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DUCKING AND COVERING FOR TOMORROW'S BOBSHELL (OR DUD?)
By Charles Payne, CEO & Principal Analyst
2/4/2010 1:13:22 PM Eastern Time
Today's Trading Session
By: David Silver, Research Analyst
The market has spent most of the day under pressure as investors are preparing for what tomorrow's jobs report will bring. There were rumbles of up to 100,000 in job creation during the month, but the official expectation is for a gain of 10,000 jobs. This doesn't seem to be supported by the initial jobless claims data which has increased in four of the past five weeks. The dollar is stronger today, but the real hit came from the bank of England which indicated that inflation was beginning to rear its ugly face. Rates were left unchanged but the wording intimated that perhaps a rate hike is in the near future for the United Kingdom. Also pressuring equities today is what the future of highly leveraged economies in Spain and Greece will be like. Will the ECB come to the rescue or will Greece be on its own to lessen its debt load, which now sits at approximately 12% of GDP.
The news out of Toyota (TM) today that the braking system for the Prius is a computer problem has many more ramifications for the company, which reported strong earnings this morning an also guided higher. The Department of Transportation is actively involved in the process which could be a bad thing if this process is run as inefficiently as many other government activities. Until a definite fix is found for the sticky gas pedals and now the brakes, the stock will continue to be under pressure.
The Dollar and Economic Questions
By: David Urani, Research Analyst
Once again, the dollar is on the run upwards which is acting as a sign of relative strength in America, but at the same time is adding fuel to the market meltdown today. And who can blame the dollar for rising after the worries in Europe continue to pile up. The ECB held rates at 1.0%, and the prospect of that rate remaining low for longer is increasing with the likes of Greece, Portugal, and Spain still causing some panic. New developments from that saga today include Spain raising its deficit projection to 9.8% of GDP for 2010 and Greece's biggest union, the GSEE, voting to walk out on February 24 to protest government spending cuts. Consequentially, commodities are largely in the red, including oil down 5.2% and gold down 4.5%.
Dollar Index
We did receive one piece of good news today in factory orders, which increased by 1.0% in December, the fourth monthly increase in a row. It's another report that underscores the idea that manufacturing is getting back online, but as we learned from the fourth quarter GDP report, mere inventory adjustments are definitely playing a huge role. The question people are asking is what the story is in the other parts of the economy. Reports from the service sector, for instance, have been tepid. Tomorrow we might just find out the true story... maybe.
Actually the idea of tomorrow's jobs report giving us a solid conclusive picture of things one way or another is doubtful. As we have found out in the last couple of monthly jobs reports, seasonal adjustments and other factors are putting many cracks in the Labor Bureau's integrity. The VIX volatility index, a.k.a. the "fear index", is spiking ahead of tomorrow's report as confidence in the big economic data is waning, backed up by the disappointment in initial claims readings in recent weeks. Overall though, volatility is still well below year ago levels as there is still underlying confidence in the market that business can continue to improve in the long- term.
VIX
The Action in Retail Stocks Today
By: Brian Sozzi, Research Analyst
Given today's trading activity in retail stocks one would think that January sales took a walk off a short pier and that guidance for 4Q was Debbie Downer-ish. The numbers and guidance were quite the contrary, with most retailers beating comp estimates and offering up stronger outlooks than sell-side estimates. In our view, I think the lack of euphoria by the market today on the sector reflects the following items:
1. There were a diminishing number of earnings raises.
2. For those companies that did raise guidance the magnitude was lower than evidenced earlier in the year. Face the facts, retailers have already trimmed their cost structures significantly, they need sales to drive added upside to consensus forecasts.
3. There is chance that initial 1Q guidance, presented when the sector reports 4Q earnings at the end of this month, will be in line to disappointing (if we receive any guidance at all).
4. Retailers are rebuilding inventory; many are unsure whether this is a good strategy in a tepid consumer recovery
Going into the holidays, we were cautious on retail stocks, harnessing the view that the market priced-in a fair amount of the probable cost savings/low inventory driven upside to EBITDA margin/EPS. The stocks generally traded sideways from November to January. As we enter the important spring and back to school selling seasons, there are opportunities within the sector. One just has to do a deep dive into the numbers and broader trends (or follow our work!).
Will the Unemployment Rate Disappoint Tomorrow?
