Tuesday, July 31, 2012

Update ...

Of course, you can see these quote updates basically anywhere in real time, but we thought to keep our blog busy for the time being:

CSTR     - 1.50%
FB          - 4.19%
NFLX     - 1.11%
XHB       - 1.00%

Mixed Economic News ...

Mixed economic news came out this morning as June personal income, May Case/Shiller home price index, July Chicago PMI, and consumer confidence index beat estimates while personal spending was disappointing.  In addition, personal savings went up 4.4% in June from May's 4.0%, which although the market may not like, we think is good news.

Personal Income & Spending (June)

A few things stood out regarding personal income.  One, the social security government social benefit increased by $7.8bil and represented nearly 13% of the total personal income monthly change.  This percentage figure is the highest since nearly 19% in Jan. '12.  Two, total pure wage & salary disbursement was down.  In fact, this was down even more for private industries; only partially offset by a nice increase in government wage & salary disbursements.  And three, downward revisions of prior years also positively impacted the personal income change print.  In fact, personal income was revised down for all three years from 2009 to 2011.  These downward revisions not only impact Y/Y changes but also m/m.  Regarding personal spending, it was revised down by $20.2bil and $29.8bil for 2009 and 2010, respectively; and revised up only slightly, a mere $3.0bil, for 2011.

Case/Shiller Home Price Index (May)

The Case/Shiller home price index for May came in much better than expected.  The 20-city index declined 0.7% Y/Y compared with the 1.8% consensus.  We are not seeing growth in wages, which is one of the main reasons we are not yet as bullish on the housing market as some of the professionals.

Chicago PMI (July)

July Chicago PMI index of 53.7 beat the 52.5 consensus, and was higher than June's 52.9.  The positive things about this report included a slight uptick in new orders and a huge increase in the order backlog index, from below 50 to 52.8.  However, the employment and capital equipment indexes both declined significantly.  Employment index reached its lowest level YTD and capital equipment came in at the lowest since April.

Consumer Confidence (July)

Conference Board's consumer confidence came in at 65.9, nicely topping the mere 61.0 expectation, and up from June's upwardly revised 62.7.  While many continue to be disappointed with the present situation (as shown by slight decline in the 'Present Situation' sub-index), most continue to have faith in seeing improvements in the future as the 'Expectations' index increased nicely in July.

Our July NFP Estimate ...

To our surprise, our model generated a July NFP change estimate of approx. 84K, which is below the Street's 100K, which we thought was conservative to begin with.  We note that the extreme volatility that we saw in initial jobless claims in July likely impacted all estimates.  The consensus is based on a wide 70K - 165K range.  We again stress that our NFP estimate could change if the change in ADP comes in significantly above or below the current 120K consensus on Wednesday.  Also as a reminder, our ISM estimate is 48.0.  The ISM is scheduled to be released on Wednesday morning.

Monday, July 30, 2012

Our Mfr. ISM Guesstimate, Dallas Fed Survey Disappoints, & more ...

This week will be a busy one as a lot of economic data is scheduled to be released, including personal income & spending for June, July ADP, weekly initial claims, July ISM (manufacturing and services), and the big one, BLS' employment report for the month of July.  The market jumped nicely last week thanks to continuing belief (or pure hope born of desperation) in a QE3 and Draghi's soothing words.  We think a QE is certainly priced in.  If any of the upcoming economic data turns out to be not too hot or not too cold, hopes of a QE and therefore the market will begin fading.

We are assuming release of economic data got off to a very cold start as the July manufacturing survey published by the Federal Reserve Bank of Dallas was very disappointing.  General business conditions index came in at -13.2 versus a +2.0 consensus, and down from June's +5.8.  The report was not encouraging (unless one is yearning for Bernanke and Draghi's helping hands, which we believe will not be effective in the long-term).  New orders, growth rate of the orders, unfilled orders, shipments and capex were all down.  Some what we believe to be bad combinations persisted - capacity utilization declined while wages jumped and employment went down.  The higher wages could be due partially to increasing hours worked.  However, with much lower capacity utilization and orders, we do not foresee an uptick in hiring.

The general business conditions for the next six months also dipped; down to -7.3 from 1.3 in June.  The forward index also included a decline in capacity utilization, new orders, order growth and employment.  Businesses expect hours worked and wages to go up, but again, we think they would rather pay current employees overtime than commit to more long-term fixed cost and hire more workers; not necessarily encouraging from an economic growth standpoint.

Manufacturing ISM, a market mover, will be released on Wednesday.  Our guesstimate is 48.0, which indicates continuing contraction.  The Street is estimating a return back to growth with an estimate of 50.1.

Lastly, we will provide an initial estimate of July NFP likely by tomorrow morning.  Given that one of the factors used to generate the estimate is the monthly ADP figure, we may have to adjust it slightly after the ADP is released on Wednesday morning.

S&P 500 remains in the black even after the disappointing Dallas Fed manufacturing survey.  Clearly, the market has faith in Bernanke.  By the way, CSTR, FB, NFLX, and XHB are down 5.06%, 1.33%, 2.72%, and 1.32%, respectively.

Delayed Weekly Sector Update ...

The delayed weekly update is inexcusable, but there was nothing we could do about it.  By the way, XHB increased 1.2% last week, helped (as was the entire market) by the 'macro drivers' - Draghi's statements.

Friday, July 27, 2012

GDP, Consumer Sentiment, CSTR, FB & more ...

