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. 

Goldman Sachs 'Dynamic' GDP Estimate Adjustment

Goldman Sachs (GS) lowered its Q2 real GDP annualized growth twice this morning.  Initially to 1.4% from 1.5%, then to 1.3%.  We do not necessarily see how such intra-day 'dynamic' adjustment helps others make their investment decisions.  We, along with some others, were saying that the economy would not be nearly as 'robust' as the big firms made everyone believe during the first three months of 2012.  We are seeing some reaction from the big firms' (such as GS) muppets. 

Where Would the Market Be Without FOMC?

Where would S&P 500 be without FOMC?  Let the economists at the Federal Reserve Bank of New York tell you.  Enjoy, then ask if the Fed's moves have had nearly as much of a positive impact on the economy as they have on the equity market.  Link to the research is below.

The Puzzling Pre-FOMC Announcement “Drift” (David Lucca & Emanuel Moench)

http://libertystreeteconomics.newyorkfed.org/2012/07/the-puzzling-pre-fomc-announcement-drift.html

Our Thoughts & Estimates Regarding Some Economic Indicators ...

The equity market was a volatile one today with the S&P 500 being up as much as 9 points (or 0.7%) in the morning and down as much as 16 (or -1.2%) in the afternoon.  It closed down 11 points, or -0.8%.  From a technical standpoint, it came very close to ending the day below the 23.6% Fibonacci retracement level, 1340, that we have mentioned before.  If it had closed below that, 1310 would've been on the horizon.  Losses were pared a bit during the last 20 minutes, as some either began bargain hunting or short covering going into tomorrow's release of the June FOMC minutes.  We do not expect to see anything surprising in that release.  While most of the economic data continues to disappoint, somewhat supported by AA's performance (closed down 4.1%), we believe hope for a QE3 has kept the equity market above its support levels.

Regarding this week's economic indicators, consumer credit (released this morning) was once again significantly above expectations.  We were not very surprised nor delighted as we understand that in order for the US to maintain or even increase its consumption habit, consumer credit has to grow, given lack of much growth in wages.

NFIB's (National Federation of Independent Business) small business optimism index came in below expectations.  There were signs of weaknesses across the board in this report, from jobs, investment plans and earnings, to consumer spending.

We think initial jobless claims will come in below the 375K consensus on Thursday, which would be positive for the market.  However, we might not see much of a reaction as it won't take long for the market to digest the fact that the decline was due to a holiday (4th of July) shortened week.  We believe there is a chance that some may not have submitted their claims forms due to the short week.

The producer price index (PPI) will be released on Friday.  We estimate Y/Y and m/m declines of 0.4% and 1.1%, respectively.  This is mainly driven by decline in oil prices along with not much growth in wages or the economy as a whole.  Although we have not estimated core PPI, we do expect that figure to increase, unlike the headline PPI figure.  We do not expect the economy to pick up, however we will see higher headline PPI during the next few months as chances of a military conflict with Iran and/or instability within the Strait of Hormuz may increase.  In addition, if the recent heat wave continues, farmers will be facing additional costs which may show up in the PPI.

University of Michigan's first round of July consumer confidence study also will be released this Friday.  We do not have an estimate for it, but think it will come in below the 73.5 consensus.  Positive impact of lower gasoline prices will be offset by lack of enough job and wage growth.

Our estimate for next week's consumer price index (CPI) is a 12-month increase of 0.8% and a m/m decline of 0.8%.  This is driven by the decline we have seen in gasoline prices, along with not much improvement in unemployment and wages.  Unfortunately, it appears that the last two have more of a negative impact on consumer demand, and offset the positive impact that the first one has on disposable income.  We note that we are not yet aware of what the June CPI consensus is.  We may provide estimates for next week's release of June industrial production and capacity utilization, either at the end of this week or early next week.

http://mogharabi.blogspot.com

Update on Alcoa's End-Market 2012 Guidance ...

Alcoa (AA) made some changes to its 2012 end-market Y/Y growth projections. 

• Upped growth estimate in the automotive space in North America to 10% - 14%, from 7% - 12%. 
• North American heavy trucks & trailers lowered to 4% - 8%, from 7% - 12%.
• Beverage can packaging market in North America was upped slightly to basically no growth from an initial projection of a decline.
• 5% sales decline projection for the commercial building and construction market in North America was maintained.
• No adjustments were made to projections for Europe.
• The lowered projection within the heavy trucks & trailers market to a decline between 3% and 8%, from growth between 0% and 5%, was the only change made for China.
• Upped outlook on global production within the automotive market by 1% on the low and high end of initial outlook range provided in Q1; lowered its global production estimate of heavy trucks & trailers to (3%) - 1% from 1% - 5%. 

The stock is up 4c in AH. 

Alcoa EPS In-Line; Tops Revenues for Q2

Aloca reported Q2 results with non-GAAP EPS of $0.06 in-line and revenues of $5.96bil topping the $5.81bil consensus.  With the near $6bil Q2 revenues, annualized real GDP Q2 growth rate could be around 1.6%.  Although better than expected, top-line was still down 9.4% Y/Y and down nearly 1% from the prior quarter.

AA's earnings call is at 5pm (ET).  We will be looking for an update on the Company's worldwide 2012 end-market guidance.  As a reminder, during the Q1 presentation, the Company called for strong growth in North American automotive and heavy trucks markets, partially offset by weakness in the beverage can industry, and commercial building and construction. The only bright spot it saw in Europe at that time was the beverage can packaging end-market.  For China, it lowered its growth projections of the automotive and trucking industries from the prior quarter, while it slightly upped growth forecast for commercial building and construction.  Again, we will looking for any changes in these projections in today's call.  AA is up a couple of pennies in AH.

More Color on the Economy from AA's Q2 Results Due Monday?

