall off if Congress doesn’t act. The Fiscal Cliff includes the expiration of the Bush Tax Cuts–the biggest in the list–as well as the Payroll Tax Cut and non-discretionary spending cuts, which were the results of the inappropriately named Congressional Super Committee. The fiscal cliff is comprised of items presently contributing about 3.5% to GDP. The latest iteration of GDP, annualized, was 1.9%, reported on June 28. Subtract 3.5% and you get a negative number, which equals recession. As to its impact on earnings, one of our favorite services, BCA Research, points out that “despite this looming threat consensus growth estimates for 2013 have remained unchanged over the past 10 months.” Stay tuned for more on the Fiscal Cliff. It’s a biggie for markets over the next few months, but it’s little appreciated.
In spite of that, there is a fair amount of pessimism amongs economists, as they seem to be underestimating the strength of the economy–and today’s Nonfarm Payrolls report (see below) will make them more bearish. When they’ve built that into their forecasts and have conveyed that out to their firms they will go too far, and, historically, turning points in the index have lead to turns in the stock market as shown below.
There was really one report that mattered this week, and I’ll cover it below, but there were a couple of reports that merit a mention. First, the purchasing managers indexes are becoming increasingly relied upon for a view of economic activity. They’re available for most developed nations, although they seem to reflect the views of some guy ordering paper clips and toilet paper. Most are diffusion indexes, which measure some version of the percentage of good to bad responses. Accordingly, the 50/50 mark has historically been the demarcation between contraction and expansion. In fact, studies have shown that line is actually lower–in the mid- to high-40s. You can imagine the market’s surprise when this week’s ISM Manufacturing index dipped below 50 (49.7) for the first time since 2009.
The ISM report is comprised of several components, and from looking at those, it’s evident where the problems were. While several deteriorated markedly, the biggest detractor was New Orders, which fell a bit more than 20%, as shown below. While not evident from the 12-month window below, several drops set post-1970 records.
The Wednesday of the week that produces the big payrolls (NFP) report always features payroll-processor Automatic Data Processing’s Employment Change index. You’d think these things are created because they measure things better, but one of these measures has to be way off. Here’s a look at the ADP report versus the NFP. It shows that this week’s ADP figure (176,000 jobs created) was one of the worst misses.
That report seemed to set markets up for a good nonfarm payrolls report today, and so did Thursday’s Initial Jobless Claims report, which showed a rather sharp drop of 14,000 claims, although it leaves the indicator in an uptrend in the short term and, troublingly, in the long term.
These reports left investors hoping for a good report today, but it was not to be. Instead of the modest increase of 100,000 in Nonfarm Payrolls, the change was a mere 80,000 (the figures were 106,000 and 84,000 for the private sector.) The Unemployment Rate remained at 8.2%. A slight increase in the Labor Force–which, on its own would have lead to an increase in the rate–was offset by a similar increase in the Household Employment report. Folks eager to grasp for positives pointed out the increase in the Average Workweek (6 minutes) and Average Hourly Earnings (+0.1%). The former, however, just recouped the loss incurred in May and just gets us back to March and April levels. Bizarrely, an article on the Huffington Post quoted the President as saying the report marked a “step in the right direction.” Huh?
Key indicators to watch
- NFIB Small Business Optimism
- Job Openings Labor Turnover Survey (JOLTS) report
- Initial Jobless Claims
- Producer Price Index
- University of Michigan Consumer Confidence
Hey! We made it through with no mention of Europe!
Graig P. Stettner, CFA, CMT
Chief Investment Officer
Tower Private Advisors