Again, given that we have been on the road we could not provide a more timely update our view regarding economic and financial news.

The initial reading on the Q2 real GDP annualized growth rate (released at 8:30AM ET today) was 1.5%, slightly below our 1.6% estimate but higher than the 1.2% consensus.  In addition, Q1 was revised up by 10bps to 2%, slightly above the last print of 1.9%, which was inline with our projection.

  • There was deceleration in personal consumption, from a 2.4% growth rate in Q1 to 1.5% in Q2.  The only component of personal consumption with higher Q/Q growth rate was services.  Durable goods actually turned negative, from Q1's 11.5%!
  • Gross private domestic investment increased nicely to 8.5% from prior quarter's 6.1%.  This was mainly driven by more investments in equipment and software.  Residential and non-residential investments showed deceleration.
  • Goverment portion of the GDP continued to decline, but at a much slower rate (-1.4% versus -3.0% in Q1), helping the overall growth rate to remain positive.  From a political perspective, it is always interesting (and not surprising) to see national defense spending improve from -7.1% to a mere -0.4%, while nondefense spending annualized growth rate basically plummets from 1.8% to -0.3%!

Overall, we were not very surprised.  However, as usual, many economists/analysts lower expectations too much so that the market can react positively; a very effective strategy that has been used for decades.

University of Michigan's initial July consumer confidence index came in at 72.3, slightly above the 72.0 consensus.  We note that we expected a m/m decline, and based on June's upward revision, we got one.  June was adjusted up to 73.2 from 72.0.

The alarming part of this report is that while the current consumer sentiment improved slightly, expectations dipped more.

It appears that many consumers are starting to worry about not only their non-growing income but also higher food prices.  Only 10% expected real growth in income next year, and only 22% over the next five years!

Less consumers are also indicating job growth, 18% versus June's 34%.

We have certainly discussed lack of jobs and wage growth many times before.

While the equity market continues its two-day run, we must point out, again, that the better economic news, is not necessarily good for the market as it lowers the chances of a QE3.  And the 'better' news to which we are referring is not necessarily good news, it is just better than the very strategically lowered expectations that we see on the Street these days.  Simply put, QE3 is being priced in at the same time that chances of a QE3 launch is declining.  Let's see if the latest rally can be justified by next week's July employment data.  We don't think so, but economists have likely lowered the bar so much that any positive NFP would look good.

S&P 500 is up 14.6, or 1.07%.  CSTR and FB are down 12.56% and 13.8%, respectively, while such ‘great’ economic news has pushed XHB up 0.65%. 

FB, CSTR, and more ...

We must apologize for not posting the numbers of and our thoughts regarding Facebook's (FB) Q2 earnings.  We were travelling all day on Thursday.

Facebook (FB)

FB reported Q2 results with revenues beating the consensus while EPS were inline. The stock is down over 10% in AH.
  • Revenues of $1.18bil versus our estimate of $1.13bil and the Street's $1.15bil.
  • EPS of $0.12 inline with the Street, and above our $0.10 estimate.
  • The Company's MAU count of 955MM was much lower than our 977.5MM, but revenues still beat expectations due to higher advertising revenues. ARPU of $1.28 was significantly above our $1.21 projection, but was up only 1.5% Y/Y. That figure was up 5.7% sequentially.
  • Total advertising revenues of $992MM were above our $945.3MM estimate. Payments & services revenues of $192 also beat our $186.7MM projection.
  • Indications of a slowdown in revenue growth were apparent, although not as much as we had initially anticipated. Total revenues were up 32%+ Y/Y, but much lower than last quarter's 44%+ growth. We had projected a 27% growth.
  • Mobile users grew 67% Y/Y, but FB doesn't have enough revenue growth accommodating such a jump.
  • In addition, while it appears that topline growth is decelerating, the Company is increasing headcount and spending significantly more on sales& marketing. Whether these investments will generate enough returns to support the current 60+ P/E multiple and nearly a 3 PEG based on our FY '13 net income estimate, remains to be seen.
We will update our model and, if necessary, provide a new valuation for FB within the next couple of days. We note that in extended trading on Thursday, FB declined 10.7% to $23.97/sh and is approaching our $23/sh valuation. We will see how the stock will trade today.

Coinstar (CSTR)

CSTR reported mixed results with EPS beating estimates, but accompanied with a significant miss on the topline.  Revenues of $532.2MM were much less than the $545.7MM consensus.  We touched on this earlier this week as we noted that the ‘good news’regarding Reed Hastings’ (CEO of NFLX) post on FB about much higher streamingin June (which we also referred to as not good news given NFLX’s revenue andsubscriber model) was a negative for CSTR because as the unusually warm weatherkept many indoors (based on our own assumption), it may have also loweredtraffic to many Redbox kiosks for that month.  In fact, even though the Company increased its fee by 20% late last year, same store sales growth of 16.5% was 10bps lower than last year’s Q2.  Of course, lack of enough titles and tight inventory management of Time Warner movies, also contributed to the not so impressive growth.  In addition, same store sales growth of CSTR’s coin machines was pretty much non-existent and 160bps lower than last year.

The Company’s guidance may also have disappointed the Street.  While Q3 EPS guidance was above the latest consensus, the revenue guidance put the current Street estimate of $566MM at the top end of the guidance range.  CSTR was down 13%+ in AH.

