Eject, Eject, Eject?

By David B. Armstrong, CFA | Aug 04, 2014 | Weekly Market Commentary

Last week I wrote a blog titled “What Goes Down Will Come Up – Over Time”.  Looks like it was a week too early but you should read it anyway because, well, damn it I took the time to write it so that’s why.

Don’t get all freaked out about last week.  I know everyone wants the trees to keep growing to the sky, but pull backs like this happen.  They have to.

Last week the Dow Jones Industrial Average (DJIA) fell over 467 points which equates to about 2.75% while the Standard & Poor’s (S&P) 500 fell a little over 53 points which is right about 2.69%.  That means the S&P 500 is now about 3.15% off from the high set earlier this year.  And when you look into the other sectors of the markets, you can see that everything was down last week and nothing was spared…it was red across the board.

Oh, wait except volatility…which was up.  The Chicago Board of Options Exchange Volatility Index jumped over 34% last week according to Dow Jones.

So we are currently looking at the Dow sitting slightly negative for the year, the S&P 500 up around 4% and the Russell 2000 down almost 4%.  So 2014 is looking pretty flat right now for investors spread across the three most popular indices.  The Russell 3000 index is comprised of 99% of all the stocks in the U.S.  The chart below from Bespoke (what would my weekly blog be without a hat tip to them) shows that 33% of all stocks in the Russell 3000 are down 10% or more over the past month.

GDP in the second quarter of 2014 expanded at an annualized pace of 4.0% following a -2.1% decline in the first quarter…revised up from -2.9%.

Ford F150 Truck sales are up YTD through July.  This is good – only a small percentage of people buy F150’s to just cruise around in for looks and Beast Mode Cowboy antics.  The rest use them as actual functioning work vehicles to haul pipes, lumber, tools, compressors, dirt and other building stuff…not golf clubs or Tumi luggage.  So it’s a good economic indicator.

(Bespoke)

Employment

Last Friday, the Bureau of Labor Statistics reported that nonfarm payrolls grew by 209,000 in July, the sixth-consecutive increase north of 200,000. That hasn’t happened since 1997.  The report included in the release what is called “average hourly earnings” and it was unchanged in July and is up a poopy 2.0% versus one year ago.

Here’s a chart of the poopy-ness and it indicates wage growth has been weak and the rate is showing no signs of accelerating. If that’s the case, it means that there is still plenty of slack in the labor force, and the Fed can be patient with its low-rate policy.

BUT….

On the other hand, a more comprehensive gauge of labor costs released last Thursday may be suggesting otherwise. The Employment Cost Index, which takes into account benefits, jumped 0.7% in the second quarter, its biggest one-quarter rise since 2008 – see below.

In theory, a large supply of labor would likely give employers leverage over current and potential employees. It’s all about supply and demand – if the supply of labor exceeds demand, then businesses don’t have to offer much in the way of wage concessions.  But if the available pool of labor is shrinking, then we should see upward pressure on wages and benefits.  This then plays into inflation fears.

Earnings

We follow Bespoke Investment Group for earnings research.  So far 1,492 companies have reported their earnings and revenue for the second quarter (2Q) of 2014 with 800 of them reporting just last week.

Here’s where we stand:

• The percentage of companies beating their revenue estimates for the 2Q currently sits at 61.3%. This number is nicely above the average of 60% we’ve seen since 2001 and above the 56.0% that finished up the 1Q of 2014.  Of course, the earnings reports are not close to being complete but that sure would be a big move down from the current reading of 62.3% to the 56% final reading we saw in the 1Q.

• The percentage of companies beating their earnings estimates stands at 61.4%, which is well above the 56.7% final reading from the 1Q 2014 quarter.

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