Friday, August 3, 2012

Sector Performance Update & more ...

After the nearly 2% spike in the S&P 500 today, we are certain many are saying to themselves "thank Goodness it is Friday".  Obviously, today's upward movement, which brought the S&P 500 1.7% in the black for the week, was driven by the better than expected July employment report.  We did point out earlier this morning that the report was not as good as it first appeared.  However, given the trend of disappointing economic data the last few months, the market was waiting to embrace any good news.

Given that the entertainment/business channel, CNBC, is watched by professional and retail investors, we should point out something interesting from CNBC's website - one of its experts, Larry Kudlow, posted an article saying basically the same things we have been saying about this week's economic reports (link: The Job Report's Bad News).  Mr. Kudlow's views may be driven more by his political beliefs, but his economic reasoning makes sense, in our opinion.  We note that we do not support any of the Presidential candidates as we think 'they are all the same'.

Below is a review of some important economic indicators released this week.
  • Dallas Fed July business survey results were very disappointing; -13.2 versus 2.0 estimate.  The survey's forward index also went into negative territory.
  • June m/m change in total personal income was above expectations, but wages & salaries were down.  Personal income for the last three years was revised down.
  • June m/m change in personal spending was a big zero, below the 0.1% increase that the Street expected.
  • Case/Shiller home price index declined Y/Y less than expected; -0.7% versus the -1.8% consensus.
  • Chicago PMI of 53.7 for July was above the 52.5 estimate.  Increases in new orders and order backlog were good news, but employment and capital equipment sub-indexes were disappointing as they showed a sizable decline.
  • Conference Board's consumer confidence index of 65.9 was much higher than the 61.0 consensus.  The June figure was revised up.  Decline in the 'Present Situation' index was more than offset by optimism shown in the 'Expectations' index.
  • July manufacturing ISM was disappointing and remained below 50.0.  New orders went up by only 0.2 points, more than offset by decline in order backlog, employment.
  • ADP print was 163K, significantly above the 127K consensus.  The June number was revised down.
  • July ISM services of 52.6 beat expectations by 0.5 points. New orders, inventories, and export orders went up, while employment, backlog of orders, imports and inventory sentiment were down.
  • The July state of employment report beat expectations with 163K net-additions to the NFP, much higher than the 100K consensus.  Hours worked remained unchanged.  Hourly wages increased by only 2c and were below expectations.  The seasonality factors applied to the data by BLS remain in question.  For example, the 25K net additions in manufacturing certainly did not go along with the data provided by most of the Federal Reserve Banks' surveys and the ISM.  While the 'official' unemployment rate barely changed, the seasonally adjusted U-6 unemployment rate went up 10bps to 15%.  Labor force and its participation rate continued to shrink.  And the household data showed a decline of 195K in number of people employed.

The weekly sector performance update is below.  We note that although the market has shot up during the last couple of weeks, the sectors that we recommended in early March have outperformed the rest nicely, as shown in the third column ('Since 3/2/12') of the table below.

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