Alcoa (AA), what many refer to as the bellwether of the economy, is reporting its Q2 earnings tomorrow after the close.  As posted in Q1, we created a simple model for projecting annualized GDP growth rate per quarter by taking AA's top-line performance into account, as the EPS results can be very misleading.  Based on the average of published analysts' estimates, AA is expected to report Q2 revenues of $5.81bil, which is nearly a 12% Y/Y decline.  The estimates range between $5.58bil and $6.07bil.  Based on the average estimate, we could say that Q2 real GDP annualized growth rate will be around 1.25%.  The min, max, and median estimates indicate possible Q2 GDP growth rates of 0.81%, 1.27%, and 1.80%, respectively.  Unfortunately, it appears that even if AA meets the expectations of the most optimistic analyst out there, Q2 GDP growth may come in below the Q1 1.9% growth rate.

We must say that the manufacturing and services ISM data for Q2 indicate a possible negative GDP growth rate.  While some of the negative data to which we have pointed the last few months may be offset by better than expected performances in residential fixed investments and housing services, chances of a slowdown in Q2 GDP growth remain very high.  We are not projecting a housing recovery, but any slight change in the positive direction within this battered down industry will likely have a positive impact on GDP growth as the two that we mentioned account for approx. 15% of real GDP.

As they say, first things first; let's see what Q2 numbersAA will put out there tomorrow after the close.

Sector Performance Update for Week of 7/2/2012

The short but busy week closed on the downside with S&P 500 ending the week down 0.55%.  Economic reports were mixed but most of them indicated a slowdown.

• Manufacturing ISM for June came in well below expectations and lower than 50.0, which meant it is contracting.
• Construction spending for May was better than expected and the April figure was revised higher.
• May factory orders also came in better than expected, but was partially offset by the downward revision of the prior month.
• Initial claims were lower than consensus, but remained above 350K.  The upward revision momentum of the prior week was broken as the prior week was revised down for the first time this year.  Continuing claims continued to increase.
• The significantly better than expected June ADP figure certainly upped everyone's hopes that the official June employment report will be a good one.  Economists increased their projections which led to a +5K adjustment in the NFP consensus to 100K.
• June services ISM was disappointing but unlike manufacturing, it remained above 50.0. 
• Lastly, the June official employment report disappointed most economists as net change in NFP of 80K was significantly below the 100K estimates.  Our estimate called for a 74K increase.  There were a couple of bright spots in the report which we mentioned in our last post. 

Sector performance update for this week is provided below.

June '12 Employment Report Disappoints

BLS' June employment report NFP change print was a mere 80K, slightly above our 74K estimate, but far below the Street's 100K.  We note that after the higher than expected ADP report yesterday morning, many (including Goldman Sachs) adjusted their projections higher, resulting in the consensus moving up to 100K from 95K.  We must say that we stuck with our 74K estimate even after that great ADP report.  Also, if anyone pays attention to the unemployment rate anymore, it remained at 8.2%.

The S&P futures are down 10 as a response to this disappointing report.  We'll likely see the negative turn slightly into positive as many analysts will start making the QE3 pitch.  Watch gold; if it starts paring losses (gold futures are down around $18.30 at this time), it means it is expecting at least some pro-QE3 headlines.  Technically, although the 10-day EMA went above the 50-day, with both trending up, S&P 500 has not yet crossed that linear regression channel which indicates more of a long-term trend.  Critical level today is probably at 1355.  If it closes below that, a head & shoulder (H&S) pattern could be in the making.  Next week's release of the last FOMC meeting's minutes will be considered very important as the market hopes it provides more color regarding chances of a QE3.

Regarding the employment report, as mentioned earlier, NFP came in at 80K.  We must note that April NFP was revised down by 9K while the May figure was revised up by 8K; net downward revision of 1K over those two months.  Most of the industries added workers and/or stayed unchanged in June.  However, growth has slowed.  The leading 'go-getter' was the professional & business services industry which added 47K, of which more than half were temporary hires (25.2K versus 18.6K in May).  We have consistently talked about why an uptick in temporary hires during what is supposedly a growing economy is not a very good sign.  Government NFP declined by 4K, making the private non-farm payoll count for the month 84K.

The labor force increased by 156K in June, which with an increase of 34K people dropping out of the labor force, resulted in a net increase of 122K of the labor force.  This long explanation was necessary to explain why unemployment rate remained at 8.2%.  The actual number of unemployed went up by 29K, which the optimists can say was at least less than the 220K we saw in May.

Here is another data point supporting our view on the temporary hires:  top reason for unemployment was "job losers and persons who completed temporary jobs".  Also, the number of part-time workers for economic reasons went up 112K, while for non-economic reasons dipped 564K.

Some bright spots in the report included an increase in average workweek to 34.5 hours from 34.4, and a 0.3% increase in hourly wages from the prior month.  Wage growth was higher than expected.

Again, let's see if Bernanke, along with the pro-market headlines he creates, can bring down this anxiety which has been brought on by a disappointing employment report. 

http://mogharabi.blogspot.com

Some Big Firms Upping Their NFP Estimates ...

Goldman Sachs (GS) increased its NFP estimate earlier this morning (after the services ISM report was released at 10am ET) to 125K from 75K.  GS' new projection is within the range that we suggested less than 20 minutes after the initial claims and ADP reports before the open.  In addition, its previous estimate was pretty much where ours is, 74K.  We're saying this because it appears the firm's daily adjustments are driven by the analyst's 'will' to be considered as accurate as possible.  Or we could ask - why didn't the analyst just tell his traders or clients that the better than expected ADP and initial claims could mean a better NFP?  Without officially changing an estimate, did the analyst really have to publish the 'revised' estimate?  Is such confidence valid as last month's 133K net change in ADP was very misleading?  Or was it published to drive muppets to act in a certain way; in other words, let's do something to up trading volume and make as much as we can via the fees before the huge Friday NFP report.  We're sticking with our 74K, which many believe to be too pessimistic.  Let's see what happens tomorrow. 

