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.

More Bad Economic News ... QE3 More Realistic?

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

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

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

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

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

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

ADP, Initial Claims, and Q1 GDP Miss Expectations

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

ADP

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

Initial Jobless Claims

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

Q1 GDP

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

 

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

Disappointing May '12 Challenger Job Cuts Report

The May '12 Challenger job cuts report was disappointing. 

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

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

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

NFP Estimate & an Update ...

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The FB IPO Debacle

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

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



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

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

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

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

Better Housing ... Worse Manufacturing

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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