The Nonfarm Payrolls for January were not too hot and not too cold but just right to keep the Fed in play.
The Nonfarm Payroll report showed the economy added +157,000 jobs in January. That compares to the estimate for a +155,000 job gain. So what is the big deal? There are two key points. The first is that the unemployment rate ROSE to 7.9% as more people started looking for work after the holidays. That will ensure the Fed continues writing $85 billion in QE checks every month until the unemployment declines to 6.5%.
The second point was a massive revision to the gains in the prior months. As a result of the annual benchmark revisions made every January it appears the economy added +647,000 more jobs than previously reported.
Every month the Bureau of Labor Statistics revises the payroll numbers from the prior months. Sometimes they are up and sometimes they are down. Every January they do what they call a benchmark revision and adjust the numbers for the entire year. I only went back six months in the table below but you can get the idea how the revisions progress. For instance August rose from the initial release at 96,000 to a final revision at 165,000. November shot up from 146,000 to 247,000 as a result of hiring for reconstruction after hurricane Sandy.
The monthly revisions are the reason most analysts don't get excited about the initial numbers on the first Friday of every month. The benchmark revision added 697,000 jobs for the year. The early months saw numbers increase while summer months saw the numbers decrease.
The big worries over the fiscal cliff in December did not translate into a lack of hiring with the latest revision showing a gain of +196,000 jobs. The January gain of +157,000 is likely to be revised higher in February and could move closer to the 200,000 level. However, jobless claims spiked last week to 368,000 and a three week high. Analysts speculate that employers have made decisions about payroll reductions ahead of the Obamacare rules and we could see some further decline in employment. However, the economy seems stubbornly resilient and more people began job hunting and that could offset the Obamacare declines.
Private payrolls increased by 166,000 in January with 28,000 of those in the construction sector. That was due primarily to home building and Sandy reconstruction. Manufacturing added 4,000 primarily in the auto sector. The government sector lost 9,000 jobs and will likely continue to lose as the spending cuts take hold and the sequestration hits on March 1st. Analysts expect the average job gains for the first six months of 2013 to be 150,000 per month.
The unemployment rate rose +0.1% to 7.9% because 143,000 people returned to the job market. The labor force participation rate remained unchanged at 63.6% or 155.654 million. The U6 rate for unemployed and underemployed remained at 14.4% or roughly 22.4 million people. Over the last year those "not in the labor force" rose by 1,095,000. Over the last four years that number has risen by nearly 8 million. Since January 1st 2009 there have only been less than 250,000 net new jobs. More people are leaving the work force than are being hired. This trend has got to change or the long term outlook for the economy is exceedingly dire.
Friday was a great day for economic reports with multiple high profile events with a positive result. The ISM Manufacturing Index came in at 53.1 compared to 50.7 in December and estimates for 50.5. While this was a bullish number it was powered mostly by inventories and historically that is a January factor. Moody's said rising inventories have boosted the January ISM all but two years since 2000. This has boosted the ISM by an average of 1.7 points every January for the last five years.
New orders did rise slightly from 49.7 to 53.3. Unfortunately backorders declined from 48.5 to 47.5 and that was the eighth consecutive month in contraction territory. Employment rose from 51.9 to 54.0 and that suggests there are plans to increase hiring.
Manufacturing activity did improve but it was a minor improvement consistent with an economy a stall speed.
Construction Spending for December rose +0.9% compared to a decline of -0.3% in November and expectations for a +0.6% gain. The gains were due to an increase in private residential and nonresidential spending. Government spending is slowing and that is also evident in state and local governments as well as Federal. Residential spending rose +2.2% while government spending declined -1.4%. The total spent was $885 billion.
The final Consumer Sentiment for January rebounded from the initial reading of 71.3 to 73.8. The gain came from an uptick in the expectations component from 63.8 to 66.6. That was probably due to the postponement of the debt ceiling fight until May and a couple weeks without any material battles in Washington.
The present conditions component declined from 87.0 to 85.0. That was a response to the return of the payroll tax. Consumers suddenly found their paychecks a little smaller while gasoline prices are rising. Over the last two weeks gasoline futures have risen about 35 cents a gallon and retail prices by about 50 cents. That makes a tank of gas about $65 and that is about how much the average two-week paycheck declined. Consumers lost the equivalent of two tanks of gas due to the returning tax. The price of gasoline is the highest ever for this time of year.
The tax should continue to weigh on sentiment but the market over 14,000 and associated headlines could be bullish for sentiment.