Better-than-expected ADP and Initial Claims ...

June change in ADP came in at 176K, significantly above the 95K consensus.  In addition, May ADP figure was revised up to 136K from 133K.  Whether the June ADP number means that tomorrow’s NFP will be much higher than we expect, remains to be seen; however, the chances of that happening have increased.  NFP could come in between 120K and 150K.  The Street expects 100K; and our estimate is 74K.  We must note that although ADP net change was 133K (original figure) in May, the NFP came in at a very disappointing 69K; but June's surprisingly high ADP cannot be ignored.

Last week's initial claims print is 374K, below the 385K consensus.  In addition, surprisingly, for the first time this year, the prior week's initial claims were revised lower by 2,000.

Although better than expected, the figures above may cast doubt on whether Bernanke will launch QE3.  In addition, China's and ECB's rate cuts, and BoE's additional easing could lower chances of a QE3, as many economists believe that the issue lies outside of the U.S. (EZ and slower growth in emerging markets) and if it is being 'addressed', then no need for a Fed QE3. 

Thoughts on Upcoming June NFP and more ...

We finally completed our model and came up with a projection for the June NFP which is scheduled to be announced by BLS on Friday morning.  We estimate June NFP of approx. 74K, up around 5K from May, but lower than the 90K consensus.  The consensus range is certainly a wide one, between 35K and 167K.  Given the way the market is moving higher, we think it is expecting a much smaller number, which would push Bernanke and the Fed into action.  For this reason, if NFP comes in-line with the consensus or even our 74K, the market would likely be disappointed.

Our estimate is based on the assumption of ADP coming in at 95K, which is what the Street is expecting.  ADP will be reported on Thursday.  Our model does take initial claims and employment statistics provided by five of the Federal Reserve district banks (within their monthly business surveys) and within the ISM (depending on if it is released before the BLS report), into account.  We note that although the services ISM index is a significant economic indicator, changes in its employment series index have not necessarily moved in-step with changes in NFP.  For this reason, in addition to the fact that services ISM won't be out until the day before the BLS report, we did not take services ISM into account.  If anything in the services ISM report jumps out at us, we may make some changes. 

The equity market is up nicely as many, the ones actually at work today, are being patriotic and investing in the US stock market.  We'll admit, we are not sure if this is correct.  However, as mentioned several times, we do know that the 'insurance umbrella' provided by the Fed is allowing many to take on more risk.  The worse the economic figures, the more likely a QE3 will be initiated before the elections; although the market will react negatively for a few hours (or just minutes!) before it begins imagining that QE3.  And that is what many are betting on.  S&P 500 is nearing that 1374 resistance level we suggesed, so if suddenly new doubts are cast over a QE3, look out below!  Happy Fourth of July!

June '12 Manufacturing ISM Update ...

June manufacturing ISM print was 49.7, significantly below the 52.0 consensus (initially, we thought the consensus was at 51.5), and slightly above our 49.0 estimate.  Estimates given by ‘professionals’ ranged between 51.0 and 53.4, according to Econoday.  As a reminder, an ISM figure below 50.0 represents contraction.

Initially, when we looked at the June data and saw continuing decline in inventories, we thought that some inventory replenishment might be in the making in July or August.  However, that decline is accommodated by an increase in customer's inventories, decline in backlog of orders, and a pretty much flat supplier deliveries.

Most components of ISM were disappointing.  New orders dropped to 47.8 from 60.1 a month ago.  Production dipped but remained above the 50 level.  Employment also remained in the expansion level, at 56.6, a decline of 0.3 from previous month.  We note that this data does support our continuing belief that the job market is not improving as strongly as it needs to.  Employment is usually a lagging indicator at the macro level, and we think within the manufacturing space.  In July, we could see the ISM employment series index dip much closer to 50, or even below it.

Prices series index declined to 37.0, from 47.5 in May.  This was not surprising as we have seen commodities take a dump for the past couple of months.  However, lower input prices won't impact production unless there is more certainty regarding demand, which currently there isn't.  This is also related to employment, as lower input costs, combined with demand uncertainty and tighter inventory management, will make it easier to keep headcount low, which means employment in this space will likely not expand in 2H12.

We will finalize our NFP estimate and post it before the close (hopefully!).  By the way, congrats to Spain for winning the 2012 Euro Cup!  Unfortunately, as a reward, Spain's 10-year yield is up 4bps right now, while Italy's is down 8bps.  The winner in the financial and economic arenas is yet to be determined.  

http://mogharabi.blogspot.com

Sector Performanc​e Update for the Week of 6/25/2012 After Friday's Huge Jump!

Well, so much for us calling this week to be a volatile one, which it was; and to end pretty much flat, which it certainly did not.

After dipping more than 6.6% (at the YTD low close on 6/1), the S&P 500 is now down only 0.6% from when we suggested sector rotation for equity holdings into less cyclical sectors (before the open on 3/5).  We note that since early March, sectors that we suggested, consumer staples and utilities, have been the two best performing sectors of the S&P, up 5.2% and 5.8%, respectively.  However, we certainly did not foresee the 'solution' which the European leaders supposedly came up with last night.  That solution basically drove the market 2.5% higher today.

Of course, the only-modest Chicago PMI reading and the University of Michigan's disappointing consumer sentiment survey result were ignored.  April consumer spending was revised down, while there was no growth in the May reading (not very good news for Q2 GDP).  In addition, lack of movement in core PCE prices provide support for the view that the global economy is slowing down, or as we believe, has already slowed down.  Regarding non-core prices, although oil had a nice jump today, driven by the overall 'guarantee' of liquidity in the EZ and the upcoming start of the oil embargo on Iran, it has certainly backtracked from its $100+/barrel level, also indicating a slowdown.