Lastly, release of the initial Q2 GDP growth rate and University of Michigan’s July consumer confidence reading later this morning will likely impact the overall market including FB and CSTR. Our initial Q2 GDP annualized growth estimate is 1.6% (as we mentioned on 7/20), above the Street’s 1.2%. Although our projection makes us look more optimistic, we certainly are not. Regarding the consumer confidence survey, economists are looking for 72.0, representing no change from June. We expect a slight decline.

Thursday, July 26, 2012

June Pending Home Sales Disappoint

June pending home sales index dipped 1.4%, significantly worse than the 0.3% growth expected by economists.
  • Regionally, the only monthly increase was in the West, up 2.6%.  The Northeast region pending home sales declined 7.6% m/m.
  • The index was up Y/Y in all regions, with the Midwest increasing more than the rest at the rate of 17.3%.
  • While the Y/Y figure looks encouraging, we note that it is based on very low prior year numbers; therefore it is not difficult to get Y/Y growth.
What is clear is that the housing recovery that many had been boasting about the last few months (with some good data to support their claims) has hit a speed bump.  Some may attribute this to "tight inventory", but we continue to say it has to do with the basics: lack of job and wage growth.  

Better Economic News ...

The market opened much higher with the S&P 500 furiously jumping above what we have viewed as the critical level, 1340; it is at 1360.2 right now, up more than 22 points!  Such a strong start can be attributed to the ECB Chief, Draghi, saying they will not quit trying to save the Euro, and from better than expected initial jobless claims and June durable goods orders.

Initial jobless claims came in significantly below expectations which is good news for the equity market this morning.
  • Initial claims came in at 353K, much lower than the 381K estimate.  The prior week's figures were again revised up.
  • The latest dip in claims helped lower the 4-week moving average to approx. 367.25K, down from 376K.
  • Although this is good news, it may be helped by higher temporary positions maintained during the time period, which may not be good news and may explain the volatility we have been seeing in jobless claims this month.

The June headline durable goods orders figure was also impressive.  But don't let the headlines fool you.
  • Overall durable goods orders increased 1.6% versus the Street's mere 0.3% expectation.  May was revised higher by 30bps.
  • However, excluding transportation, new orders dipped 1.1%, much lower than the (0.1)% estimate. 
  • Excluding defense orders, new orders declined 0.7%.
  • Orders for computers and electronic products declined 4.9% in June.  The computers orders dipped 1.5%, while orders for communications equipment went down 4.6%.
  • As mentioned earlier, transportation equipment orders helped overall durable goods orders beat expectations.  Although the nondefense aircraft and parts went up 14.3%, the defense went up even more, by nearly 24%.  One can reach many different conclusions from this, especially given the current geopolitical factors impacting the entire world.
  • Orders for capital goods went up 6.8%, which is good news.  Then again, the nondefense capital goods orders increased 1.2% while defense capital goods went up 62%.

Regarding the XHB ETF, PulteGroup (PHM), a company within the fund, reported better than expected earnings, but missed on the revenues.  Results included EPS of $0.11 versus $0.05 consensus; and revenues of $1.07bil versus the Street's $1.10bil.

Trex (TREX) beat expectations on the top and bottom-line.  EPS of $0.59 came in better than the $0.53 consensus.  Revenues of $94.3MM topped the $90.5MM consensus.

XHB was down 3.4% this week, but it appears that it will pare some of those losses today as it is up 2%.  

Wednesday, July 25, 2012

XHB, FB Update ...

  • ETH reported disappointing quarterly and year-end results with Q4 EPS missing consensus by 2c and revenues missing by nearly $4MM.  The stock is down more than 9% in AH.
  • RYL also missed on the top and bottom-line.  Although Y/Y results were impressive, it appears overall expectations within the homebuilding industry were too lofty.  RYL is down 5c in AH.
  • XHB ended the day down 1%.

Facebook (FB)
  • FB is down nearly 8% in AH as one of its main revenue generators, Zynga (ZNGA) reported very disappointing quarterly results.  ZNGA's revenues of $332.5MM were nearly $11MM short of expectations.
  • ZNGA also lowered its guidance.  It partly blamed the miss and the lower outlook on FB, saying "a faster decline in existing Web games due in part to a more challenging environment on the Facebook Web platform, and ...".
  • FB reports Q2 numbers tomorrow after the close.  We're looking for $1.13bil in revenues, or a 26.8% Y/Y growth.  Our EPS estimate for the quarter is $0.10.  The Street is expecting revenues and EPS of $1.15bil and $0.12, respectively.  Of course, the 'whisper' numbers are now likely lower than the official estimates after the ZNGA debacle.
  • We're not sure about the user estimates for FB, but our estimates for the quarter include approx. 977.45MM monthly active users (MAU) and $1.21 in monthly average revenue per user (ARPU).  Our ARPU estimate represents a 0.6% and a 4.25% sequential and Y/Y decline, respectively. 

Bad New Home Sales Figures ...

June annualized new home sales print was 350K, significantly below the 372K consensus.  S&P 500 is now down slightly at 1336 after going above 1345.
  • New home sales increased Y/Y in nearly all regions.  Northeast was flat.  The West led the way with 36.1% growth.  Overall Y/Y growth was 15.1%.
  • However, monthly change was disappointing with an overall 8.4% decline.  Northeast declined 60%!  Sales in the South were down 8.6% m/m.  Sales in the West and Midwest went up 2.1% and 14.6%, respectively.
  • Additional disappointing data include indication of higher inventory, although rising at a slow pace.  Homes for sale increased for the first time in the last 12 months!  In addition, the months' supply increased for the first time in three months.

