Thursday, May 31, 2012

More Bad Economic News ... QE3 More Realistic?

Chicago PMI survey result came in at 52.7, significantly below the Street's 57.0, and lowest since Sep. '09.  Production and new order indexes were down, but order backlogs and employment indexes did increase for the month of May.

With all of the recently released bad economic numbers, will the Fed change its mind and begin discussing a QE3?  Just last week, we heard NY Fed's Dudley, who has been very hawkish when it comes to monetary easing, say that he believes QE is no longer needed unless things get worse.  He said: "But if the economy were to slow so that we were no longer making material progress toward full employment, the downside risks to growth were to increase sharply, or if deflation risks were to climb materially, then the benefits of further accommodation would increase in my estimation and this could tilt the balance toward additional easing."  So there is still a chance of a QE3 even in an election year.

Under what circumstances would a QE3 become more likely?  We think given today's bad figures, a big disappointment tomorrow might create more 'optimism' when it comes to monetary easing.  If tomorrow's employment report is in-line or slightly better, which we think it will be, the market will not react very positively, especially after seeing this morning's Challenger job cuts and jobless claims which both indicate a not-so-good employment situation in June.

Again, long strangle positions on VIX and/or SPY could work.  SPY, the S&P 500 ETF, is approaching the 129 level which if it goes below that, the 125 level could be next.  In addition, given that the 20-day moving-average (MA) has already gone below the downward trending 50-day MA, it is also approaching the 100-day MA, which could trend downward after a down day today and tomorrow.  This appears to be a bearish technical indication building on top of an already existing bearish technical indicator.  However, as mentioned earlier, if economic news gets much worse, increasing likelihood of a QE3 could initiate a risk-on strategy in the market, which could turn around S&P 500 and SPY for the short to medium-term.  For all of these reasons, a long strangle on SPY may work.

Regarding VIX, it not only jumped nearly 21% but also dipped nearly 18% after we made a similar recommendation before March 5.  VIX is now nearing the 25.0 level again.  At this point, we think there is still potential for dramatic moves up or down, which is why a long strangle would be a good idea.  Basically, the same reasoning mentioned earlier for SPY can be applied to VIX.

The market continues to take a dump.  S&P 500 is down nearly 0.9%.  FB is down 3.3% at $27.25.  GLD is at $152.2, up 0.2%.  Lastly, VIX and VXX are up 3.2% and 5.4%, respectively.

ADP, Initial Claims, and Q1 GDP Miss Expectations

Based on another disappointing employment data, ADP, it appears that we may have been too optimistic regarding tomorrow's official US employment report.  However, we will stick with our original total NFP net change of 152K as we believe there was actually some net hiring in the government sector in May.  Initial jobless claims was disappointing again.  Q1 GDP was in-line with our estimate, but below the Street's and lower than the official advance estimate.


ADP employment report for May showed an increase of 133K in jobs within the non-farm private sectors.  This was significantly below the 150K consensus.  Hiring in small, medium, and large non-farm private businesses increased by 67K, 57K, and 9K, respectively, from the previous month. 

Initial Jobless Claims

Seasonally-adjusted initial claims came in at 383K, up 10K from another upwardly revised prior week's figure, and higher than the 370K consensus.  The upward revision trend continues and is getting stronger.  We note that this figure likely was not included in nor did it impact tomorrow's employment report.


The Q1 GDP print of 1.9% was in-line with our estimate, but below last month's official advance estimate of 2.2% and the Street's 2.0%.  On the bright side, the tiny annualized growth was driven mainly by consumption and increase in exports. 

Overall, this morning's economic figures were disappointing.  However, it appears that for the time being, the market is still hoping for better employment and ISM numbers tomorrow, as S&P 500 futures remain in the black.  Again, our ISM and NFP estimates for tomorrow are 54.5 and 152K, respectively. 

Disappointing May '12 Challenger Job Cuts Report

The May '12 Challenger job cuts report was disappointing. 