As mentioned last week, although the 4th of July is during the upcoming week, we think trading volume, along with volatility, will be high this coming week, as the market expects some rate cutting in Europe along with various state of employment economic indicators such as the ADP report, the Challenger Job Cuts and BLS' NFP figures.  The week will get off to an exciting start as the manufacturing ISM index is to be released 25 minutes after the market opens.  Although the consensus is at 51.5, we think it will actually come in slightly below 50.0, around 49.0.  In terms of how such disappointment may impact the market, we are not sure given that the market is awaiting the June BLS employment report and it's expectation of a rate cut in Europe.  Regarding the employment report, we expect June NFP to come in around 70K - 80K.  We will likely narrow this range in a few days, but overall, we think the official figure will be disappointing.  What is interesting is that given the slightly better housing numbers and the market's latest jump into the stratosphere, the June employment report will have to be significantly worse than expected for the Fed and Bernanke to consider initiating a QE3 before the end of 2012.  We will likely see the market go down, reacting to any disappointing NFP figure.  However, the less disappointing that number is, the less likely a bounce back will be on Friday or the early part of the following week.

Economic indicators gave an overall mixed signal this week, with new and pending home sales, Case/Shiller home price index and overall May durable orders being the bright spots.  New and pending home sales for May were much higher than expected, but we note that most of the purchases are made by investors/institutional buyers.  The mom & pap homebuyers that previously drove market's expansion are not yet in the game; and the deteriorating state of employment along with lack of wage growth will likely keep them out of this so-called recovery for some time to come.  In addition, while overall durable goods orders came in above expectations, there was barely any growth in non-defense goods orders, which again provides support for lackluster GDP growth in Q2. 

Consumer confidence and initial claims were disappointing.  Initial claims were again revised up, strengthening that bad-news upward revision momentum we have seen since beginning of 2012.  Also, Q1 GDP came in at 1.9%, as we had expected.

From a technical standpoint, that 1340 resistance level that we mentioned was certainly overridden today.  However, the S&P 500 still remains below its linear regression trend line, which we view as the next resistance level, around 1374.  In addition, although it jumped nicely today, it will likely have to create a support above that 1340 level before we could say with confidence that it may be headed for 1374.  The 10-day and 50-day EMAs are getting closer to cross, but this time they are not both downward trending.  While the 10-day EMA has turned up, the 50-day is pretty much flat.  And 1310 remains the support level.

We note that beginning the week of 7/9, we will attempt to analyze and value specific public companies and make recommendations.  Of course, as those fancy professional analysts and their lawyers say, none of the projections and/or valuations is guaranteed to be accurate or correct.

Lastly, we were very very disappointed in seeing Germany lose.  The two goals were scored by Mario Balotelli, which surprisingly we found out that he is a Sicilian, raised in Palermo.  He certainly doesn't resemble a 'Super Mario', but given his talent, that's what they call him.  He was also given the nickname 'Bailoutelli' on Twitter, as many believe he defeated the German resistance on the soccer field.  Maybe he should be put in the same mix as Italy's Mario Monti.  Yesterday, both of those Mario's defeated Germany, each in his own way.  At least regarding Monti, we think Germany's Merkel will somehow fight back and make this more of a knock-down, drag-out fight.  Unfortunately, none of the German soccer players will have a second chance to take revenge on Balotelli as he and Italy will face Spain on Sunday at 2:45pm ET.  We’re not sure for whom to root given that we are not familiar with either soccer team.  We do know that both nations need bailouts.  Our non-soccer related reason to cheer on Italy:  After comparing the two countries’ 10-year yields, it appears that Italy is slightly safer to root for … so go Italy!

Facebook Use At Work Falls, Twitter Is On The Rise: Report

According to an article in the Huffington Post, a study indicates that usage of Facebook (FB) at work is declining while that of twitter and other social networks is increasing. More detail is available in the article, which can be accessed at http://www.huffingtonpost.com/mobileweb/2012/06/27/facebook-use-at-work-office-twitter_n_1631560.html.

Sector Performance Update for the Week of 6/18/2012

After Moody's downgrade of major banks on Thursday after the close, the market basically reacted positively, as we had guessed it would.  XLF, the SPDR financial sector ETF ended Friday up 0.77%.  Of course, the usual dead-cat bounce after the 2.0%+ decline on Thursday was also the driver behind market's closing in the black on Friday.

We remain pessimistic about the economy, which we think will be displayed by the June employment report.  Important upcoming economic indicators were mentioned in the last post we published on Thursday.  Although the market bounced up a bit on Friday, it still closed below the resistance level, 1340, which is the 23.6% Fibonacci retracement.  The 50-day EMA remains above the 10-day, so we are basically at a wait & see mode.  As mentioned onThursday, we're looking at the 1310 level of S&P 500 being the short-term critical level.  If the index goes below that before getting back up to the 1340 level, which will also take the 50-day EMA below the 10-day, then the 1290 support could be at risk again.  Given how much the market moved up in anticipation of Bernanke's helping hand, the 1290 support which we initially thought might be at risk due to a Bernanke disappointment remains intact.  Of course, overall, the market remains fragile while the economic recovery remains questionable.

The sector performance update for this week is provided below.  By the way, we must congratulate the Germans for making it to the semi-finals of the Euro Cup 2012 by basically destroying Greece.  Let's see if Merkel approaches addressing the EZ crisis with the same mentality.  If so, and assuming a very very negative market reaction, then a QE3 announcement at the August FOMC is basically guaranteed.

Market Coming Back to Earth?