Morning Update ... QE3, AAPL, BA, CAT, NFLX, & XHB

Equity futures are up nicely as CAT and BA reported better than expected results.  We note that CAT lowered the high end of its revenue guidance range.  NFLX and AAPL remain down big before the open; -19.9% and -4.7%, respectively.  The market will open higher this morning due to more rumors and reports about the Fed possibly seeing just how bad the state of the economy is and therefore reacting by injecting more liquidity, which as we have seen the past few years has only short-term benefits but could bring with itself huge long-term costs.

By the way, some data that may reduce hopes of a QE3 was released by the USDA this morning.  The USDA expects food inflation to be between 2.5% and 3.5% this year.  Next year's food inflation, to which we think the Fed is paying more attention, is projected to be between 3% and 4%.  With these figures, and oil futures rising again due to QE3 hopes and a possible war with Iran, core inflation may have to be negative in order for the Fed to not only launch a QE3 but also make sure inflation remains within its target range!

As a follow up to some information we provided regarding companies within the XHB ETF, USG Corp. (USG) and Lumber Liquidators Holdings (LL) reported earnings this morning.  Results were mixed, with USG, the largest weighted company in the XHB fund, missing big on top and bottom-line.  USG is down more than 4% before the open.  However, LL's results were impressive as the Company not only beat EPS and revenue estimates, it also raised its FY guidance significantly.  The stock is up more than 14% before the open.  Other XHB components such as The Ryland Group (RYL) and Ethan Allen (ETH) are reporting today after the close. 

Tuesday, July 24, 2012

QE3, AAPL, NFLX, XHB and more ...

Well, as we kept saying, there had to come a time (as we have seen numerous other times) that magic QE3 rumor begins circulating again.  It certainly happened during the last hour of trading today as the regular 'rumor-villain', Jon Hilsenrath posted another story about another discussion going in among Bernanke and his pals regarding the seriousness of current downturn and the necessity of another QE.  The story can be found here: Fed Sees Action if Growth Doesn't Pick Up Soon.

The blog post helped the market pare some of its losses, but S&P 500 still closed below that 1340 level we discussed this morning.  It had gotten as low as 1329.  Given the not so great earnings reports of Apple (AAPL) and Netflix (NFLX), the 1310 level we touched on appears more realistic.

Regarding AAPL:
  • Missed on top and bottom-line in Q2.
  • Announced quarterly dividends of $2.65/sh, a 1.8% annual dividend yield based on the stock price in AH.
  • Q3 guidance for revenues and EPS were both significantly below consensus.
  • AAPL is down 4.7% AH.

Regarding NFLX:
  • When NFLX CEO, Reed Hastings, posted what appeared to be good news on Facebook a few weeks ago, saying that streaming content by subscribers had exceeded expectations in June, NFLX shot up and was on its way to the moon.  We called and tweeted many times saying that more streaming does not mean more subscribers given NFLX's subscription model.  In addition, we tweeted that such high streaming may have been driven by the very hot weather which kept many indoors.  But the stock kept going up.
  • Based on the Q2 results which came out this afternoon, it appears that we were right.  Subscriber count was nearly 400K below expectations.
  • EPS of $0.11 was much higher than the $0.05 estimate; revenues of $889MM were inline.
  • Although it beat on bottom-line, gross margins showed continuing decline, Y/Y and sequentially.
  • NFLX's top and bottom-line guidance were below consensus.
  • NFLX is down 14.5% AH.
  • By the way, the unusually warm weather which may have kept many inside, may have impacted Coinstar's (CSTR) Redbox volume negatively.  For the same reason, demand of VOD for cable companies such as Comcast (CMCSA), Time Warner Cable (TWC) and Cablevision (CVC) may have gone up a bit.  CSTR will report this Thursday, while the cable companies mentioned are scheduled to report next week and the week after.

Three more companies which are a part of the XHB ETF reported this afternoon:
  • iRobot (IRBT), beat nicely both on revenues and EPS.  Q3 and FY estimates were in line with guidance provided by the Company.  IRBT is flat in AH trading.
  • Tempur Pedic Intl. (TPX) also beat both on revenues and EPS; both were down Y/Y.  FY top and bottom-line guidance fell short of estimates.  However, the stock is up nearly 12% AH.
  • Aaron's Inc. (AAN) reported inline EPS, and beat on revenues.  Q3 revenue guidance was above estimates.  FY revenue and EPS guidance were in line with consensus.  The stock is down slightly AH.
  • As a reminder, two other companies within the XHB ETF, WHR and LII, reported disappointing results this morning.  They ended the day down 7.5% and 4.1%, respectively.  XHB was down 2.1%.


Second Update for 7/24/12

Currently at 1342, S&P 500 is close to touching the Fibonacci retracement level of 23.6%, which is around 1340.  This has been a strong support area between Feb. and May of this year, in addition to the last couple of weeks.  If it dips below this level, without much support from demands for, or rumors of a QE, then 1310 could be next.  This is for the next 2 - 3 weeks, as earnings this week, especially today after the close, could turn the market around in the short term.  AAPL and NFLX are among the 'big names' that are reporting this afternoon.  Both are in the green today. 

Update ...