Consumer Sentiment Chart
Vehicle sales for January came in at an annualized rate of 15.3 million. This was just slightly below the 15.4 million rate for December but was in line with expectations. Sales were up +10% over the year ago levels. That headline number was made up of 7.9 million cars and 7.4 million trucks/suvs.
There is still plenty of pent up demand. Polk claims the average age of cars in the USA is 11 years. More than 20% are older than 16 years. They estimate more than two million leases expire in 2013. Analysts expect sales to end 2013 near the 16.0 million level.
It was a great sales month for most manufacturers. Leading the pack was Toyota with a +26.7% sales jump. Following Toyota was Ford +21.8%, Chrysler +16.4%, GM +15.9%, Honda +12.8% and Hyundai +2.6%. Nissan was flat.
The economic calendar for next week is light on important reports. The only two worth mentioning are the Factory Orders and ISM nonmanufacturing. Neither will move the market. The big reports were last week and they helped lift the Dow to 14,000. What happens next week without any major releases could be a disappointment.
The news driving the market next week will be earnings with 17% of the S&P 500 reporting. Most of the blue chips have already reported but there are still a lot of names that draw investor attention. Hartford, Yum Brands and Humana are the leaders for Monday. Disney, the Chicago Mercantile Exchange, Expedia and Automatic Data processing will be the most watched on Tuesday.
The major earnings for Friday were MRK, IR, CVX and XOM. Merck (MRK) reported earnings of 83 cents that beat estimates by 2 cents and revenues declined by -5% to $11.74 billion. They also warned they were putting off seeking approval for a high profile osteoporosis drug until 2014. Shares of the Dow component declined -3% to $42.
Ingersoll Rand (IR) reported earnings of 76 cents compared to estimates of 71 cents. Revenue was flat at $3.51 billion. The company guided in line with analyst estimates for the full year and the CEO said he expected economic growth to be flat. Despite the lackluster guidance the shares of IR rallied +2% to a new 52-week high.
Ingersoll Rand Chart
Exxon (XOM) reported earnings of $9.95 billion and a five year high. Full year profits rose to $44.88 billion and only $340 million short of their record set in 2008. Exxon's refining division earned $1.77 billion in Q4 and almost four times the $425 million they earned in Q4-2011. Exxon processed 4.837 mbpd, a -7.9% decline from 2011. The big surge in profits came from using cheaper shale oil at a discount to the imported oil that is indexed to Brent prices. Exxon said oil production fell -5.2% to 4.293 mbpd due to depletion, mechanical and political issues. Exxon shares finished flat on the day.
Chevron (CVX) posted a 41% rise in profits to $7.2 billion on revenue of $60.6 billion compared to $5.1 billion on revenue of $60 billion in the year ago quarter. This was a record quarter. Their full year earnings of $26.2 billion was their second best ever. Chevron earned $3.70 per share but that included a $1.4 billion gain for an asset exchange. The company did not split out the impact on a per share basis. One analyst speculated it was worth 72 cents and that would have seen them missing estimates by 8 cents but that was a back of the napkin calculation.
Chevron's production rose from 2.5 mbpd to 2.67 mbpd in Q4. Chevron is suffering from the closure of a 60,000 bpd field offshore Brazil. There was a spill last year and the Brazilian government has not yet given them permission to restart the field. Chevron produced 462,000 bpd in the US and received an average of $91 per barrel. Overseas Chevron received an average of $100 per barrel.
Chevron also suffered a two month outage at the Richmond California refinery after a fire damaged the processing unit. Chevron's refinery production declined -75,000 bpd until the unit was repaired. That caused gasoline prices in California to reach record levels on a temporary basis.
Earnings have been positive with 73% of the S&P companies reported beating on earnings. Just over 63% have beaten on revenue. Only about 49% have raised guidance. Earnings are showing about +3.7% growth but that should decline now that all the major blue chips have already reported. The end of the cycle typically drags down the numbers.
This mediocre guidance and minimal earnings and revenue growth are casting a lot of doubt on the expectations for future quarters. Currently Q3 earnings are expected to surge +10.3% followed by a +16.7% spike in Q4. Revenue growth is expected to rise +3%. However, with the economy currently running at stall speed, consumers cutting back on spending because of tax hikes and rising fuel prices and the Fed warning of continued downside risks, I don't see these earnings estimates coming to pass. Sooner or later analysts are going to have to cut estimates by a lot and this will be market negative.