By: Carlos Guillen, Research Analyst
So far the signs for the unemployment rate are not looking very good. This morning's initial claims result for the week ending January 30 totaled 480,000, which increased from the 472,000 revised number reported for the prior week and landed above the Street's estimate of 455,000. Perhaps this would be considered just noise in the data, but these figures have been trending higher over the last four weeks. In fact, as it can be seen in the chart below, the trailing four-week average, which tends to smooth out some of this noise, has been on the rise. Although the increase is not sharp, the direction is certainly not encouraging at all.
It is also discouraging that, although expectations seem to be favorable for employment, the initial claims results have actually missed the Street's consensus estimate for the last four weeks. We believe the current initial claims level is still extremely high. In our opinion, an initial claims level of less than 400,000 would need to be reached in order to help bring the unemployment rate lower. As it stands, the unemployment rate expectation for January is 10%, which is flat with what was achieved in December. So, given the initial claims figures we've been witnessing, we believe the unemployment rate is likely to disappoint tomorrow.
By Charles Payne, CEO & Principal Analyst
2/4/2010 1:13:22 PM Eastern Time
Today's Trading Session
By: David Silver, Research Analyst
The market has spent most of the day under pressure as investors are preparing for what tomorrow's jobs report will bring. There were rumbles of up to 100,000 in job creation during the month, but the official expectation is for a gain of 10,000 jobs. This doesn't seem to be supported by the initial jobless claims data which has increased in four of the past five weeks. The dollar is stronger today, but the real hit came from the bank of England which indicated that inflation was beginning to rear its ugly face. Rates were left unchanged but the wording intimated that perhaps a rate hike is in the near future for the United Kingdom. Also pressuring equities today is what the future of highly leveraged economies in Spain and Greece will be like. Will the ECB come to the rescue or will Greece be on its own to lessen its debt load, which now sits at approximately 12% of GDP.
The news out of Toyota (TM) today that the braking system for the Prius is a computer problem has many more ramifications for the company, which reported strong earnings this morning an also guided higher. The Department of Transportation is actively involved in the process which could be a bad thing if this process is run as inefficiently as many other government activities. Until a definite fix is found for the sticky gas pedals and now the brakes, the stock will continue to be under pressure.
The Dollar and Economic Questions
By: David Urani, Research Analyst
Once again, the dollar is on the run upwards which is acting as a sign of relative strength in America, but at the same time is adding fuel to the market meltdown today. And who can blame the dollar for rising after the worries in Europe continue to pile up. The ECB held rates at 1.0%, and the prospect of that rate remaining low for longer is increasing with the likes of Greece, Portugal, and Spain still causing some panic. New developments from that saga today include Spain raising its deficit projection to 9.8% of GDP for 2010 and Greece's biggest union, the GSEE, voting to walk out on February 24 to protest government spending cuts. Consequentially, commodities are largely in the red, including oil down 5.2% and gold down 4.5%.
Dollar Index
We did receive one piece of good news today in factory orders, which increased by 1.0% in December, the fourth monthly increase in a row. It's another report that underscores the idea that manufacturing is getting back online, but as we learned from the fourth quarter GDP report, mere inventory adjustments are definitely playing a huge role. The question people are asking is what the story is in the other parts of the economy. Reports from the service sector, for instance, have been tepid. Tomorrow we might just find out the true story... maybe.
Actually the idea of tomorrow's jobs report giving us a solid conclusive picture of things one way or another is doubtful. As we have found out in the last couple of monthly jobs reports, seasonal adjustments and other factors are putting many cracks in the Labor Bureau's integrity. The VIX volatility index, a.k.a. the "fear index", is spiking ahead of tomorrow's report as confidence in the big economic data is waning, backed up by the disappointment in initial claims readings in recent weeks. Overall though, volatility is still well below year ago levels as there is still underlying confidence in the market that business can continue to improve in the long- term.
VIX
The Action in Retail Stocks Today
By: Brian Sozzi, Research Analyst
Given today's trading activity in retail stocks one would think that January sales took a walk off a short pier and that guidance for 4Q was Debbie Downer-ish. The numbers and guidance were quite the contrary, with most retailers beating comp estimates and offering up stronger outlooks than sell-side estimates. In our view, I think the lack of euphoria by the market today on the sector reflects the following items:
1. There were a diminishing number of earnings raises.
2. For those companies that did raise guidance the magnitude was lower than evidenced earlier in the year. Face the facts, retailers have already trimmed their cost structures significantly, they need sales to drive added upside to consensus forecasts.