S&P 500 is currently down 7.5, or 0.55%.  From a technical standpoint, after it hit the Bollinger Band's upper band that we discussed last week, 1380, it has dropped nearly 3%.  In addition, the McClellan Oscillator went from an overbought level to -131; then again this indicator declined all the way to -340 in May of this year.  The profit taking that we touched on has been taking place, partially helped by the continuing problems in Europe.  As conditions continue to deteriorate, yearning for and/or chances of a QE3 may increase which could help the equity market in the short term.

We also discussed the XH ETF last week, saying that the positive data regarding the homebuilding sector may be priced in.  Two companies within the XHB fund, Whirlpool (WHR) and Lennox International (LII) reported disappointing Q2 results this morning.  WHR is down 5%+ and LII is down nearly 7%.  We note that while XHB is down 1.2% today, things could change as 12 of the 35 companies within the XHB fund are reporting earnings this week.  We'll try to keep you updated on this.  By the way, the FHFA printed its May house price index about 45 minutes ago, up 0.8%.  This index says that in May of this year, home prices were at the same level as they were in 2004, which we believe indicates that home prices are still a bit too high given lack of job and wage growth.  Of course, this index is for the entire US, and recovery in some areas has been better.

From a macro standpoint, things are not looking any rosier.  UPS, another bellwether of the economy, disappointed the Street with its Q2 earnings report this morning as it missed on the top and bottom line.  It also cut its guidance.  UPS is down 4.2%. 

In addition, the Richmond Fed reported disappointing manufacturing survey results.  It came in at -17, significantly below the -1 estimates; contraction is continuing.  All of the survey's index components, besides wages and inventories, declined in July when compared with June.  In our opinion, it is not good news when shipments, new orders, backlogs, capacity utilization, number of employees, and average workweek hours all decline, and wages increase.  What makes it worse is that inventories increased at the same time.  Most of the components of the forward index of this survey also declined from the prior month. 

Friday, July 20, 2012

Sector Performance Update for Week of 7/16/2012

With respect to economic data, this week was ok and not so ok, which is exactly what the QE3 hopeful ones do not want to see or hear.

Next week will be a busy one, with new and pending home sales for June, weekly jobless claims, initial estimate of Q2 GDP annualized growth and the University of Michigan's final reading of consumer confidence for July scheduled to be released.  Our Q2 GDP estimate is 1.6% which is above the very low 1.2% consensus, but certainly not a rate justifying S&P 500's YTD performance.  Again, the equity market is moving along hoping for just one more sign of Bernanke extending his helping hand.

Mixed Economic Data for the Week

Empire manufacturing survey surprised on the upside.  Unfortunately, that indicator is known for its volatility.  When it comes to the monthly manufacturing ISM, the Philly business survey is a slightly better indicator.

June retail sales were very disappointing, which as we said might have been good news for the QE3 seekers. 

Fear of deflation has been put to rest for the time being, given the in-line June CPI print, which is not very good news for the pro-QE3 group.  However, as of the end of June, there were also no indications of too much inflation, which helps keep that QE3 option on the table.

June industrial production came in above consensus, while capacity utilization was slightly below consensus.  Again, this combo is not necessarily good news for QE3 proponents.

Building permits and housing starts were overall positive, but the impact was short-lived as we expected.  XHB ended the week pretty much unchanged from the prior week.  In addition, according to the MBA mortgage index, purchase applications declined, while refi's increased.

Initial jobless claims disappointed once again; and the prior week was revised up, once again.  Things are not as rosy as the holiday shortened week numbers supposedly indicated, which we touched on last week.

Lastly, the Philadelphia Fed business survey, June existing home sales, and the leading economic indicators, were all disappointing.

While not everything was positive, they were also not as bad as we believe is necessary to ignite a launch of QE3.

Sector performance update for this week is provided below.

Thursday, July 19, 2012

Disappointing Philly Fed Survey, June Existing Homes Sales, and LEI

The Philadelphia Fed business survey, June existing home sales, and the leading economic indicators, were all disappointing.

Philadelphia Fed Business Outlook Survey
  • The overall index came in at -12.9, significantly below the -8.0 consensus, but an improvement from June's -16.6.
  • Every sub-index within this survey was negative except for prices received and prices paid. 
  • New orders, unfilled orders and shipments were all at contractionary levels. 
  • Inventories were also negative, but that might not be such bad news.
  • Number of employees index fell to -8.4 from 1.8, as we suggested it would last month.
  • With average employee workweek remaining at very low levels, we expect only a slight marginal so-called improvement in this survey's employee index for next month. 
  • Businesses surveyed also don't feel much better about how things will look six months from now.  The overall forward index fell slightly to 19.3 from 19.5. 
  • Although more think that average workweek will increase, more also do not plan on increasing their number of employees.
  • It also appears that inventories may not be built back up, as the forward inventories index dipped further to -16.0 from -12.0.

June Existing Home Sales
  • June existing home sales came in at an annual rate of 4.37MM, lower than the 4.65MM consensus and below May's upwardly revised 4.62MM.
  • The, what we believe to be a non-objective analysis provided by the NAR (National Association of Realtors) indicates that lower sales were due to tighter supply as prices also increased.  However, we note that while inventories did decline, due to YTD higher sales, the months supply increased to 6.6 from 6.4.  It is lower than 9.1 in June '11, but is higher than December's 6.0.  There appears to be a little bump in the road for the recovery of the housing market.
  • Median prices increased nearly 8%, while average prices went up nearly 6%, Y/Y.  We believe this is mainly due to foreclosures making up less of the sales.  But foreclosure sales could go up again, in our opinion.