It came in at 61,887, up 52.6% from April's 40,559, and up 66.7% from May '11.  YTD job cuts of 245,540 are up 20.1%.  Top three reasons for job cuts were restructuring, closing and cost-cutting, which we think indicate not-so-great, or moderate, economic conditions at best.  Total planned job cuts in May were highest in the computer, transportation and financial industries; and highest in the Western region with CA leading the way.

On the hiring front, according to Challenger, there were 7,722 announced hiring plans in May, down 4,072 m/m, and down 2,526 Y/Y.  Hiring plans were highest in the automotive, health care/products, and industrial goods industries.

This report certainly isn't positive.  However, it does not necessarily indicate how good or bad tomorrow's official employment report will be.  A better indicator, although not accurate, is the ADP report which will be released at 8:15am.

Wednesday, May 30, 2012

NFP Estimate & an Update ...

After the feel-good day yesterday, the equity market is down more than 1%.  Disappointing April pending home sales released earlier this morning certainly did not help. 

April pending home sales declined 5.5% from the prior month.  This was significantly below the 0.6% increase that the market was looking for.  In addition, March's sequential growth rate was revised down by 30bps to 3.8%. 

We certainly try to estimate most of the widely followed and market moving economic indicators.  We must say that playing a guessing game is a bit risky, and for this reason, we post estimates in which we have enough confidence.  Yesterday we posted our estimates for Q1 GDP (which we had also posted during the second week of April) and manufacturing ISM, 1.9% and 54.5, respectively. 

After looking at the initial claims data, along with results of some of the Federal Reserve Bank districts' business surveys, and the current ADP consensus, we're estimating NFP of 152K for May, slightly above the 150K consensus.  If the official NFP count does represent an addition of 152K, we do not think it is significant enough to turn around the current risk-off attitude.  In addition, when analyzing responses to surveys regarding business conditions six months from now, it appeared that many are expecting to slow down hiring. 

Worries about Greece, Spain, Italy (which has taken a backseat the last few months but will likely be on the front pages again soon), the overall downturn in Europe and a slight slowdown in China's growth rate will likely overtake the possibly better than expected ISM and employment results.

S&P 500 is at 1313, down 1.4%.  FB is trading at $28.29/sh, down nearly another 2%.  Gold is up nearly $14.  Lastly, we thought to give you a clearer picture regarding how some sectors have performed YTD, this past month, and since we posted our less risky proposition in early March.  The simple table is below. 

Tuesday, May 29, 2012

Update ... Q1 GDP & May ISM Estimates ...

This short week will certainly be filled with some market moving economic indicators.  With the way the equity markets shot up this morning, it appears that many were expecting either significantly better than expected economic indicator results, or significantly worse, which may start more talk/rumors about QE3.  When there's some type of insurance such as the QE's, although not providing 100% coverage, most tend to take more risk.

Let's start with last week's economic numbers.  As we had guessed, they were pretty much mixed.

MBA Mortgage index went up 3.8% compared to prior week's 9.2%.  While the refi applications increased 5.6%, the home purchase applications were down for the second week in a row, -3.0%.

New home sales print for April was 343K, above the 339K expectation.  There was m/m increase in every region except the South.  All regions reported Y/Y growth in new home sales.  Month's supply, basically inventory, went down to 5.1 from 5.2 in March.

Initial jobless claims were again disappointing, 370K versus estimates of 365K.  Not surprisingly, the previous week's figure was revised higher by 2K to 372K.  It was amusing to see many headlines asserting the "decline" in initial claims.  By the way, in addition to continuing claims data for week of May 7 being about 10K more than expected, the prior week's data (week of April 30) was revised higher by 24K to 3,289K. 

Both durable orders for April were disappointing.  Overall durable orders went up 0.2% from March, lower than the 0.3% estimates.  Excluding transportation, that figure was -0.6%, significantly below the market's 1.0% expectation. 

University of Michigan/Reuters consumer confidence figure surprised to the upside, coming in at 79.3 versus the 77.5 consensus.

This week got off to a mixed start with the Case/Shiller 20-city house price index coming in about 20bps better than expected.  The index declined 2.6% in March.  However, the Conference Board's consumer confidence index was pretty disappointing, 64.9 versus the 69.4 estimate.  In addition, the Dallas Fed May manufacturing survey result of -5.1 (released this morning) was worse than last month's -3.4.  