Lack of anything exciting and beyond (or even up to) expectations from the Fed finally brought the market back to earth.  Of course, we would have included the bad economic numbers, but their negative impact on the market have been discounted every year since the Fed started 'helping the economy recover' or basically artificially inflate assets such as equities.  The market also dipped today due to the expectation of rating downgrades of some of US' largest banks.

S&P 500 closed at 1325.51, down more than 2%.  Technically, the support level of 1290 based on the Fibonacci retracement (38.2%) that we mentioned on June 7, remains.  Unfortunately, S&P 500 was not able to remain above the 23.6% Fibonacci retracement which we view as the resistance level.  Combined with the downward trending 50-day EMA being close to going lower than the 10-day EMA, we're looking at the 1310 level of S&P 500 being the short-term critical level.  If the index goes below that before getting back up to the 1340 level, then the 1290 support could be at risk again.  Given how much the market moved up in anticipation of Bernanke's helping hand, the 1290 support which we initially thought might be at risk due to a Bernanke disappointment remains intact.  Of course, overall, the market remains fragile while the economic recovery remains questionable.

A few market-moving events are coming up during the next couple of weeks.  We don't see anything significant due tomorrow, except for market's reaction to the rumored rating downgrades.  It could be a case of sell on the rumor and buy on the news, the opposite of what took place going into the FOMC announcement.  Next week, new home sales, Conference Board's consumer confidence, initial claims, personal income, PCE prices, the Chicago PMI, and the University of Michigan's consumer confidence final reading, all will be released.  Although we expect volatility with all of this news next week, we believe the market will end the week pretty much flat, as it waits for the now even more important June employment data coming up the week after.  More specifically, the BLS will release June's state of employment report on 7/6/12.  And even though we’ve got the 4th of July to celebrate, we still expect to see a lot of volume along with volatility.  Similar to what we said in early May regarding May's employment report, if the June report is very disappointing, then the market could again begin expecting a QE from the Fed, especially given just how much Bernanke emphasized that all options remain on the table.  As to when that expectation begins to be priced in, remains in question.  We will take a wild guess and say that if oil continues to drop, the expectation could become more likely which means it could begin to get priced in as early as mid-July, only a couple of weeks before the next FOMC (scheduled for 7/31 - 8/1). 

Economic Update, FOMC, and FB ...

Last week's initial jobless claims print was 387K versus the 383K consensus.  As usual, the headlines came out saying that initial claims "declined" from previous week, but did not cite what has basically become the 'norm' - prior week's figure was revised up once again.  Upward trend is being seen in the 4-week moving average and continuing claims; not very good news.  What is even more amusing is that the non-objective media is now citing the 400K level as the 'critical' level, while not too long ago that critical level was around 350K.

The Philly Fed manufacturing survey index came in significantly below expectations; -16.6 versus estimates of 0.0, which was to be an improvement from May's -5.8.  All components of the index were worse than the prior month, except for number of employees, which went up to 1.8, from last month's -1.3.  However, we must note that when combined with a significant decline in average workweek, this figure is questionable.

In terms of the survey results regarding six months from now, a 19.5, which was an improvement from May's 15.0, may be good news.  We believe such optimism is primarily driven by the upcoming US elections and the thought that 'we've gone down so much, there's nowhere to go but up.'  By looking at the decline in current inventories, we think the higher 6-month survey result could also be based on inventory replenishment, which we believe will be short-lived.  This is supported by the 6-month out inventory index which declined to -12.0 from -10.8.  In addition, while more manufacturer's said they may increase hiring 6 months from now, more still believe the average employee workweek will decline; again, an awkward combination, which we think represents overall uncertainty that remains among survey participants.

Existing home sales also came in below expectations.  For May, the annual rate of existing home sales came in at 4.55MM, below the 4.57MM consensus and April's 4.62MM.  We are always amused by the biased report that NAR (National Association of Realtors) publishes.  They cite the 8% Y/Y higher median price in May and say that lower inventory was the driver.  That may be the case Y/Y, but sequentially, the month's supply actually rose to 6.6 from 6.5.  In addition, while foreclosures and short sales still accounted for 25% of total sales and were lower than April's 28%, first-time buyers also declined.  We believe consumers, which we assume represent most of the first time buyers, are becoming a bit less optimistic.

Regionally, the Northeast sales were down 4.8% from April, but up 7.3% Y/Y.  The West declined 3.4% from April and was up only 3.6% Y/Y.  May sales in the South were pretty much flat m/m, but up 9.2% Y/Y.  Compared to April, the only bright spot was the Midwest, up 1.0%.  That region was also up 19.5% Y/Y.

Let's now go back to Wednesday.  Should we thank Mr. Bernanke for basically not doing anything surprising?  The way the equity market had risen the last 2 weeks indicated that the Fed may actually bluntly say that a QE3 was coming.  That did not take place.  After the FOMC meeting, the Fed announced that it is extending Operation Twist to the end of this year (it was scheduled to end at the end of June).  The Fed also finally indicated that the economy is not in great shape, as we mentioned in March.  It lowered its economic forecasts and did not sound very optimistic regarding the labor market.  Again, it was not surprising.  However, the market liked it when Bernanke said that all monetary easing options are still on the table.  What made us laugh was when Bernanke actually said that even if short-term interest rates hit zero, the Fed will have tools such as "communication techniques" to help the economy and the market.  We're assuming Bernanke is referring to the propaganda and leaking information to various privileged members of the mainstream media that it deploys at times. 