Leading Economic Indicator
  • The LEI for June dipped another 0.3% following a downwardly revised decline of 0.4% in May.  The consensus was for a decline of 0.2%.

Overall, the economic figures were once again disappointing.  However, in our opinion, they were not bad enough for the Fed to announce a QE3. 

Some Technical Thoughts on the Market ...

Just thought we should provide an update on technical analysis of the equity market.  Of course, the market has moved up very nicely the last couple of weeks.  The 10-day EMA did not dip below the 50-day.  In addition, S&P 500 remains slightly below the Bollinger Band's upped band which is around 1380.  The MACD also has moved a bit away from what we thought would be short term bearish levels.  With all of that said, what stands out is the advance-decline numbers.  We looked at the McClellan Oscillator which basically analyzes the difference between advances and declines in exponential moving average terms.  We saw that it is within a range which can be considered as overbought.  Today, it has moved up to 112, within the overbought range of 100 - 125. We note that this doesn't necessarily indicate an upcoming pullback as this index went all the way up to 285+ and 300+ in Oct '11 and first week of July this year.  However, this combined with the S&P 500 nearing the upper band of the Bollinger indicator, could initiate some profit taking which would move the market lower, assuming no additional 'magic words' will be heard from worldwide central banks.  

Initial Jobless Claims Disappoint

Last week's initial jobless claims print was 386K; 21K above the 365K consensus.  It appears that things are not as rosy as the holiday shortened week numbers supposedly indicated, which we touched on last week.  And claims for that holiday week were revised up by 2K.  We are still amazed that the economists' estimates were so low.  We are assuming they thought a 15K increase would account for the prior holiday week.  We guess the lower seasonal factor applied to the latest week data, which is available for every week in 2012 on the DOL website, was overlooked.

  • Seasonally adjusted (SA) initial claims of 386K versus the 365K consensus for last week; up 34K from prior week.
  • Non-seasonally adjusted (NSA) claims also up from the prior week.
  • Continuing claims (both SA and NSA) up from the prior week.

With continuing bad numbers regarding the state of employment, the market futures remain higher; S&P 500 futures are up 5.0.  Drivers behind the latest optimism, as the market has already increased another 1.4% this week, are the better than expected earnings and continuing hope for the Fed to announce QE3 next month.  We note that many of the good earnings numbers were also accommodated by disappointing forward guidance, especially on the topline.  But that doesn't really matter in today's central-bank-centrally-controlled market, does it?

Existing home sales and the Philadelphia Fed's business survey will be released later this morning at 10am (ET).  Estimates call for 4.65MM and -10.0, respectively.  In addition, the Conference Board's leading economic indicators (LEI) will be posted.  The consensus is for a decline of 0.2% in June, following the 0.3% increase we saw in May.  The June LEI was likely helped by the stock market's gain in that month.  S&P 500 went up by approx. 4% in June.  Then again we keep wondering that given the central bank's role in the equity market and overall asset inflation, and the not so encouraging economic numbers, can the equity market still be considered an economic leading indicator?  Of course, that's a question for the experts to answer. 

Wednesday, July 18, 2012

Building Permits & Housing Starts Beat Expectations

Housing numbers released this morning were positive, but we think the impact will be short lived as growth in construction and permits may be priced in.  In addition, other indicators such as the MBA mortgage application index show that demand for home purchase by individuals remains volatile.  We also note that with lack of enough job and wage growth, the better than expected housing permits and starts could be adding too much too fast to inventories.  XHB is down 1% this week.  It opened pretty much flat this morning.

Building Permits

  • June building permits print was 755K, below the 765K consensus.  However, the May figure was revised up by 4K to 784K.  Building permits were down 3.7% m/m, but up 19.3% Y/Y.
  • MDU (multi-dwelling units) permits for 5+ units declined 11.4% sequentially but were up 21.7% Y/Y. 
  • Single-family homes saw a slight sequential increase, 0.6%, and were up 19.7% Y/Y.
  • On a monthly basis, the Western region saw the biggest growth, 2.9%, while the biggest decline was in the South, -8.0%.  No growth was registered in the Northeast region.
  • Midwest monthly growth of single-family homes was less than total growth, -1.2% versus -0.8%, respectively.  The same can be said about the West, 1.8% versus 2.9%.  However, single-family homes in the South grew faster than total homes, 0.8% versus -8.0%, respectively.
  • All regions saw Y/Y growth, with the West leading the way with 30.4%.  Y/Y growth of single-family homes was higher than total growth in the Northeast and West, but lower in the South and Midwest.

Housing Starts

  • June housing starts came in at an annual rate of 760K, above the 743K consensus; up 6.9% sequentially and 23.6% Y/Y.  Previous month's number was revised up by 3K to 711K.
  • Sequentially, MDU starts outpaced single-family homes, 17.0% versus 4.7%, respectively.  The same can be said about Y/Y changes, 29.1% versus 21.7%. 
  • Total starts declined 7.3% and 4.2% m/m in the Midwest and South, respectively.  They increased 22.2% and 36.9% in the Northeast and West.
  • Single-family home starts monthly growth lagged behind total starts in the West, but the opposite can be said about the other regions.
  • Midwest saw a decline of 19.8% in total starts Y/Y, while starts grew in the other regions with the West leading the way at 63.4%. 
  • Single-family home starts Y/Y growth lagged behind total starts in the West and South; and grew faster than total starts in the remaining two regions.

