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It's About Jobs, Not Earnings
Earnings season is almost over, and next week just 62 firms report (versus almost 1000 a week not too long ago), including just 1 in the S&P 500. Many on the list are retailers, many of who have fiscal periods that ended in April, not March, or are firms based abroad, which tend to report later. Some of the better known firms reporting this week are Joy Global (JOYG - Analyst Report), Bank of Nova Scotia (BNS - Snapshot Report), Charming Shoppes (CHRS) and Suntech Power (STP - Analyst Report). With the week light on earnings reports, most of the attention will be focused on the economic data coming out, as well as political developments -- most importantly in Europe, but also potentially out of Korea. It will be a very heavy week for data. After the Memorial Day break, traders will get information on Construction Spending on Tuesday, as well as the ISM Manufacturing report. Wednesday brings auto sales data was well as pending home sales. Thursday has the normal weekly initial claims for unemployment insurance as well as the ADP report on job growth, the ISM Service Index, Factory orders and the second look at Productivity and Unit Labor costs in the first quarter. All that is a lead-up to the really big number on Friday -- the monthly job report. Thus, even without a lot of earnings news there will be more than enough to keep the markets from getting bored. Monday * Many barbeques and trips to the beach are scheduled, along with trips to cemeteries to honor those who gave their lives for our freedom. Enjoy your weekend. Tuesday * The ISM Manufacturing Index is expected to show continued growth in May but at a slower pace than in April. The overall index is expected to fall to 58.9 from 60.4. Any reading over 50 indicates that the economy is expanding, and the April reading was exceptionally strong. In addition to the headline number, keep an eye on the sub-indexes, particularly those for output, new orders and employment. * Construction Spending in April is expected to have been unchanged after a 0.2% increase in March. Given the rise in new home starts, the residential side should show a nice increase, but that will be offset by continued weakness on the commercial real estate side. Wednesday * Pending home sales are expected to have increased by 4.35% in April, on top of a 5.30% increase in March. Given the rush by people to get in under the wire to be eligible for the homebuyer tax credit, I would expect this number to come in higher than the consensus is looking for. I would not read too much into an oversized increase, since it is likely to be reversed by a hangover from those pulled forward sales over the next few months. * Auto sales are expected to have increased a bit in May after having fallen back a bit in April. Domestic auto sales are expected to rise to an annual rate of 4.0 million cars, while truck sales are expected to increase to a rate of 4.95 million. The rate for cars is still expected to be below the March rate of 4.3 million. Including imports sales fell to an 11.2 million annual rate in April from 11.8 million in March, but still well above the 10.4 million rate in February. The overall rate should move back to about 11.8 million. That is still an extremely depressed level. For years before the recession hit, we would normally see total vehicle sales in the 15 to 16 million range. The current sales rate is probably well below the rate at which cars are being scrapped, which would mean that demand is still being pent up. Thursday * Weekly initial claims for unemployment insurance come out. They fell 14,000 in the last week, to 460,000. After a huge downtrend from mid-April through the end of 2009, initial claims have become very erratic so far in 2010. Look for them to fall next week. Longer term, we have made good progress, but not good enough. We probably need for weekly claims (and the four week moving average of them) to get down to closer to 400,000 to signal that the economy is adding enough jobs to make a dent in the unemployment rate. We are a lot closer now than we were last spring when they were running north of 640,000 on a consistent basis, but still have a ways to go. * Continuing claims have also been in a steep downtrend of late. However, that is in part due to people simply exhausting their regular state benefits which run out after 26 weeks. If one factors in the extended claims paid by the Federal government as part of the Stimulus program, claims soared last week. Looking at just the regular continuing claims numbers is a serious mistake. They only include a little over half of the unemployed now given the unprecedentedly high duration of unemployment figures. Last week regular continuing claims were 4.607 million, down 49,000 from the previous week. Extended claims (paid from Federal ARRA funds) were 5.339 million, a decline of 3,000. Make sure to look at both sets of numbers! Many of the press reports will not, but we will here at Zacks. * The ADP “appetizer” for the big employment report on Friday is expected to show a gain of 52,000 private sector jobs, up from 32,000 in April. However, in recent months, the ADP numbers have been dramatically undershooting the official BLS figures, even if one corrects for the fact that the ADP report only looks at private sector payrolls. Look at the revisions to previous months data as well as the headline number in considering this report, as well as its breakdown of job growth by small, medium and large firms. * We get the second look at first quarter productivity and unit labor costs. The preliminary productivity number was growth of 3.6% on top of growth of 6.3% in the fourth quarter and 7.8% growth in the third quarter. Combined, that has lead to some of the fastest