Lastly, let's briefly discuss the bounce that Facebook (FB) has had since June 6, after the very disappointing IPO.  FB has gone up 25% from its low of $25.52 in two weeks.  As a reminder, our valuation of the Company was at $23.00/sh.  We think the recent bounce is driven by many betting on the upcoming Q2 earnings call, where FB management will likely be much more vocal, positively.  Lately, we are hearing more people praise FB for potentially implementing an ecommerce strategy to help improve returns on the ads it places on its site and at the same time possibly address the mobile ad dilemma.  We mentioned these options in our initial post on the Company.  In addition, more sell-side analysts will probably initiate coverage on the Company given how much lower than its IPO valuation it is still trading.  Many institutional investors would like to bet on FB (not necessarily invest) given its brand name and potential upside, although it also comes with a lot of risk.  This is another reason why we think sell-side coverage will increase, trying to get a piece of trading revenues associated with more buy-siders possibly beginning to stock up on the FB stock or bet on Q2 earnings. 

Economic Data Update ...

Housing starts for May were a bit disappointing, while that month's building permits blew away expectations.

May housing starts figure came in at an annual rate of 708K versus the Street's 722K expectation.  Although this was a 'miss', we note that April's data was revised up by 27K to 744K.  Single-family homes starts grew 3.2% from April and 26.2% from May '11.  MDU's dipped 24.2% from last month, but grew 31.6% Y/Y.  Regionally, housing starts in the Northeast, Midwest and South declined 20.3%, 13.3%, and 6.1% from April, respectively; while they grew 14.4% in the West.  There was growth in all regional Y/Y figures, with the South leading the way by having housing starts 39.5% higher than last year.

May's building permits had a print of 780K versus the 730K consensus.  Permits for single-family homes were up 4.0% m/m, while MDUs with more than five units were up 17.7%.  Both types also saw Y/Y growth of 19.9% and 39.3%, respectively.  There was growth in building permits within all regions compared to April '12 and May'11.  The South led the way in monthly growth at 11.1%, while the West and East had Y/Y growth of 30.7% and 29.5%, respectively.

While this may first appear to be positive for the market, we must note that the market is looking for bad economic news in order for the likelihood of a QE3 by the Fed to increase.  In addition, the housing figures may not be that good as they indicate we might see inventories increase during 2H '12 and early next year, which is not necessarily good news given lack of much wage growth combined with the deteriorating state of employment.  But then again, these days not too many take what may happen six months from now into consideration.  By the way, it appears that a QE3 continues to be priced into the market as equities keep going up.  Although many large banks, such as Goldman Sachs, believe that the Fed will announce monetary easing, we wonder - what if they don’t?

Marc Cuban comments on Facebook ...

Marc Cuban said earlier on CNBC that he made a mistake investing in Facebook (FB).  He also said he has sold his position, which we think was 150K shares.  According to CNBC, Cuban said "my thesis on Facebook was wrong, I sold my position." 

Update on Greece ...

Greece's election may have created more questions rather than providing answers to the ones that came up in the May elections.  The more conservative New Democracy (ND) edged a win over the radical left, SYRIZA.  Basically, the pro-bailout barely beat the anti-bailout, which means Greece has some more time to remain within the EZ.  However, ND does not yet have enough seats in the parliament (needs at least 151).  It will likely form a coalition with PASOK and maybe even with the Democratic Left to get the 151 seats.  Many believe such coalition is likely.  It has to be done within the next three days.

We listened to a conf. call which took place in Europe this morning, and it was stated that although such coalition will take place, the new government may not be able to do much to address the growing economic and political issues, as the parties and their leaders within this group have been rivals for around 40 years.  Greece will likely just be given more time, but the final result, whether it takes place tomorrow or next year, will be an exit from the Euro. 

At this time, based on lower U.S. equity futures, it appears that although Greece's election results were not the worst, the markets do not welcome those results.  This could go along with what we mentioned last week, which is that the market may have priced in risk-on actions that the ECB and/or the Fed would take if Greece's election results turned out to be very frightening.  So, now the market is looking for more bad news to convince the central banks (CB) to reach out and help again ... and again.  The CBs are looking for a big crash to justify more intervention, but given that the market expects intervention in case of a bad crash, the crash that may come along may not be that bad!  Confusing, eh?  This is the psychological hold that the CBs and governments have over the market.

Lastly, we must note that the meeting in Moscow between Iran and the other five nations was discussed on that conf. call.  It appears that many believe those talks will fail, which will result in a higher likelihood of an attack on Iran before the U.S. elections.  We do not want to get into all the dirty politics that surrounds this issue, but must say that we are amazed that given the current uncertainty about the U.S. economy, the U.S. government would actually take steps that would push up oil prices and create more pressure on its consumer-driven economy.  

The Equity Markets Have already Begun to Thank the Central Banks!

Well, as we mentioned a couple of times since end of May (5/31/12 and 6/7/12), with so many disappointing economic data coming in, along with the fear of the upcoming Greece elections, it appears that the market has already begun to price in some monetary policy to be implemented by the ECB and/or the Fed.  It is amazing that the market and its participants have not recognized the diminishing marginal returns, in terms of duration of a jump in the stock market and real economic recovery, of the various QE's, twists, central bank policy rumors, political statements, etc.

More indications of the not-so-great recovery came out this week.  They included disappointing retail sales, initial jobless claims (of which the previous week's number was revised up again), core PPI and core CPI, Empire (NY) manufacturing, industrial production, capacity utilization, and the University of Michigan / Reuters consumer confidence.  All indicators mentioned above were disappointing.  When better than expected MBA Mortgage index came out, the S&P futures actually dipped a bit, as the better the economy is, the less likely Bernanke will reach out and help the market; and excluding a Bernanke helping hand, the market is more than fairly valued. 

