NEW$ & VIEW$ (6 MAY 2013)

Smile  Job Gains Calm Slump Worries

Nonfarm payrolls rose by 165,000 last month and the jobless rate ticked down to 7.5%, the lowest level since December 2008. The Labor Department also significantly raised hiring estimates for the two prior months, by a combined 114,000 jobs. (…)


The increase in 176,000 private-sector jobs, on top of a loss of 11,000 government jobs, was concentrated in a handful of service industries. The professional and business-services sectors added 73,000 jobs, including 31,000 temporary workers. Manufacturing employment stalled and construction employment contracted after gains earlier in the year.

High five  But, as Markit notes:

So far this year, 783,000 new jobs have been created, comprised of a 813,000 rise in the private sector and a 30,000 drop in government jobs. That compares less favourably with last year, when a 899,000 increase
was seen in the four months to April, buoyed by a 916,000 increase in the private sector.

Sad smile  In reality, after 4 months, the U.S. economy, still on hyper-strong financial heroin, has created 13% fewer jobs than during the same months in 2012.

Americans actually worked less last month because of a 0.2- hour drop in the workweek, resulting in total hours worked dropping 0.4% for the month. The U-6 underemployment rate, which covers folks who are working part-time but want full-time gigs or have stopped looking for work, ticked up to 13.9% from 13.8%, the first rise since last July, Philippa Dunne and Doug Henwood of the Liscio Report note. And in the household survey, some 306,000 joined the ranks of the self-employed, more than the total 293,000 overall gain. (Barron’s)

And this from NBF:

Private employment expanded by a consensus-beating 176,000 during the month. The rise, however, was not widespread as only 53.9% of industries increased their headcounts, the lowest proportion in eight
months (the goods sector actually shed 9,000 jobs in April).

The end result is that aggregate hours worked are only up an annualized 0.14% early in Q2, the weakest showing since Q4 2009. As today’s Hot Chart shows, this development is consistent with a significant slowdown in real nonfarm business GDP.


Storm cloud  Spring Swoon Alive and Well in Manufacturing

The manufacturing sector failed to add any jobs last month after a meager 2,000 increase in March payrolls, a black spot on the otherwise rosy jobs report. Those numbers add to other economic data showing that demand for factory goods is falling and the sector is seeing a broad slowdown this spring. And that spring swoon could turn into a summer slide.

(…) with car sales slowing and dealer inventories climbing, the auto industry growth is likely to ease. (…)

Vehicle sales peaked in November and have fallen in four of the past five months but auto production continued at double-digit year-on-year rates through March, he said. That disconnect could result in longer summer shutdowns or slow down at some factories, robbing manufacturing of one of its growth engines.

If the auto sector is starting to sputter, the defense industry has stalled. Military factory orders plunged 34% in March, the month across-board-government cuts backs known as the sequester began. Defense spending has been volatile in recent months, but is down 25% from a year ago. (…)

Storm cloud  Factory Orders Fell 4% in March

Demand for U.S. factory goods in March fell 4% to a seasonally adjusted $467.29 billion, the latest evidence that manufacturing sector began to slow during the month.

(…) Orders for long-lasting items, including cars and machinery, fell 5.8%, slightly worse than last week’s initial estimate.

Demand for civilian aircraft and parts fell 48.3% in March. Orders for metals dropped 3.2% and machinery demand eased 0.8%.

Meanwhile, March orders for nondurable products, reported for the first time Friday, fell 2.4%. (…) Petroleum refining fell 7.3% in March, partially reflecting lower prices. Food processing, clothing and chemical production also declined during the month. (…)

Defense capital goods orders fell 34.4% in March, the first month of the so-called sequester.

Outside of defense, factory orders fell 3.5%

Total factory shipments, including durable and nondurable goods, decreased 1% during March, compared with small gains the prior two months, the Commerce Department said. (…)

ISM Services Weaker Than Expected

This was the lowest reading since last July.  Combining both the ISM Manufacturing and Services indices based on their weighting in the overall economy, the ISM for April came in at 52.8 versus last month’s reading of 54.0.


Total retail volume fell 0.1% MoM in March after a 0.2% decline in February. Real retail sales have dropped 0.4% since September 2012. Core sales volume slumped 0.5% in March, following a 0.7% drop in February. Core sales volume is down 1.0% since September 2012.



This Eurostat data is for March. Markit’s retail PMI released last week said that sales continued to decline at a “sharp rate” in April:


Spanish Jobless Claims Dwindle

The ministry said the number of people filing for jobless benefits fell 0.9% in April from the prior month, to 4.99 million. Although the figures aren’t adjusted for distortions caused by seasonal trends, they show the second-largest fall in joblessness for any April since 2007, before the global financial crisis later that year sparked a deep recession across Europe in 2008 and 2009 from which countries have struggled to recover.

Portugal Unveils Budget Cuts

The prime minister’s plan would cut the number of public employees by 5%, lengthen their workweek and raise the retirement age by a year, to 66.

The plan, which aims to save €4.8 billion ($6.1 billion) through 2015, is certain to face resistance from the Socialist-led opposition and trade unions.

The government has promised to cut its budget deficit to 3% of gross domestic product by 2015, two years later than initially planned and the year Mr. Passos Coelho’s term ends. Last year’s deficit was 6.4%.