3. There is chance that initial 1Q guidance, presented when the sector reports 4Q earnings at the end of this month, will be in line to disappointing (if we receive any guidance at all).
4. Retailers are rebuilding inventory; many are unsure whether this is a good strategy in a tepid consumer recovery
Going into the holidays, we were cautious on retail stocks, harnessing the view that the market priced-in a fair amount of the probable cost savings/low inventory driven upside to EBITDA margin/EPS. The stocks generally traded sideways from November to January. As we enter the important spring and back to school selling seasons, there are opportunities within the sector. One just has to do a deep dive into the numbers and broader trends (or follow our work!).
Will the Unemployment Rate Disappoint Tomorrow?
By: Carlos Guillen, Research Analyst
So far the signs for the unemployment rate are not looking very good. This morning's initial claims result for the week ending January 30 totaled 480,000, which increased from the 472,000 revised number reported for the prior week and landed above the Street's estimate of 455,000. Perhaps this would be considered just noise in the data, but these figures have been trending higher over the last four weeks. In fact, as it can be seen in the chart below, the trailing four-week average, which tends to smooth out some of this noise, has been on the rise. Although the increase is not sharp, the direction is certainly not encouraging at all.
It is also discouraging that, although expectations seem to be favorable for employment, the initial claims results have actually missed the Street's consensus estimate for the last four weeks. We believe the current initial claims level is still extremely high. In our opinion, an initial claims level of less than 400,000 would need to be reached in order to help bring the unemployment rate lower. As it stands, the unemployment rate expectation for January is 10%, which is flat with what was achieved in December. So, given the initial claims figures we've been witnessing, we believe the unemployment rate is likely to disappoint tomorrow.
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TAKING IT FOR WHAT IT'S WORTH
By WSS Research Team
2/5/2010 1:41:12 PM Eastern Time
By: Brian Sozzi, Research Analyst
I love the increasing analysis by market mavens usually found post the non-farm payrolls release. In many respects, it's breaking down the data into such minutia that aids in the understanding of what's truly happening in the economy. As the day has progressed, we have learned the survey of households showed employment increased by 541,000 workers last month and the number of people in the labor force rose. If the economy wasn't healing, these types of figures would not be in the mix. Whether the occurrences are being fueled by dollar weakness, easy Fed policy, and inventory de-stocking it's imperative to keep in mind that the healing process is well underway. The ultimate test, of course, is later this year as Keynesian measures mostly will have run their course on the economy. Still, an improvement in labor conditions is an improvement in labor conditions.
Under this emerging scenario, which now appears to have begun in earnest in November 2009, manufacturers have boosted hours. Companies are placing orders for plastics, rubbers, finished goods. Industrial segments with exposure to residential construction and commercial construction in the U.S. and abroad have tepidly returned to buying goods to reignite growth after a year of careful budget allocation. Companies are reinstating 401k matches and incentive compensation, thus supporting consumer confidence and then consumption (Ford even announced a profit sharing plan for its hourly workforce). Our internal data has consumer spending up nicely in the past three months on modest income growth. The rise in equity values has also helped.
If you think that I am making this stuff up, let's hear what corporate America is discussing this earnings season. Note that I have sensed a definitive change in tone by the management teams I converse with, more of a "cautious optimism" than "oh my god the world is ending." And there is good reason for the cautious optimism; sales registers are opening their drawers more frequently and sales representatives are placing orders at a faster clip.
What I am hearing:
Retailers warming up to reorders
Demand in the U.K strong
Demand in Germany and Italy picking back up
Spain still under considerable stress
Increased order flow and visibility into future business trends warranting of increased hours for existing employees and the reinstatement of job perks (cash bonuses, 401k match)
Don't get me wrong, there is a litany of unknowns looking beyond the mid-point of this year. Is the Fed going to be completely unfriendly? Remember, the Bernanke Fed (not to mention Bernanke missed calling the credit meltdown while serving alongside the "Maestro") was quite slow in lowering rates in response to the credit crisis, so their track record is spotty. Will the Obama Administration focus on true pro-growth measures (today it was reported that the President will increase the total value of loans available for small businesses under the SBA to $1 million from $350,000; not sure how much this works as small businesses are very concerned about future healthcare costs and increased taxes on business owners)? Is sovereign debt risk in Spain and Greece, among other countries, about to be Subprime Contagion Part 2? Heck, is it troublesome that Berkshire lost its "AAA" credit rating yesterday that it held since 1989? These are but a few of the many economic questions weighing on the minds of institutional and retail investors, and explains why the market has undergone such volatility relative to the end of 2009. But, unlike the massive sell-off exhibited in the beginning of 2009, the circumstances (insane leverage at financial intuitions and consumers) are rather different, different from the perspective of not being as troublesome.