Tuesday, July 17, 2012

QE Explained in an Entertaining Way ...

We enjoyed watching the following videos.  They are somewhat biased, to which we do not object.  After watching the videos, in our opinion, we have even a clearer perspective on the pros and cons of QEs.  By the way, the two videos are very entertaining, in our opinion.  Take a look, if you have 10 - 15 minutes to spare (this time range covers both videos together).  Enjoy ...

Quantitative Easing Explained (11/11/2010)

Quantitative Easing Revisited (2/1/2012)

Mixed June Industrial Production & Capacity Utilization

Industrial production came in above consensus and higher than our estimate, while capacity utilization was slightly below our estimate but significantly lower than consensus.  With higher production but disappointing capacity utilization, it appears that there is a sizable deadweight loss out there in the jobs market.  Unfortunately, this combo of news may not push the Fed to announce a QE3 in August or before end of 2012; but the market is still hoping. 

  • June industrial production index increased 0.4% versus the 0.3% consensus, and certainly above our 1% expected decline.  We note that the May index was adjusted lower by 0.3%.  In addition, the index was revised lower for three out of the first five months of 2012.
  • Capacity utilization for June was 78.9%, below our 79.0% estimate and the 79.2% consensus.  Similar to the production index, capacity utilization for May was revised down by 30bps.  It was revised down in four of the first five months of this year. 

June CPI In-Line with Consensus

June CPI, which was in-line with the consensus and higher than our estimate, may dampen the hopes of a QE3 just a bit.  However, with the S&P futures up 5.50, the market appears to be expecting some magic words and/or promises from Bernanke while giving his semiannual report to the Senate Banking Committee this morning.

  • June CPI came in at no change from July; in-line with the consensus, and above out -0.8% estimate. 
  • Y/Y change was 1.7%; 10bps above expectations, and 90bps higher than our estimate. 
  • Core CPI, which excludes food and energy prices, increased 0.2% and 2.2%, m/m and Y/Y, respectively.

Deflationary pressure due to disappointing economic growth along with lower energy prices appears to be less significant than we originally expected.  Regarding the energy index specifically, gasoline prices may be bottoming out as June's monthly decline was only 2%, compared with a decline of 6.8% in May and 2.6% in April.

June production and capacity utilization numbers will be released at 9:15am, followed by the NAHB (National Association of Home Builders) housing market index at 10am.

Monday, July 16, 2012

Ok Empire State Manufacturing; Disappointing June Retail Sales

We had good news and bad news this morning.  However, overall, such a combination is bad news for the ones that are begging Bernanke to intervene once again and push up the equity market further. 

The good news was that the July Empire State manufacturing survey came in at 7.39, significantly above the 4.50 consensus and an increase from June's 2.29.  However, some bad news accommodated the better than expected headline number.  The survey results indicated that new orders actually declined in July.  Shipments increased, while unfilled orders declined significantly; a bad combination, in our opinion.  Another not so positive combination is the decline in new orders and an increase in inventories.  Increase in the number of employees initially appeared to be positive; however we also noticed that growth in average employee workweek is slowing.

In addition, although according to the report, respondents appeared more optimistic regarding 2012 when answering some extra questions, results of the forward looking indexes told a different story.  The number of respondents believing that business conditions would improve during the next six months declined in July when compared to the June survey results.  The same can be said about number of employees and capex.  More businesses expect average employee workweek to decline during the next six months.  In June, those businesses were expecting an increase in the following six months.  And although more shipments are expected in the future, growth of new orders is expected to slow.  The headline figure for Empire State manufacturing survey was good, but many of its components continue to raise questions about the health of the economy.

On the bad side, which QE3 gamblers may consider good, June retail sales figures were disappointing.  Total retail sales declined 0.5% in June from May, significantly lower than the 0.2% growth that was expected by economists.  Excluding auto sales, that figure came in at -0.4%, again worse than the +0.1% estimates.  Excluding gas, along with auto sales, the m/m change was -0.2%, again much worse than consensus.  When oil and gas were highly priced (due to guesstimates of a solid economic growth and possible invasion of Iran), at least the headline retail sales figures made many smile.  Unfortunately, that is no longer the case.  At least for now, lower gas prices have not yet resulted in more non-gasoline consumer spending.  As we have said before, the state of employment and stagnant wages explain a lot of this.

Lastly, we ran through some numbers and did come up with estimates for June industrial production and capacity utilization, which will be released tomorrow morning.  We expect production to be very disappointing, 96.0, significantly below the 97.6 consensus.  In addition, we see capacity utilization remaining flat m/m at 79%; slightly below the 79.2% consensus.  As a reminder, we have a m/m change of -0.8% for June CPI which also will be released tomorrow.

Sunday, July 15, 2012

Sector Performance Update for Week of 7/9/2012

After a significant upswing in the market on Friday, S&P 500 inched up a bit for the week, approx. 0.16%.

Given the consistently lowered earnings estimates by the analysts, the bar is certainly set very low for companies to beat.  For the time being, earnings will likely get the most coverage, but we think the macro concerns will be back on the front pages very soon.