Party smile  France Says Austerity Over on Germany Flexibility


French Finance Minister Pierre Moscovici declared the era of austerity over after his German counterpart offered flexibility on deficit cutting amid renewed bickering between Europe’s two biggest economies. (…)

Moscovici’s declaration amounts to an acknowledgment that France will avoid a sanction for missing 2012 budget-deficit targets and for failing to reach the European Union ceiling of 3 percent of GDP this year. The shortfall will amount to 3.9 percent of GDP this year and 4.2 percent next year with no policy change, the commission said.

There is a “certain flexibility” in allowing France, as well as Spain, to meet its deficit targets, Schaeuble told the Bild am Sonntag newspaper in an interview published yesterday. “This comes with clear conditions for the necessary reforms. The commission will make concrete proposals by the end of May which then will be discussed and decided upon among the euro area finance ministers.” (…)

Indonesian growth slips to two-year low  Domestic consumption helps keep growth above 6%

(…) Gross domestic product grew 6 per cent in the first quarter compared with a year earlier, according to government data released on Monday, lower than the 6.1 per cent delivered in the last quarter of 2012.

(…) the breakdown of the GDP data shows that the pace of growth in investment across the economy is starting to slow because of the knock-on effects of lower export commodity prices.

Australia Retail Sales Fall

March retail sales were down 0.4% from February, the Australian Bureau of Statistics reported Monday, whereas economists had expected a 0.1% increase. First-quarter sales, meanwhile, rose by 2.2%—the biggest quarterly gain in six years—as consumers took advantage of heavy price discounts offered by retailers. (…)

Australian retail sales declined toward the end of last year as the mining-dominated economy slowed alongside China, the nation’s biggest trading partner. They rose 1.3% in January and February, though, as house prices and consumer sentiment picked up.


The earnings season is near complete as 84% of the S&P 500 companies have declared Q1 results. The  beat rate computed by S&P is at 69% while the miss rate is at 22.7%.

Q1 earnings are now estimated at $25.78, up from the March 28 estimate of $25.49 but down from last week’s surprising $26.20 number. Nearly 28% of the 97 companies reporting last week missed (vs 21% up to then), including 44% of companies in Consumer staples (vs 14%), IT (21%) and Utilities (33%).

imageIn addition, Factset calculates that 63 S&P 500 companies have issued negative EPS guidance for Q2 2013, while 17 companies have issued positive EPS guidance. While the 79% negative ratio is not much different than that preceding Q1, there is some concern in the fact that 63 companies have guided negatively so far this season compared to 50 at the same stage in Q1, although there have been 17 positive pre-announcements this year, up from 11 last year.

In light of the above, analysts are busy revising their estimates: while Q1 EPS remain 1.1% above their March 28 forecast, current estimates for the next 3 quarters are now 2.5%, 1.7% and 1.0% lower than their March 28 estimates.

imageIn all, EPS (per S&P) are estimated up 6.4% YoY in Q1, +5.3% in Q2, +16.4% in Q3 and +27.3% in Q4 for full years earnings up 13.6% YoY to $109.94. We will see how that evolves in coming weeks…FYI, this chart from S&P shows the incessant decline in 2013 estimates. My experience with estimates is that a good rule of thumb is that yearly estimates are generally 15% too high, meaning that it would be safer to use EPS around $101 for 2013 if you wish to use forward earnings.

For now, trailing earnings should reach $98.36 after Q1, up 1.6% from trailing EPS after Q4’12. Trailing earnings remain within their very narrow $97.40-98.70 range of the last 5 quarters, confirming that earnings have completely stalled since the end of 2011.

Unsurprisingly, this has coincided with a complete flattening of revenues since Q4’12. Q1’13 revenues are estimated up 1.5% YoY but down 0.5% from their Dec. 2011 level. It is, indeed, very difficult to grow earnings when revenues stall. Here’s what Moody’s wrote last week, to be read in the context of deteriorating conditions in the economies of most of the U.S. trading partners:

Slower global expenditures now weigh on US business activity. It may be difficult to appreciably rejuvenate business sales without a rejuvenation of US exports. After slowing from Q1-2011’s 16.3% to Q1-2012’s 6.8%, the yearly increase by US exports eased to merely 2.1% in Q1-2013. The first quarter’s even slower 0.5% yearly rise by US merchandise exports was weighed down by outright declines of -8.0% for sales to the EU and of -8.5% by shipments to Japan.


U.S. exports have declined at a 4.9% annual rate in Q1. Recent PMIs offered little hope on that front.

This is why second half earnings growth projections of more than 20% appear rather heroic at this juncture.

While trailing earnings stalled, equities have roared ahead +21.8% since May 2012. During that period, U.S. inflation has declined from 2.3% to 1.5%. Under the Rule of 20, such a  decline in inflation raises the fair PE by 4.5% (from 17.7 to 18.5). The remaining 17.2% advance in equity values is a re-rating of equity markets from a 27% undervaluation to a 12% undervaluation as of last Friday.


On the above chart, notice how the Rule of 20 Fair Index Value (yellow line) has moved sideways during the last 12 months while the S&P 500 Index (blue) has jumped. Stable earnings and inflation caused the sideway movement in fair value. This is why the Rule of 20 Value (black) has gone up from its May 2012 15.1 reading to its current 17.6.

Fingers crossedSyria Strikes Raise Alarm

Strikes that Syria attributed to Israel hit an area around a research facility near Damascus, raising concerns of a widening conflict


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