Other data to be released this week includes pending home sales (tomorrow), MBA mortgage index (tomorrow), Challenger job cuts (Thursday), initial jobless claims (Thursday), ADP Employment Change (Thursday), Q1 GDP (Thursday), Chicago PMI (Thursday), state of employment (Friday), ISM manufacturing (Friday) and PCE prices (Friday). 

We have not yet come up with a projection for non-farm payrolls (basically the state of employment report due out on Friday), but will likely do so at some point tomorrow, and it may be followed up by minor adjustments on Thursday morning after the ADP release. 

Regarding the Q1 GDP, we stated a while back (in a post discussing Alcoa) that Q1 GDP will likely be around 1.9%.  Initially, the median estimate on the Street was around 2.25%.  The first estimate came in at 2.2%.  For Thursday's GDP data release, the Street expects 2.0%. 

The May ISM manufacturing consensus is 54.0, which basically means the Street is expecting a decline from April's 54.8.  We also expect a decline, but a slightly lesser one.  We think ISM manufacturing will come in at around 54.5.  Of course the market's reaction will depend on the job numbers which are also released on Friday.  Again, we will post our initial non-farm payrolls estimate tomorrow morning. 

The S&P 500 is still up, although not nearly as high as it was earlier this morning.  After almost hitting 1335, it has come down a bit to 1325, but is still up around 0.6% for the day.  NASDAQ was up over 1.5% earlier but now it is up only around 0.45%.  FB is down 8%, below $30/sh.  Gold is down another $11 today at $1557.6. 

Wednesday, May 23, 2012

The FB IPO Debacle

We're probably beating a dead horse here, but thought to give one more update on FB.  As everyone already knows, FB's big four underwriters' analysts involved in the deal lowered their estimates after FB filed an amended S-1 which discussed the risk of minimal growth in revenues generated from the mobile platform.  In addition, some are saying that those analysts were provided with more 'color' regarding Q1 and FY '12 revenues, and FY '13 EPS by someone from FB.  What makes this even better is that the analysts lowered their estimates asindicated by Reuters earlier tonight (5/22).  And to top it off, some are saying that those underwriters only informed select clients (which we will safely assume means only institutional clients) of the downward revision of their estimates.  Retail investors were left in the dark, as usual.  To all of this, we say ... wow!  Then again, none of this is very surprising.

Based on this new info that strengthens our initial argument that FB remains overvalued, we lowered our own estimates (which we must note were pretty comparable to what Reuters says were Goldman Sachs' initial estimates).  The new projections are provided below.  We also lowered our terminal growth assumption for the DCF model, which along with lower top & bottom-line estimates, resulted in a $23.00/sh valuation.

But let us try to examine how all of this may impact the big four underwriters, the ‘muppets’ (or in this case the retail investors), and most importantly, the employees at FB.

The big four - Morgan Stanley, JP Morgan, Goldman Sachs, and Bank of America - will likely have to deal with a so-called investigation.  As usual, we know that they will likely get just a slap on the wrist, if the accusations are proven to be correct.

The retail investors lost more money, unfortunately.  This had added, and will continue to add, to the mistrust of Wall Street among individual investors, which is a negative for the market.

And what about those 'poor' FB employees?  We think that after hearing about accusations that some member(s) of the FB management team shared valuable information with underwriters and not with its employees, and that the information led to what appears to be a disappointing IPO, the employees will hold a possibly costly grudge.  Yes, many that were given shares early on will remain millionaires (or billionaires), but their worth has already declined 26% from where FB opened on May 18.  We fear that a lot of employees that were planning to leave the Company will do so even more quickly.  In addition, it may no longer be too easy for FB to find qualified employees to join its 'team', as such display of mismanagement may have reduced the number of 'likes' clicked on the statement (a virtual one) - FB is the best place to work at.  