Lastly, we note that the homebuilders index (XHB - S&P Homebuilders ETF) has spiked up 26%+ YTD.  Although management teams of many companies within this space have tried to keep expectations low, the market is certainly expecting the numbers to show more than a mere modest recovery.  Any slight miss in the upcoming week's housing figures (housing starts, building permits, and existing home sales) could send the homebuilders index and its components down at least for the short term.  Of the top ten holdings of XHB, NVR Inc. (NVR), is the only homebuilder reporting earnings next week (7/16).  Most of the other ones are reporting Q2 numbers during week of 7/23.

Sector performance update for week of 7/9/2012 is provided below.  We will post our thoughts on and expectations of a few soon to be released economic indicators by the end of this weekend.  By the way, the Knicks picking up Raymond Felton and possibly letting go of Jeremy Lin, is, in our opinion, a pretty good move. 

Friday, July 13, 2012

UMich Consumer Confidence Misses Expectations

University of Michigan's initial consumer confidence reading for July came in at 72.0, below the 73.5 consensus.  We had expected a miss (as mentioned on Monday), so this was not surprising; however, the market's reaction to such a disappointing economic indicator is.  JPM and its management team have gotten everyone to 'buy in' as S&P 500 is up 1.3% at 1351.7!  We remain less optimistic and do not expect as nice of a bounce in economic recovery during Q3 as the equity market may be hinting. 

June PPI Significantly Above Our Estimate

Headline PPI print was higher than expected, which may reduce chances of a QE3 launch before the end of this year.  S&P 500 is up 8, which we think is partially due to JP Morgan & Chase's (JPM) nicely packaged and well-presented Q2 earnings.  What really underlies the nicely looking Q2 earnings is a different story, which is better for someone with more knowledge about JPM and the finance & banking industry to discuss. 

Going back to PPI, we certainly over-estimated the impact of lower oil prices as the 0.1% monthly and 0.7% Y/Y increases were significantly above our -1.1% and -0.4% estimates.  Core PPI, which excludes food and energy prices, came in at 0.2% higher m/m, in-line with the consensus.  Again, this shows that the negative impact on PPI from lower oil prices was much less than we had anticipated.  The data may lessen the fear of deflation due to a slowing economy, but it also reduces chances of a QE3, for which the equity market has been yearning. 

Lastly, China's Q2 GDP growth rate, which was released last night, was pretty much in-line with expectations.  Its industrial production was slightly lower than expected, while retail sales for the month of June came in slightly above expectations.  This data is not great, and while it supports the assumption of global economic slowdown, it is also not too bad.  But it may keep the Fed and its QE3 at bay. 

Thursday, July 12, 2012

Some Technical Thoughts on the Market ...

Per our post on Monday evening, it appears that the 1310 level may actually be on the horizon.  We understand it is still early in the trading day to make these statements as any politician and/or Fed official can make rosy comments and positively impact the market, at least for the short term.  In addition, we have seen the market paring losses going into the close consistently the last few trading days.  However, some technical indicators stand out now with the S&P 500 being down 1.1% at 1326.5.

First, the current level is certainly below 1340 which is the 23.6% Fibonacci retracement.  The next Fibonacci retracement level is 1290.  However, based on the lower Bollinger band and our own opinion of the chart, we still think the next support level is around 1310. In addition, the 10-day EMA, although is now negatively sloped, is still slightly above the negatively sloped 50-day EMA.  If the two cross, which would probably be around the 1315 level, we could see a dead-cat bounce.

Lastly, the difference in the MACD (moving average convergence-divergence) has turned negative after a positive peak of nearly 8.0 on 6/20.  It appears that the downside momentum is … gaining momentum.  The last time we saw this was early May and the S&P 500 dipped around 8% the following three weeks.  Also, the last time that not only the downside momentum (based on MACD) increased but also S&P 500 went below a Fibonacci retracement level was in early November of last year, after which it declined around 9% in just a few weeks.    

Again, it is still early in the trading day, but S&P 500 is down 1.1%

As Expected, Latest Initial Claims Were Below Consensus

Last week’s initial jobless claims came in at 350K, well below the market's expectation of 375K.  As we mentioned earlier this week, we expected this ‘good news’ given that the 4th of July holiday was in the middle of last week.  Historically, seasonally adjusted initial claims have dropped during those types of holiday shortened weeks.  We note the upward revision trend might be on its way back as the prior week's figure was upped by 2K to 376K.

A couple of things stood out.  On the negative side, we noticed that the seasonal factor applied to the week of 4th of July this year was much higher than its historical average since 1967; 125.8 versus 114.9.  The applied seasonal factor was also much higher than the 110.8 average since the beginning of the last recession.

We also looked at how the seasonally adjusted initial claims of the 4th of July week compared with the prior week historically.  On average since 1967, that figure turns out to be approx. 1,955.6 lower, which can be considered as good news given that this year’s figure was decrease of 26K.  Initial claims for the following week usually go up by 1,133.3, which may partially offset that good news.  We’ll see that next week.

We looked at the non-seasonally adjusted initial claims the same way and surprisingly found that they usually go up by around 67,152.1 during the 4th of July holiday week, and decline by 27,474.8 the following week.

With all of that said, it appears that the market understands how the holiday shortened week may have impacted the initial claims figure, as the S&P 500 is down nearly 1% during the first 20 minutes of trading.  If today's initial claims number is viewed as good news by economists, the market could still see it as bad news as it reduces chances of a QE3; especially after the release of the FOMC minutes yesterday which indicated a QE3 will not be launched unless we see significant shocks to the economy and/or the markets.