We must note that with the market withstanding the potential economic and EZ risks, it actually may be reducing chances of any pro-risk news coming out of next week's FOMC.  Although the language is likely to be very positive, and pro-risk and pro-market (in terms of the Fed being ready to pull the QE trigger once again), we believe the recent market jump will likely force the Fed to stick merely with the language and actually not take any actions.  Of course, this may change depending on how disappointing the elections in Greece turn out to be.  And by disappointing, we are referring to the US, big banks, and the equity markets' disappointment, and not necessarily the Greeks themselves.  These days, democracies and/or the way they are structured are not good or 'morally acceptable' unless they meet the US 'criteria'.  We certainly would not be surprised if we heard about various US banks, corporations, consulting firms, and/or 'pro-democracy' groups aggressively campaigning for/against political parties that stand for Greece to remain/exit the EZ and accept/reject the latest bailout plans.

The sector performance update for this week is provided below.  Have a great weekend.  We'll be watching and rooting for Germany to beat Denmark this Sunday, and we'll certainly be keeping our eyes on Greece's elections.

Sector Performance Update for Week of 6/4/2012

Summary of Bernanke's Testimony

Ben Bernanke did not guarantee a QE3, but he also did not take that option off the table.  Although he appeared a bit nervous in the beginning (compared to his previous testimonies), he got into the flow of the 'game' and started joking with lawmakers about sleeping habits and things such as "a trillion here, a trillion there", referring to the US debt.  We will provide some of the main points he made during his testimony.  Regarding QE3, he basically said that they have not yet made a decision as they first have to review economic data and update their projections to see how well or badly the economy is doing.  After that, they will decide on whether or not to add another QE, and that decision may be announced (if needed) at the next FOMC meeting on June 19 -20.

Bernanke's main points:

• The Fed will continue to maintain a highly accommodative monetary policy, but its effectiveness will depend on whether Congress gets its act together.
 
• Have not yet decided on a QE3.  Must answer these questions first: How strong will the economy be going forward?  Will economic growth be enough to improve state of employment and offset the negative impact of the end of the catch-up rate?  (The catch-up rate in employment is discussed in more detail below.)
 
• He said that tax and spending policies should increase incentives to work and save. (Save?  Savings?  How can Americans save when interest rates are so low, pushing everyone to make risky bets?)
 
• US economy is growing at a moderate rate
 
• Labor market has improved, but the last three months’ employment data has been disappointing.  Such disappointment is due to not only the unusually warm weather this year, but also due to last year's employment catch-up transition that raised expectations too high.  Basically, after the beginning of the recovery, the state of employment did some ‘catching up’ in terms of accelerating hiring, which explains the encouraging NFP figures we saw in late 2010, and early and late 2011.  Now, Bernanke believes in order for jobs to continue to grow, economic growth needs to continue at a higher rate.
 
• He admitted that income growth is only modest, but believes lower energy prices will help. (Let's see if Obama listens to Bernanke and therefore won't try to help Israel attack Iran; or if he will listen to Netanyahu, attempts an invasion of Iran and sends oil prices back up above $100 or maybe around $125 - $150)
 
• He has seen good demand for US exports. (But given the slowdown we are seeing not only in Europe but also in some emerging economies, will such demand continue?)
 
• He views households and businesses as still being cautious in terms of spending and hiring, respectively.
 
• The housing market is improving slowly, but lending standards appear to be tightening up a bit again and there is still backlog of foreclosures that could pressure prices.
 
• He believes inflation is under control. (It appears as though he's is assigning zero probability to a possible war with Iran, and/or he doesn't think economic growth will pick-up anytime soon.)

Regarding economic data, April's consumer credit numbers, which were released at 3pm (ET) today, were disappointing.  Consumer credit increased $6.5bil from March (which has been revised down), nearly half the $12.7bil that economists expected.  Revolving credit balance went down $3.4bil, while non-revolving went up by $10bil, 'driven' mostly by auto and student loans.  Given the disappointing job numbers, we would expect to see a slowdown in the rate of increase in non-revolving credit.  After a decline in 2008, non-revolving credit outstanding increased 2.5% and 5.7% in 2010 and 2011, respectively.  In April, it increased at an annual rate of 7.1%.  We expect such rate to come down to between 3.0% and 5.0% by the end of 2012.

Overall, the economy and the markets are looking for Bernanke's helping hand.  This was demonstrated pretty clearly in the equity markets as the S&P 500 closed pretty much flat (down 0.01%) after being up as much as 1.1%, after finally realizing that there is no guarantee of a QE3.  Now bulls are likely hoping for further disappointing data to push Bernanke and the Fed to take action.  Technically, the support and resistance levels that we discussed this morning have not changed: 1291 and 1325, respectively.

Initial Update on Bernanke's Testimony

According to various reports and Bernanke's written testimony, the economy is growing at a moderate rate.  He is saying the Fed has accomodated monetary policy and will respond IF NECESSARY.  The Fed is prepared to take action in the event that financial problems escalate.  We think this basically means that the Fed won't do much until things get much worse.  Bernanke will also tell Congress to do its job and resolve the fiscal issues. 

We must say the the Republican representative Kevin Brady (TX) just told Bernanke that he doesn't think QE3 would help.  He is asking very good questions such as - tell us exactly what you will do regarding QE3 and under what circumstances?   

If interested, a live coverage of the entire testimony is here: http://www.c-span.org/Live-Video/C-SPAN3/

Market is Begging Bernanke for Help ... Again

Well, after tripping on its own feet and tumbling down last week, the market is now looking for a couple of crutches again from Bernanke.  With many rumors and articles basically dangling the Bernanke carrot (or the crutches), the market certainly gave it all to get back on its feet, especially yesterday.  Of course, given that China cut its rates this morning, it appears the expected help is at least partially made in China, similar to most other things consumed in the US.

The VIX strangle strategy from last week did well, at least on the call side.  How well, depends on the expiration date and strike price chosen, and if the position was closed.  And depending on the expiration date, the upcoming Greek elections could help out. Of course, also based on the expiration date, strike price, and given yesterday's big move and futures in positive territory this morning, the put side could go to breakeven or even make some money too.  Regarding the SPY strangle strategy, the puts did well until Tuesday and now the calls are in the driver’s seat, basically for the same reasons mentioned before.