Tuesday, May 22, 2012

Better Housing ... Worse Manufacturing

Existing home sales for April were released this morning.  The figure came in at 4.62MM, slightly below estimates of 4.65MM, an increase of 3.4% from the prior month, and 10.0% Y/Y.  We note that the March figure was revised down by 100K.  The month's supply increased to 6.6, that's up 6.5% from March.  The good news is that it is down 27.5% from last year.

The region that experienced biggest increase in seasonally adjusted sales versus last month was the Northeast, 5.1%.  The weakest region based on a monthly comparison was the Midwest.  The Northeast also saw the biggest Y/Y increase at 19.2%.

On the pricing front, there was a 10.1% Y/Y increase in prices, with the West leading the way at 15.9%.  There was not a decline in prices in any of the regions.

Now, let's move to the not-so-good news.  The Federal Reserve Bank of Richmond released its May manufacturing survey results, and they came in significantly below expectations.  Current conditions were 4.0 versus the 11.0 estimate.  In addition, that figure was a significant decline from April's 14.0.  This was more in line with the Philly Fed rather than the Empire State survey results.

The bright side was that the number of employees and the average workweek increased, according to the businesses surveyed.  However, the wages indicator declined.  Other components of the survey that we believe can be viewed as indicators for future hiring were down.  They include backlog of orders coming in at -18.0, and much lower m/m volume of new orders and capacity utilization.

Results of survey about the businesses' expectations support what we just said.  Expectations regarding order backlogs, capacity utilization, number of employees and capex were all lower than the prior month.  Expectations regarding volume of new orders came in only slightly above April's figure.  Wages were also a bit higher, but that is not surprising, given the increase in number of employees cited in the current conditions survey.  Prices paid declined at a lower rate than prices received, which is usually not very good news.  Prices paid declined 14.4% versus a decline of 17.6% in prices received.

Regarding the overall market, after the S&P 500 came close to the 1290 level that we have been suggesting for a while, more specifically, 1291.98 on Friday, we are seeing a dead-cat bounce.  Right now, it is at 1327.19, up 2.7% from the Friday lows.  As things had gotten worse, increasing hopes and chances of further monetary easing, along with today's better than expected housing numbers, are driving the markets higher.  We think the market will likely settle a bit later this week as various economic indicators (new home sales, FHFA housing price index, initial jobless claims, durable orders, and consumer confidence) are scheduled to be released.  We think they'll provide mixed signals regarding the economy.  Let's not forget about the EZ crisis, of which another 'kicking the can down the road' step was taken (as it was revealed that Greece and other PIIGS members received some 'emergency' and 'secret' loans), which is also driving US equity markets higher.  We remain cautious as Greece's election is not far away, and as we get closer, the market will likely again demonstrate a risk-off.

And regarding FB, as we know most readers probably have their Facebook page open right now, it is trading down about 3%.  We note that it has pared its losses a bit as it was down more than 8% earlier this morning. 

An Attempt at Valuing Facebook (FB) ... Remains Overvalued

Facebook (FB) is not a bad company, but we must say that it is overvalued, as we assumed it would be prior to it going public last week.

The Company’s revenues are driven by industry growth, more specifically growth in the social network advertising market, which we see growing at a 15% CAGR over the next five years.  Although the mobile advertising market is estimated to grow at a 40%+ 5-yr CAGR, it will remain a small portion of the overall online advertising market.

In addition to these markets, FB’s topline growth is driven by user growth, or as FB puts it, monthly average users (MAU).  However, mobile MAUs are growing faster, and as we mentioned early last week, this could be a negative for the Company as it isn’t yet generating significant ad or other types of revenues from its mobile platform.  Again, the mobile ad market does appear attractive, but we don’t think FB users are yet ready to embrace ads, etc. on their smartphones or tablets.  FB is trying various ways to monetize the users on the mobile platform.  For example, it is using sponsored stories, but the results of such a strategy remain to be seen.  Given such uncertainty, we discounted growth driven by the mobile ad market.

The payments & other fees revenue growth potential is pretty attractive.  FB may be successful in including ecommerce which then can enhance return on ads placed on FB, making them more attractive to advertisers and companies.  We have that segment going from a mere $557.0MM in FY ’11 to $3.2bil in FY ’16.  Overall, we’re seeing a 5-year 26.5% CAGR for payments & other fees revenues. 

