Vacation

By David B. Armstrong, CFA | May 05, 2014 | Weekly Market Commentary

I decided to take some time off last week and that included a vacation from writing the blog.  Of course, while I was on vacation and not blogging, there was an article written about me and this “Off The Wall” Blog that appeared in today’s print and online edition of Investor’s Business Daily. I’ve added the link inside along with some thoughts on the market and economic data that has been released over the past week.  Come on in!

I feel a lot of pressure to write a good blog after this came out.

Oh, so the Dow Jones Industrial Average closed at an all-time high last week.  Just in case you have been ignoring the markets…and who would blame you…I mean most DVR’s are chocked full of Mad Men and Game of Thrones.

First, let’s review our standard charts below to bring you up to speed on how we fared over the trading week.

Economic Data

The first quarter Gross Domestic Product (GDP) was released.  This is the broadest measure of the economy and it slowed from 2.6% annualized pace in the fourth quarter of 2013 to 0.1% in the fourth quarter of 2014.  This was well shy of the estimated 1.1% estimate. Looks like winter took a bite out of economic activity, but it’s important to remember that this report looks at the economy from January through March…and we are now in May.  Since this is the first report for the first quarter, I suspect it will be adjusted higher when they publish a revision (which they will do a few times).

Both ISM Manufacturing and Non-Manufacturing (Services) reports have been released.

ISM Manufacturing came in at 54.9 vs the 54.3 that was expected, so that was a little bit better than analysts thought it would be.  It was the best reading of the year though, so that’s a good sign.

ISM Non-Manufacturing was reported today and came in at 55.2 vs. the 54.1 that was expected. That was an increase from the April reading of 53.1.  Remember, when these reports have a reading of greater than 50, it signals expansion.  So obviously readings above 50 and those that are reporting higher than the previous month are good signs.  In fact, the monthly ISM Non-Manufacturing report was the 52^nd straight month that this reading was above 50.

Employment

288,000 new jobs were created in April, when the expectation was for only 218,000.  What’s good about that is we are a mere 113,000 new jobs away from the all-time high set in early 2008.  See the below chart below from Bespoke.

In addition, the unemployment rate moved from 6.7% down to 6.3%, but a lot of this drop is explained by the big drop in overall labor.  In the chart below, note the massive blue line to the downside on the very right. It’s due to a mixture of out of work Americans giving up on the job search and baby boomers retiring. I know it seems dumb, but according to the official definition of unemployment, if you are not working and choose to put your job search on hold, you are not counted in the official unemployment rate.  The unofficial definition is “too pissed to even look for a job anymore.”  You can look that up on the internet.

 

Then there is this graph, below.  This shows that while the number is getting better, there are still A LOT of people who are considered long-term unemployed as a percentage of total unemployment.  This is not that great because while the headline unemployment is what a lot of people (politicians) like to look at, we still have a lot of people who can’t find a job.  And with the way technology changes in the work place, a year out of work can have a devastating effect on a person’s ability to find a new job.  So there are still some serious systemic problems in the overall labor market.

 

 

Earnings

We follow Bespoke Investment Group for earnings research.  According to them, over 1,500 companies have reported their earnings and revenue for the first quarter of 2014 and we are closing in on the end of the reporting season (mid-May). Here’s where we stand:

• The percentage of companies beating their revenue estimates for the first quarter of 2014 currently sits at 56.4%. This number is well below the average of 60% we’ve seen since 2001 and nowhere NEAR the 63.8% that finished up the fourth quarter of 2013.  Of course, the earnings reports are not all through yet, but that sure would be a big move from 56.4% up to 63.8%.

• The percentage of companies beating their earnings estimates stands at 60%, which is a tad off the 61.9% final reading from the fourth quarter.

They also publish a chart that shows the spread between companies guiding future earnings higher or lower on a percentage basis.  Up to this quarter, the spread has been negative for the TEN previous quarters, meaning that there are more companies stating they will earn less in the upcoming quarter than the same quarter a year prior.

As of Friday, the spread between companies posting negative guidance vs. companies posting positive guidance stands at +0.1%. That means, depending on this week, it is possible we could see this reading turn positive for the first quarter out of the last eleven quarters.

Otherwise, it could be eleven straight times in a row.

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