The economics may have picked up a little in Friday's reports but over the last couple of weeks the trend has been lower. The continued FOMC commitment and the lack of material economic growth are keeping pressure on the dollar. The dollar index declined to four-month lows on Friday before rebounding slightly from support. The drop in the dollar helped support commodities and equities. If the 79 level breaks on the dollar index we should see another sharp spike in commodities.
The euro has broken out to a new 52-week high because Europe did not self destruct. Greece is going to stay in the eurozone. Spain is no longer on suicide watch. Multiple countries are in recession but it is mild. Citizens are taking their money out from under their mattresses and putting it back into banks. Banks are paying off their three year LTRO crisis loans early. Suddenly Europe is looking better than it has in years.
Dollar Index Chart
The yield on the ten-year treasury dropped sharply on the jobs report but immediately rebounded as investors took advantage of the spike in treasuries to sell. The 2% level is considered to be significant resistance and a move over that level should produce a higher volume of selling.
Several fund managers stressed late in the week that the majority of cash going into the equity market is not coming out of bonds. Bill Gross at Pimco said they had $20 billion in new money come into their bond funds over the last month. Gross and others believe the cash going into equities is coming from money markets and bank accounts. These analysts believe the end of the crisis insurance on bank accounts is forcing investors to do something with their excess cash.
Even if Gross does not believe treasuries are being sold we have evidence to the contrary with the yields rising. Obviously Gross is talking his book and is probably trying to slow the outflow of funds from his trillion dollar bond fund. He may have received $20 billion in new funds but he did not say how much in old funds were withdrawn.
Ten-year Yield Chart
I am surprised the market was not more reactive to the violence overseas. The U.S. embassy in Ankara, Turkey was hit by a suicide bomber that killed one person and injured another. The heightened security measures appeared to have worked and the bomber could not gain access to the embassy and blew himself up when he could not get through the security checkpoint.
In Egypt there was continued violence and various worker strikes with mor ethan 75 dead. The shipping though the Suez Canal is being handled by the Egyptian military after workers walked off their jobs in sympathy with the protestors. Some ships were not able to leave port because of problems related to the walkouts.
Israel was reportedly considering further airstrikes on Syria and Lebanon to prevent weapons from being moved into Lebanon from Syria. Israel moved up another battery of its Iron Dome protective missile system to protect against earlier missiles that had been smuggled into Lebanon. Syria has warned Israel it will retaliate if attacked again. Iran repeated the warning that an attack on Syria is an attack on Iran and will be punished.
Israel said Syria would not be able to counter attack. "Syria is weak, they are in distress. Hezbollah is in distress. The entire axis of evil is coming apart." The first attack by Israel was on a convoy trucking Russian missiles from Syria into Lebanon. The second attack by Israel was on a base for "nonconventional weapons" and lasted 4-5 hours. Syria was unable to stop it.
Hillary Clinton warned on Friday that Iran was increasing the number and quality of weapons it is supplying to Syria and Hezbollah. "We know that the Iranians are 'all in' for Assad" and keeping him in power "is one of their highest priorities." Clinton also said "We have reason to believe that Russia, like Iran, is providing financial assistance and military equipment to Assad."
The potential for an Israeli, Syrian, Iranian, Russian, Hezbollah wildfire to breakout at any moment is supporting oil prices but I am surprised it is not weighing on the equity market. These tensions could actually be supporting the bond market.
There is nothing weighing on Google. Shares of the Internet giant soared +2.6% to a record high of $776 at the close on Friday. Google posted profits of $10.65 last week that beat estimates of $10.50. Shares spiked to $750 on the news and then moved sideways for a week before spiking on Friday. Google has a 75% share of the search market and a 53% share of the advertising market compared to 8% for Facebook.
Apple shares declined again on Friday but it was only a minor dip. Shares of Apple had stalled at $460 after rebounding from a dip to $435. We need Apple to heal and investors to return to the stock if the Nasdaq rally is going to stick. Google was the support on Friday but if Apple does not resume its uptrend soon the tech rally will stall.
Equity fund flows in January were the best since 1996. The Investment Company Institute (ICI) reported that long-term funds, which exclude money-market vehicles, attracted a record $64.8 billion in the first three weeks of January. The previous record was $52.6 billion in May of 2009. Getting past the fiscal cliff removed a lot of investor worries. Many had cashed out positions in December to take advantage of favorable tax rates. There were also tens of billions in special dividends paid in December for the same reason. Those funds were put back to work in early January.
There is a story making the rounds that UBS is about to send a mass mailing to many of its brokerage clients telling them they have been reclassified as "aggressive" investors because of a change in market outlook by UBS. In late January UBS changed its "strategic asset allocation guidelines," the parameters used to classify its brokerage clients depending on their mix of stocks, bonds and other investments in their portfolio.