FB is in a growth stage. While expanding and attempting to further monetize its 1bil-and-growing users, we will likely see margins decline during the next 12 – 18 months.  A summary of our top and bottom-line estimates is provided below, followed by our MAU and avg. quarterly ARPU (avg. revenue per user) projections. 

Now, let’s move on to valuation.  We currently value it at $27.69, which is 18.7% below its Monday closing price.  It is tough to value a company such as FB.  We tried to stay with the basics and used DCF.  We must note that we did make some pretty optimistic assumptions.  Our valuation, FB’s current market value, along with a comparison of some val multiples of other companies are provided below.  We note that our target makes FB’s val multiples pretty comparable to where the others are trading at.

In summary, as we mentioned a couple of times before the IPO last week, FB appears to have been overhyped.  Even after an 11.0% decline today, which puts it 10.5% below the $38.00/sh IPO price, FB remains overvalued.  If anyone needs additional detail regarding our estimates and the val model, let us know.

Friday, May 18, 2012

Philly Fed, Initial Claims, Overall Market ... and FB

In this lengthy post, we discuss the Philly Fed business survey results, initial jobless claims, our thoughts on the overall market, and we also digress a bit and touch on Facebook (FB).

Philly Fed Business Survey
The Philly Fed business survey came in at -5.8 for May, significantly below estimates of 8.8.  It appears that the Empire State manufacturing data which came out earlier this week may have been an outlier.
Drivers for such disappointing Philly Fed survey results included the much faster delivery time which was impacted by much lower unfilled orders.  In addition, decline in number of employees and average workweek was not encouraging at all.
A couple of other things stood out in the report.  One was that the index for future capex (the next six months) in that region declined significantly to 5.3 from 21.7.  This basically indicates that businesses surveyed do not expect as much capex in the future as they did the previous month.  The other data that caught our attention was response to the question of what factors are forcing businesses not to hire aggressively.  In the current stormy political environment (which is expected given the upcoming elections) politicians usually say taxes, health care legislation, other regulations or policies, and lack of skilled workers are the biggest reasons why businesses are not hiring more.  Well, at least in the third Federal Reserve District, the biggest factor restraining hiring is the businesses' pessimism regarding topline growth in the future.  The next biggest factor was that companies wanted to keep costs low, which is expected given lack of sales growth.  Clearly, such data is not very encouraging.

Initial Jobless Claims
Seasonally adjusted initial jobless claims were again above expectations, and as we suggested before, the prior week's data was revised up.  In fact, YTD, every single week's jobless claims data has been revised up; 20 weeks in a row!