However, let's put the trading talk aside for a bit.  The economy is still barely growing, or as the Fed puts it, the economy is growing at a "moderate" rate.  We all know that most organizations tied to the government (and yes, no matter how its functions/responsibilities are defined, the Fed is tied to the government) use politically correct terms such as moderate.  We continue to believe the economy is growing at a modest pace at best.

Initial jobless claims for last week printed 1K below expectations, which many may view as good news, but that upward revision continued as the previous week's figure was changed to 389K from 383K.  Initial claims came in at 377K versus the 378K Street estimate.  By the way, continuing claims were disappointing as they were higher than expected.  In addition, the prior continuing claims figure was also revised up.

May services ISM was released on Tuesday, and the index of 53.7 was better than expected.  However, there was a significant drop-off in ISM's employment index to 50.8 (which indicates it is barely growing) from April's 54.2.  In addition, even though new orders and inventories did increase, the inventory sentiment index indicated that many think their inventory level remains too high, as mentioned in the ISM report.

Let's get back to the equity market.  The futures were indicating there's basically certainty that Bernanke will provide very pro-QE3 testimony today.  Of course, the slightly better than expected jobless claims was actually bad news because it could prevent Bernanke from being hawkish when it comes to further monetary easing.  This was clearly shown as the S&P futures went from being up 11.5 to 8.0.  They did move higher as we got closer to the opening bell.  S&P 500 is up 13+ at 1328 right now.

If Bernanke doesn't basically say 'we will print more and more money to force many to take too much risk again', then we will likely see the market turn to the downside as the Greek election (which is on Father's Day) and all other issues faced by Europe are still looming.  And do not forget that the US economy is not performing as well as many expected even with all of the monetary easing we have seen.

On the technical side, S&P 500's big move up yesterday did help the bulls a bit.  It closed nicely above the 200-day moving average and based on Fibonacci retracements, it made 1291 the new support level.  We think the next resistance level is around 1325, which S&P 500 has already passed in the first 10 minutes of trading.  If it does close above that level, 1341 could be next, likely making S&P 500 trade in the pretty wide range of 1291 - 1341.  However, if Bernanke disappoints and it closes lower or around 1300, then the 1291 support level will be at risk, with 1250 being next.  There are a lot of if's and if's with what we just mentioned, but then again, there is a lot of domestic and international uncertainty out there right now. 

Sector Performance Update for Week of 5/28/12

Thoughts on Jobs & ISM Reports

May '12 net change in NFP came in at 69K, significantly below expectations.  March and April numbers were revised down by 11K and 38K, respectively.  Official unemployment rate edged up to 8.2% from April's 8.1%.  The broader U-6 unemployment rate went up to 14.8% from 14.5%.

We will discuss a few things that stood out in this report.

There was a decline of 13K in government jobs.  We think this will turn around as we get closer to the elections, no matter how much cost cutting the politicians preach.  Temporary jobs increased by 9.2K and represented 9.5% of increase in private service type jobs.  We continue to believe that higher temp figures are not good news for the state of employment.  They indicate that the jobs issue is still in a turnaround and not necessarily a recovery mode.  Construction industry recorded the biggest decline of 28K, while jobs in transportation & warehousing industries led the way with an increase of 35.6K.

What really stood out, which goes along with what we have been saying for a while, was the lower than expected increase in hourly earnings; 0.1% versus a 0.2% estimate.  In addition, average workweek (hours) declined to 34.4 from 35.5.  These figures (along with some data that we pointed out yesterday) indicate that the slowdown in the job market is more likely to continue through June.  They also indicate that good growth in consumer spending, which increased along with consumer credit, will not last too long.  Lastly, we believe lack of growth in wages will slow down the recovery that many think has begun within the housing market.

Manufacturing ISM for May came in at 53.5, below our 54.5 estimate and the Street's 54.0.  The employment index of this study declined, indicating a slowdown in hiring.  This is similar to most of the Federal Reserve Bank districts' survey results.  The same can be said of the inventory, backlog and production indexes, which as mentioned in other posts, indicate a possible slowdown in this recovery.  We note that while new orders were up, again, the backlog and inventories tell a different story in terms of expectations for the next 3 - 6 months.

Another Disappointment - May Employment Report Missed Badly

BLS released May '12 state of employment report and it appears that our initial thoughts regarding net change in NFP were not accurate, as it came in significantly below our estimate and the Street's. However, our simple trading strategies appear to be working. We must note that the March and April figures were revised down significantly, which obviously impact nearly all NFP projection models.

The NFP net change print of 69K was less than our 152K estimate and the 150K consensus. The unemployment rate edged up to 8.2% from April's 8.1% and above the Street's 8.1% estimate. The broader U-6 unemployment rate was 14.8%, an increase from April's 14.5%.

Net change in NFP for March and April were revised down by 11K and 38K, respectively.

The market has gotten off to a good start, S&P 500 down 1.6% and VIX up 6.0%+, when you consider our suggested strategies yesterday around 11am (ET). We note that the Fed's Rosengren did whisper hints that Operation Twist could be extended beyond June; in other words, QE3 is becoming more likely. This is also shown with GLD being up 2.0%+. For the time being, the market is not necessarily embracing such psychological support provided by the Fed. It appears that the market will be twisting the Fed's arm a bit more to make sure the extension of Operation Twist is set in stone.

We had been in a meeting all morning and that's why we did not post our thoughts on the employment figures earlier. We will post a more detailed analysis of the BLS employment report by noon today. We will also discuss the manufacturing ISM report for May which is due out in about 9 minutes.