According to brokers inside UBS the new guidelines reflect a growing belief that the bull market in bonds has run its course. Investors that constructed a "conservative" portfolio in bonds over the last several years could now be reclassified as aggressive. Some believe this is a tactic by UBS to protect themselves from future suits by investors holding large bond portfolios. When the bubble finally bursts it is going to be ugly. Since December 2007 investors have put $1.1 trillion into bond mutual funds and bond ETFs. That is 33 times more than they put into equities over the same period.
Mike Ryan, the chief investment strategist for UBS, said the "non-consent" letters will be sent to investors in the coming weeks. He says it is not directly a result of the future of the bond market but rather UBS changing its long term view of what could be a volatile market.
At some point in the next 12-18 months the Fed will have to change its monetary policy and allow rates to rise simply because it can't continue its QE programs forever. The bond bubble may not be bursting but there may be a slow leak developing. A QE halt by the Fed would be the equivalent of a sharp pin for that bubble.
We have had the Internet bubble with the S&P at 1,520. In the credit/housing bubble the S&P rose to 1,560. You could now say we are in a stimulus bubble with the S&P at 1,515. The S&P is at the same place today as it was when the Internet bubble burst in 2000. During each of those prior bubbles analysts and commentators were proclaiming right up until the last minute how it was different this time and the market bullishness could continue well into the future. The stimulus bubble will burst. It is only a matter of time.
There is no good reason not to invest in equities since bonds are returning almost nothing after allowing for inflation. With many of the central banks currently involved in some form of QE the risk of future inflation is off the scale. Stocks and commodities are hedges against that inflation while bonds are the investment to avoid. With the investing public so heavily invested in bonds there is a massive asset rotation in our future. It could be in two months or two years ahead but it is coming.
The Fed has NEVER been able to unwind an accommodative policy without creating inflation. The Fed has NEVER injected this much QE into the economy before. Do the math! It is entirely possible we have NEVER seen an inflation cycle like the one in our future because the other central banks will be trying to unwind their QE at the same time.
Remember, Bernanke testified to Congress in 2007 that the subprime crisis would be contained but losses could be as much as $100 billion. After that statement how much do you trust him to unwind $4 trillion in QE in a calm method?
The interest rate on the ten-year treasury is currently 2%. If the Fed was successful in unwinding what will be $4 trillion in QE by year end without stimulating hyper inflation and the yield went back to a "normal" 4% that would increase the interest rate the government is paying on our $16.5 trillion in debt by $300 billion a year. If the Fed was unsuccessful in avoiding a little inflation and the rate went to 6% that would put the total interest on the debt at $1 trillion a year. It does not take too much imagination to visualize the future when the Fed starts to unwind and the eventual global market reaction to our soaring debt and interest. The bond market vigilantes are powerless today to enforce monetary discipline on the USA because of the $85 billion in QE purchases every month. Once that QE ends they will swoop in and force rates significantly higher. We should enjoy the bull market in equities while it lasts because the latter part of this decade could be ugly.
The decline in Q4 GDP of -0.14% could be a harbinger of things to come. The fed blamed it on the weather and that is entirely possible but we have had weather events before that did not damage GDP that badly. The impact of the tax hikes is expected to reduce GDP by -1.5 points according to the Congressional Budget Office. If the Q4 number was not as much weather related as everyone thought then a -1.5 point hit to Q1 could also cause a negative GDP number and the U.S. is back in a recession. Currently the economy is expected to grow at an anemic 2% for all of 2013. It would not take much to push us back into the negative column if the sequestration occurs as scheduled on March 1st. You can bet the analysts are going to be looking a lot closer at those Q1 economic reports.
The AAII Investor Sentiment Survey declined from the 52.3% bullish reading last week to 48.0% reading as of Jan 30th. That survey ended with the market weakening on Wednesday. It will be interesting to see how next week's survey plays out.
Non-commercial longs in the Russell futures just hit a historic high. Non-commercial means retail investors and a record high should be a red flag of extreme bullish sentiment.
The Volatility Index (VIX) closed at 12.90 on Friday and just above the five year low set the prior week at 12.30. This is a clear warning that bullish sentiment is overdone. However, note that in 2005-2006 it stayed below this level for nearly two years. Extreme sentiment can last for months and be extremely frustrating for the opposite side.