Overall Market
The equity market took another dump Thursday with the S&P 500 declining another 1.5% to 1304.86.  Since end of April, it has declined approx. 6.7%; and it is down 8.3% from its YTD high of 1422.38.  It is down 4.7% since we posted recommending transitioning to less risky equity sectors on 3/5/12.  That 1325 support level we touched on earlier this week was broken through on Wednesday.  Thursday's further decline was an indication that it could be well on its way to the 1290 level we suggested.  However, again, as mentioned earlier this week, the Facebook (FB) IPO could help create a dead-cat bounce Friday.
We haven't yet had a chance to go through FB's S-1 in much detail as we knew we wouldn't be able to get in on the action early enough.  However, we do have some hesitations regarding sustainability of FB's revenue model in the long-run.  The Company generates revenues from ads (based on number of impressions or click-throughs) and from fees that its payment platform charges businesses per transaction.  Consistent growth in ad revenues is in question.  We have already seen one major business, GM, pull its ads saying they do not pay off.  In addition, more and more FB users are on the mobile platform which creates some limitations for generating ad revenues.  Lack of screen space certainly further restrains FB to place ads on its mobile platform.  Also, we believe it is less likely for users to conduct click-throughs on ads they see on their mobile devices as compared to the ones they see on their laptops, PCs or Macs.
Although FB's user base continues to grow (for good reasons as the users love their experience on the FB platform), we could see the average revenue per user, ARPU, level off and possibly decline for the reasons mentioned above, which is not good news for the Company's topline growth.  We also note that FB's revenues from transactions, which in the March quarter made up 17.6% of total revenues, are heavily concentrated.  In other words, most of those revenues come from purchases of apps by users from one company, Zynga (ZNGA).  We are not saying that other developers won't contribute to FB's revenues, but right now the risk of client concentration is clear and present.  Also, surprisingly, we did notice seasonality in this young Company's revenues.  It appears that the March quarter is usually its lightest when it comes to topline, which could explain why they chose to go IPO after the March quarter.
Regarding FB, we are not saying that this Company will be a bust and no growth remains.  In fact, there is a lot of growth potential for FB, as many others will agree.  However, sustainability of such growth and some steps that may be necessary for this may backfire in the long-run.  Of course, the Company won't face such risk until a few more years down the road.  FB users have stayed on FB because of fewer ads and because it is free.  We just hope that with declining ARPUs in the long-run, FB won't have to consider creating a 'premium subscription' plan.  Once users get something for free or for a low price, the worst thing is to raise the price; something that NFLX has realized during the last 12 months.  We note there is significant growth potential in FB's transaction based revenues.  Then again, that space is pretty competitive with companies such as Amazon (AMZN) doing pretty well.   Unfortunately, we digressed a bit from our discussion of the overall market.  We’ll likely discuss FB in more detail once we have a chance to go through the S-1 filing and conduct some good ‘ol due diligence.
We did see some signs of a potential break of the positive correlation between gold and the equity market.  While the stocks went down further, gold spiked up a bit on Thursday.  This could be due to either that many believe commodities will still have value in bad times and/or that the macro environment is deteriorating so much that chances of further quantitative easing just may be increasing, which of course help commodities and metals such as gold.  Whether the divergence demonstrated on Thursday will last or not remains to be seen.  The gold ETF, GLD was up 2.2% on Thursday.  We must note that YTD GLD is up only .5% while S&P 500 is up 3.8%.  It’s a bit different Y/Y, with GLD up 5.6% and S&P 500 down 1.8%.
Overall, the economy is not growing as strongly as many expected and the Euro crisis continues to get worse.  For these reasons we still believe a little bounce off the lows might be short lived and 1290 for the S&P 500 is within reach.

Wednesday, May 16, 2012

Update on Economic Data ...

Both industrial production and capacity utilization for April came in higher than the market expected, which also means higher than our estimates.  We actually had expected a slight disappointment.  Although, we must note that the 1.1% growth in industrial production, as stated in many headlines, was misleading as growth in March was revised down from flat to -0.6%.  The actual figure of 97.4% was still above the 97.1% consensus.  Capacity utilization came in at 79.2% versus the market's 79.0% estimate and certainly above our 78.6%. We note that the March capacity utilization was also revised down.

Although the data came in above expectations, we must emphasize two things.  One is that the March figures were revised down, which could mean that Q1 GDP may actually come in below the 2.2% initial estimate.  We have stated before that based on certain indicators we believe the final Q1 GDP growth figure will be around 1.9%.  The second point of emphasis is that the higher industrial production and certainly capacity utilization go, the less likely it is for the Fed to continue its aggressive monetary easing policy, which is not necessarily good news for the equity market.

Regarding the housing numbers, as expected, permits were disappointing, but housing starts came in much higher than the estimates.  In addition, March's housing starts were revised up.

Permits for April were 715K, above the 730K expectation.  March's figure was revised to 769K from 747K.  Permits for single-unit homes grew 2% from the previous month, while permits for MDUs declined 21% m/m.  We note that the Y/Y growth rate for MDUs remained significantly above single-unit homes, 36% versus 17%, respectively.  Regionally, only the northeast did not experience negative m/m growth in total building permits (single-units and MDUs).  West had the biggest m/m decline, 14%.  However, Y/Y growth was positive for all regions with the northeast ahead of others at 33%.

Housing starts for April were at 717K, above the 680K estimates.  Starts in MDUs grew faster than single-units m/m and Y/Y.  MDUs were up 4% from March and 75% from April '11.  Single-units grew 2% m/m and 19% Y/Y.  Housing starts (for both single-units and MDUs) in the northeast region were down 21% from the prior month.  The west region was down 8%.  All regions experienced double-digit Y/Y growth in April.