Toyota Continuing to Slip (pun intended)
By: David Silver, Research Analyst
Toyota (TM) has been in the media's crosshairs for the past two weeks, and in the grand scheme of things, the company has moved with exceptional speed to fix two potentially dangerous situations. The first situation involved nearly eight million vehicles worldwide for a gas pedal problem that could potentially cause the accelerator to stick. That problem takes approximately 30 minutes to fix and most Toyota dealers have indicated they would stay open for 24 hours if need be to fix these issues. The next issue, which apparently has already been fixed, is an electronic braking problem in the Prius. The difference with this problem is that it was in Toyota's background of Japan. The recalls have for the most part excluded vehicles sold in Japan; however, the Prius is built in Japan and was the most popular car there during 2009.
Transportation Secretary Ray LaHood can continue his probe for what Toyota knew and when, but the fact remains, the company moved quickly with respect to identifying the problem, recalling vehicles, and fixing the problem. The icing on the cake for Toyota came this morning when Akio Toyoda actually apologized for the problems. Up until this morning, the only person we have heard from in Toyota regarding the recall has been Jim Lentz (President of the U.S. segment). Toyota's stock has been in freefall this week, and while we don't think it is out of the woods just yet, it should find some support here. The company is still the largest automaker in the world, and this problem is not going to knock it off its top spot. Yes, it gave Ford (F) and General Motors a little ammo and room to take market share in North America, but it will still be a major player, and look for an aggressive marketing campaign and some incentives to get consumers back into the showroom. It would hurt the quarterly results for one quarter, but would regain that coveted market share.
The Employment Situation is Favorable
By: Carlos Guillen, Research Analyst
Today's jobs numbers were certainly a good indication that the overall employment backdrop is heading in a favorable direction. Earlier today the Department of Labor reported an unemployment rate of 9.7%, which decreased from the 10% reached in December and landed nicely lower than the Street's estimate of 10.0%. What is encouraging about this result was that the number of people employed increased quite significantly while those unemployed and those not in the labor force decreased. In essence, the unemployment rate in January was not positively affected by people moving out of the job force.
Even when looking at the darker side of the story, that is including discouraged workers and those underemployed, the numbers still look to be improving. If we include in the unemployment rate calculation "part-time for economic reasons" of 8.3 million and "marginally attached to the labor force" of 2.5 million, we calculate an unemployment rate of 16.5%, which also decreased from last month's figure of 17.3%.
Perhaps a bit disappointing was that non-farm payroll did not meet the Street's expectations. Non-farm payroll employment decreased by 20,000, lower than the Street's estimate calling for a 15,000 increase. Surprisingly, this result came in line with ADP's non-farm jobs number that showed a loss of 22,000 jobs. Nonetheless, as it can be seen in the chart below, it is encouraging to see that the overall trend in non-farm employment changes is positive.
Working hours also improved during January, with the average workweek for production and nonsupervisory workers on private non-farm payrolls increasing by 0.1 hours to 33.3 hours. Moreover, the manufacturing workweek increased by 0.2 hours to 40.8 hours and factory overtime rose by 0.1 hour to 3.5 hours. While these changes are small, they most certainly are heading in the right direction. Although we are not pulling out the champagne bottles, we are giving a sigh of relief.
By WSS Research Team
2/5/2010 1:41:12 PM Eastern Time
By: Brian Sozzi, Research Analyst
I love the increasing analysis by market mavens usually found post the non-farm payrolls release. In many respects, it's breaking down the data into such minutia that aids in the understanding of what's truly happening in the economy. As the day has progressed, we have learned the survey of households showed employment increased by 541,000 workers last month and the number of people in the labor force rose. If the economy wasn't healing, these types of figures would not be in the mix. Whether the occurrences are being fueled by dollar weakness, easy Fed policy, and inventory de-stocking it's imperative to keep in mind that the healing process is well underway. The ultimate test, of course, is later this year as Keynesian measures mostly will have run their course on the economy. Still, an improvement in labor conditions is an improvement in labor conditions.