year-over-year productivity growth since the end of WWII. Over the long term, there is probably nothing more important than productivity, since it is the ultimate source of higher GDP per capita, which is after all what really counts, not just total GDP. In the short term, though, when the country faces high unemployment, the ability to make the same amount of stuff with fewer workers is not great news. Given the downward revision to the first quarter GDP growth number, it is very likely that this number will be revised down as well, even though the consensus is looking for no change. * Unit labor costs are tightly and inversely related to productivity, particularly if companies do not share the benefits of higher productivity with workers through higher wages. In the first reading, unit labor costs were down 1.6% after seeing huge drops of 5.6% in the fourth quarter and 7.6% in the third quarter. The massive plunge in unit labor costs is one of the key reasons that profits have been soaring. The consensus is looking for no change from the initial reading. * Factory orders are expected to have risen 1.0% in April, on top of a 1.3% increase in March. * The ISM services index, which covers a much bigger percentage of the economy than the manufacturing index, but does not have as long or as illustrious history is expected to show that not only did growth continue on the non-manufacturing side of the economy in May, but that it actually accelerated slightly, with a reading or 55.6 expected up from 55.4 in April. Like the manufacturing index, any reading above 50 indicates the economy is expanding. While healthy, the service index has been trailing well behind the manufacturing index in recent months. Friday * Job growth is expected to not only continue, but accelerate sharply in May, with an addition of 500,000 jobs, up from 290,000 jobs in April. However, the bulk of the jobs added will be temporary census workers. While those jobs are better than being unemployed, they will only last for a few months. In March and April, census hiring was well below expectations and there will have to be a big catch up if the government is going to do its constitutionally mandated duty. A better measure to look at will be the number of private sector jobs created, which totaled 225,000 in April. Another important indicator to watch is the number of private sector temporary jobs added, as they are often a precursor to more full time jobs in the future. * The massive 500,000 expected gains in the number of jobs is only expected to put a slight dent in the unemployment rate, which is expected to edge down to just 9.8% from 9.9%. The reason is the better overall job picture is drawing formerly discouraged workers back into the workforce. In addition to the unemployment rate, pay attention to the employment rate, also known as the employment to population ratio. After a huge plunge during the recession and only an anemic increase in the previous recovery, the employment rate has been on the rise for the last four months. * Other important measures in the employment report include average hourly earnings, which are expected to rise by 0.1% after being unchanged in April, and the average work week, which is expected to edge up again to 34.2 hours from 34.1 hours in April. While that additional six minutes a week on average might not sound too significant, it really adds up when you multiply it by the 130.1 million people who are working in the country. A longer average workweek is often a precursor of more full-time jobs ahead. Other things to look for in the report will be the duration of unemployment numbers, which have been simply awful in this downturn and have so far shown no sign of improvement, and the percentage of the unemployed who have been out of work for more than six months. Potential Positive Surprises Historically, the best indicators of firms likely to report positive surprises are a recent history of positive surprises and rising estimates going into the report. The Zacks Rank is also a good indicator of potential surprises. While normally firms that report better-than-expected earnings rise in reaction, that has not been the case so far this quarter. While pickings are getting slim, some of the companies that have these characteristics include: Exide Technology (XIDE) is expected to report EPS of $0.12, up from a loss of $0.11 per share a year ago. Last time out, XIDE posted a positive surprise of 21.1%, and over the last month the mean estimate for its first quarter earnings is up 318.2% (low base). XIDE has a Zacks #1 Rank. Shoe Carnival (SCVL) is expected to post EPS of $0.71 , up from $0.33 a year ago. Last time, SCVL beat expectations by 66.7%, and over the last month analysts have raised their estimates for the about to be reported quarter by 21.4%. SCVL is a Zacks #1 Ranked stock. Potential Negative Surprises SAIC (SAI) is expected to earn of $0.31 a share, up from EPS of $0.29 a year ago. Last time, they reported 3.13% below expectations. For this Zacks #4 Ranked stock, analysts have cut the estimates for this quarter over the last month by 0.2%. Shanda Interactive (SNDA) is expected to earn $0.68 a share this quarter, versus $0.78 a year ago. They were below expectations by 6.02% last time out. Analysts have cut the estimate for this quarter by 1.9% over the last month. The stock holds a Zacks #4 Rank Article Directory: http://www.articledashboard.com Dirk van Dijk, CFA is the Chief Equity Strategist for Zacks.com. With more than 25 years investment experience he has become a popular commentator appearing in the Wall Street Journal and on CNBC. Dirk is also the Editor in charge of the market-beating Zacks Strategic Investor service. For more information, visit www.zacks.com. |
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