Volatility Index Chart
The bears have been capitulating. We are seeing very little shorting of the intraday highs even though market internals have been mixed. Friday was a bullish day with 1,076 new 52-week highs and only 73 new lows. Unfortunately volume remains only mediocre at 6.7 billion shares. You would expect new highs and a triple digit gain by the Dow to have more volume and stronger internals. There were five advancers for every two decliners. That is good but not outstanding.
The S&P had a decent day with a +15 point gain and rebounded from two days of losses that took it back to 1,498 at Thursday's close. That is clear support for next week. The S&P only gained +4 points for the week but it did close at a new five-year high. The S&P still has about 50 points before it reaches the historic high. In this market with January fund flows behind us and the earnings quality expected to deteriorate that could be a challenge.
S&P Chart - Weekly
The Dow rallied +149 points to pull within 155 points of its historic high at 14,164.43. Don't breakout the new high hats just yet. For those who may not have been in the market when the Dow hit 14,000 the first time in October 2007 let me refresh your memory.
Apple had just launched the first iPhone and the stock was trading for $170. Supermodels were demanding payment in euros rather than dollars. Strangely, with the dollar at a four month low and euro a 12 month high today we could see those headlines start to reappear.
Lehman Brothers, born in 1850, was one of the top five investment banks. Homeowners were refinancing their homes using ARM loans on the recommendation of Alan Greenspan and then putting the money in the market. (Betting Your Home Against wall Street)
Bernanke warned that subprime losses could hit $100 billion. The FOMC minutes said the hiccup in the housing sector could remain a drag on growth but inflation was still the greatest concern. The yield on the ten-year treasury was 5.03%. (That would be a disaster today) Gold was $678. Gasoline was $2.25 a gallon. The economy added +166,000 jobs for the biggest gain in five months. Unemployment was 4.5%. GDP growth was +4.92% in Q3-2007. (It fell to +0.58% in Q4 and the Dow fell to 11,600 by January.) Financials were 18% of the S&P.
Is it different this time? GDP growth is negative. Interest rates are 2%. Very few people can get a home loan. Unemployment is 7.9%. Eight million people have left the work force in the last four years. The economy added +157,000 jobs in January, the smallest number in four months. The FOMC said its biggest fear today is deflation. Taxes are going up. Gasoline is $3.45 a gallon and the highest ever for this time of year.
It would appear to me the economy is worse today than what it appeared in Q3-2007. Obviously we know from hindsight that disaster was about to strike. Will we look back on the market today six months from now and wonder why we were so bullish or will the market be significantly higher?
Nobody has the benefit of a crystal ball. However, nearly all the major market forecasters are now bullish. Most of the big hedge fund managers have switched from bearish to bullish bets. There appears to be no bears in sight except for Harry Dent and even he believes the market will go higher before his projected 40% drop.
When everyone stands on the same side of the boat it normally capsizes. Is everyone standing on the same side of the boat today?
Support is 13,850 and resistance would be the high at 14,164.
The Nasdaq finally broke free from the congestion at 3150 and appears on track to test resistance at 3200. That is a twelve-year high dating back to the bursting of the Internet bubble in 2000. To say that should be strong resistance would be an understatement.
GOOG, ISRG and PNRA were major contributors on Friday but there were a lot of Nasdaq stocks with a decent gain so it wasn't just a couple of stocks. Apple declined -1.69 so if anything the rally succeeded because Apple was not down double digits.
There is a heavy tech component to the earnings next week and they are the second and third tier companies and results may not be so outstanding. I would expect trouble at 3200 but as long as there are no major headlines it could be just a pause.
Having the Dow and Nasdaq hitting their historic and twelve year highs respectively could produce some follow on bullish sentiment. However, those levels will be the last stand for the bears. Once out to new highs it becomes harder to mount a concentrated short attack.
Support is now 3140.
I apologize for the economic rambling tonight. I am just having a hard time wrapping my head around a market in breakout mode and investors ignoring the 800-lb debt gorilla. If the economy was actually accelerating I could understand but the numbers are not cooperating.
In the End of Year subscription packet I sent everyone this year I included an authentic $50 Trillion Dollar bill from Zimbabwe and a comparison of their inflation problems with the problems the U.S. is likely to face in the years to come. I have received many emails from readers with stories of amazement when they passed the bill around at the office and among family. I wish I could send one to everyone on our subscription list in the hope it would alert them to the problems ahead. If you subscribed to the EOY send me an email and tell me what happened when you showed the trillion dollar bill to your friends and family.
Don't fight the Fed and the other global central banks.
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"We can't tax our way out, cut our way out or grow our way out of our current debt problem."
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