Under this emerging scenario, which now appears to have begun in earnest in November 2009, manufacturers have boosted hours. Companies are placing orders for plastics, rubbers, finished goods. Industrial segments with exposure to residential construction and commercial construction in the U.S. and abroad have tepidly returned to buying goods to reignite growth after a year of careful budget allocation. Companies are reinstating 401k matches and incentive compensation, thus supporting consumer confidence and then consumption (Ford even announced a profit sharing plan for its hourly workforce). Our internal data has consumer spending up nicely in the past three months on modest income growth. The rise in equity values has also helped.
If you think that I am making this stuff up, let's hear what corporate America is discussing this earnings season. Note that I have sensed a definitive change in tone by the management teams I converse with, more of a "cautious optimism" than "oh my god the world is ending." And there is good reason for the cautious optimism; sales registers are opening their drawers more frequently and sales representatives are placing orders at a faster clip.
What I am hearing:
Retailers warming up to reorders
Demand in the U.K strong
Demand in Germany and Italy picking back up
Spain still under considerable stress
Increased order flow and visibility into future business trends warranting of increased hours for existing employees and the reinstatement of job perks (cash bonuses, 401k match)
Don't get me wrong, there is a litany of unknowns looking beyond the mid-point of this year. Is the Fed going to be completely unfriendly? Remember, the Bernanke Fed (not to mention Bernanke missed calling the credit meltdown while serving alongside the "Maestro") was quite slow in lowering rates in response to the credit crisis, so their track record is spotty. Will the Obama Administration focus on true pro-growth measures (today it was reported that the President will increase the total value of loans available for small businesses under the SBA to $1 million from $350,000; not sure how much this works as small businesses are very concerned about future healthcare costs and increased taxes on business owners)? Is sovereign debt risk in Spain and Greece, among other countries, about to be Subprime Contagion Part 2? Heck, is it troublesome that Berkshire lost its "AAA" credit rating yesterday that it held since 1989? These are but a few of the many economic questions weighing on the minds of institutional and retail investors, and explains why the market has undergone such volatility relative to the end of 2009. But, unlike the massive sell-off exhibited in the beginning of 2009, the circumstances (insane leverage at financial intuitions and consumers) are rather different, different from the perspective of not being as troublesome.
Toyota Continuing to Slip (pun intended)
By: David Silver, Research Analyst
Toyota (TM) has been in the media's crosshairs for the past two weeks, and in the grand scheme of things, the company has moved with exceptional speed to fix two potentially dangerous situations. The first situation involved nearly eight million vehicles worldwide for a gas pedal problem that could potentially cause the accelerator to stick. That problem takes approximately 30 minutes to fix and most Toyota dealers have indicated they would stay open for 24 hours if need be to fix these issues. The next issue, which apparently has already been fixed, is an electronic braking problem in the Prius. The difference with this problem is that it was in Toyota's background of Japan. The recalls have for the most part excluded vehicles sold in Japan; however, the Prius is built in Japan and was the most popular car there during 2009.
Transportation Secretary Ray LaHood can continue his probe for what Toyota knew and when, but the fact remains, the company moved quickly with respect to identifying the problem, recalling vehicles, and fixing the problem. The icing on the cake for Toyota came this morning when Akio Toyoda actually apologized for the problems. Up until this morning, the only person we have heard from in Toyota regarding the recall has been Jim Lentz (President of the U.S. segment). Toyota's stock has been in freefall this week, and while we don't think it is out of the woods just yet, it should find some support here. The company is still the largest automaker in the world, and this problem is not going to knock it off its top spot. Yes, it gave Ford (F) and General Motors a little ammo and room to take market share in North America, but it will still be a major player, and look for an aggressive marketing campaign and some incentives to get consumers back into the showroom. It would hurt the quarterly results for one quarter, but would regain that coveted market share.
The Employment Situation is Favorable
By: Carlos Guillen, Research Analyst
Today's jobs numbers were certainly a good indication that the overall employment backdrop is heading in a favorable direction. Earlier today the Department of Labor reported an unemployment rate of 9.7%, which decreased from the 10% reached in December and landed nicely lower than the Street's estimate of 10.0%. What is encouraging about this result was that the number of people employed increased quite significantly while those unemployed and those not in the labor force decreased. In essence, the unemployment rate in January was not positively affected by people moving out of the job force.