While the latest figures are a bit encouraging, we note that sudden growth in permits and starts will increase inventories which could push prices further down.  In addition, due to lack of strong enough wage growth rental units remain in higher demand, even with rental rates hitting new highs in certain regions.  Lastly, the latest consumer credit figure does indicate that consumers may be abandoning deleveraging a bit too soon, which combined with only modest wage growth, may lower their chances of getting a mortgage for a new home.  It may also force them to again turn to deleveraging later this year. 

Update ...

We thought it might be time to discuss some upcoming economic indicators.

Tomorrow, Wed. 5/16/12, the US Census Bureau will release April housing starts and building permits figures.  In addition, the Fed will release industrial production and capacity utilization. 

The housing figures are a bit difficult to get a handle on, mainly due to the mixed signals brought forth by the warmer weather this winter.  For example, in March, housing starts were surprisingly disappointing as many expected construction to begin much earlier due to the warmer weather.  However, building permits and housing completions were encouraging.  Similar to many economists, we believe to see an uptick in housing starts combined with a slight decline in permits.  Housing starts and permits estimates for April are 680K and 730K, respectively.

Regarding April's industrial production, the market expects a 0.5% increase from March.  After running through some numbers, we think this might be a bit too optimistic.  We are looking for an increase, but slightly less than the consensus; approx. 0.2%.  We expect capacity utilization to also come in below the 79.0% expectation.  Given the disappointing employment figures the last two months, we believe we may see a slight decline in capacity utilization and look for that figure to come in at approx. 78.56%, .04% lower than March. 

Of course, the US economic indicators have once again taken a backseat to the crisis in Europe.  Combined with the 6%+ decline in the S&P500 that we have seen since the beginning of May, slightly disappointing economic data may not have much of an impact on the equity market tomorrow (Wed.).  In addition, the market will be waiting for the release of FOMC minutes in the afternoon.  We note that Thursday's initial claims, of which the previously reported week keeps getting revised upward, along with the Philadelphia Fed's manufacturing report, are potential market movers. 

Initial claims will likely come in slightly below the 365K consensus, but we are confident that the previous week's figure will be revised up to approx. 369K.  We think by now, given the Department of Labor's consistent upward revisions, the market has taken notice. 

Expectations for the Philadelphia Fed manufacturing figure have risen after the surprisingly high Empire State manufacturing data released this morning.  For this reason, a mere in-line Philadelphia Fed manufacturing number could be seen as disappointing.  We must also note that while the Empire State survey results were better than expected, most of it was due to the current indicators within that survey.  Significant increases in current shipments and average employee workweek, along with a slight uptick in number of employees, were encouraging.  However, the forward looking indicators were not as encouraging.  The overall forward looking index declined significantly driven by lower expectations of number of employees hired, along with declines in average employee workweek, new orders and shipments.  Again, the much better than expected headline Empire State manufacturing number could have raised expectations for the Philadelphia Fed figure just a bit too much.

Lastly, we note that since our post on 3/5/12 before the open (it was approx. 1:45AM (ET)!), the market has declined 2.9%.  It did peak at 1422.38, as we had assumed it would get above 1400, but we also suggested that it was time to rotate equity holdings into more defensive types of sectors.  In addition, our suggestion of strangle positions on VIX and USO have also worked out ok.  Unfortunately, given the weaker Euro and no further indication of Bernanke becoming more aggressive regarding QE, gold has declined.  It may go down further, but that just may be necessary in order for it to break the positive correlation it has had with the equity market since the start of the monetary easing policies.  From a technical standpoint, S&P500's next support level is 1325.  If it goes below that, then there isn't much support until around 1290.  However, the Facebook (FB) IPO (which we are still trying to figure out how it will grow its revenues consistently), along with a potential dead-cat bounce, might just help the market create a base at the 1335 - 1345 level, at least for the short term.  By the way, we note that there are reports stating GM has withdrawn its ads from FB saying those ads do not pay off.