Old Gorrila New Gorrila

david —  November 13, 2013

Going 519 days without a big stumble is rare, but not unprecedented, says Bespoke Investment Group. The market trekked 1,153 trading days without a correction from March 2003 to October 2007, and 1,767 sessions from October 1990 to October 1997. We know how those runs ended, but there’s no denying the pull exerted while they lasted. “The current streak would have to extend all the way out to Oct. 1, 2018, to match that record,” notes Bespoke.

-Almanac-Apparently today’s U.S. GDP report, which showed the economy growing at a 2.8% annualized rate, is renewing fears that the Fed will taper bond purchases. Digging into the report, the details don’t seem to support this. It wasn’t consumer spending or business investment that drove growth; it was an increase in inventories. Slowing consumer and business spending does not create more jobs nor does it spark inflation. The Fed has been quite clear that it is not satisfied with the present state of the jobs market and inflation is well below the Fed’s target. Tomorrow, when the job’s report is released, we should have a better idea of whether this 2.8% growth is actually spurring hiring or not.

Sequester cuts, higher payroll taxes, and an improving economy had the U.S. deficit reaching a 5-year low of $680.3 billion in the 12 months ended Sept. 30. For the month, the U.S. posted a $75.1 billion surplus, as advances in employment had revenue climbing 15 percent year-on-year to $301.4 billion – bringing revenue on an annual basis to $2.77 trillion.

The Bureau of Labor Statistics said today that the economy added 204,000 jobs in the month. Economists had expected 120,000, and worried that uncertainty in Washington, D.C., would hold back hiring.

The other event of the day, arguably more significant, was a rate cut by the European Central Bank (ECB). It cut its main rate from 0.5% to 0.25%, a new record low in response to euro zone inflation that fell to an annualized 0.7% last month, well below the 2% target. The cut had an immediate and sizable effect on the Euro and the U.S. dollar. The Euro sank and the dollar surged. Should the U.S. dollar reverse its current trend and head higher, inflation is likely to head even lower. If anything, the details of today’s GDP report and the actions taken by the ECB are more likely to spur the Fed to continue QE3 even longer and possible even expand its monthly purchases.

According to Bloomberg, 244 of the SP500 companies have reported earnings.

  • Investors are “over” earnings at this point – most of the “systemically” important companies/industries have reported by now and the big broad themes and trends from CQ3 have been revealed (although that being said the market’s two biggest companies will be reporting in the coming week – XOM and AAPL).
  • 76% of the 244 have beaten St EPS forecasts by an average of 4.88% (that number has been in the 70%s throughout the entire earnings season).
  • Growth – SPX EPS is tracking up 7% and revs are pacing up 3.5% so far.
  • The largest EPS beats have come in materials – 76% of S5MATR firms have exceeded EPS forecasts by an average of 12%.  Some of the upside highlights include AA, FCX, NUE, IP, and DD.  Financials and consumer discretionary also have been exceeding estimates by a large margin (7% and 6%, respectively).  Utilities are the only sector where EPS in aggregate is tracking below the St.
  • As is usually the case, EPS “beats” don’t always translate into upside stock price action and that is especially the case in banks.  BAC “beat” by 36% but the stock is down small since reporting.  GS also “beat” by 17% but that co’s Q was received very poorly on Wall St (in large part b/c of the soft FICC results).
  • On the sales front trends have been more mixed w/only 53% of companies exceeding expectations.
  • Street EPS estimates haven’t changed over the last few weeks.  “Top down” (average of Wall St strategists) is still calling for $109 in ’13 (JPM’s T Lee is $110) and $115 in ’14 (JPM’s T Lee is $120).  The “bottoms up” (aggregate of all individual SP500 company EPS forecasts) is $110.50 and $122.70.
  • Many people are using ~$120 for ’14 and using a 15x or 16x multiple to justify further SPX upside (15x is $1800 and 16x gets to 1920).

Yesterday, the Labor Department reported that nonfarm payrolls (jobs) increased by 148,000 in September. Today’s chart provides some perspective in regards to the US job market. Note how the number of jobs steadily increased from 1961 to 2001 (top chart). During the last economic recovery (i.e. the end of 2001 to the end of 2007), job growth was unable to get back up to its long-term trend (first time since 1961). More recently, the number of nonfarm payrolls has been working its way higher but at a pace that is not fast enough to close the gap on its 1961 to 2001 trend. It is interesting to note that the current number of US jobs recently surpassed its 2001 peak. However, the job market has yet to reach the peak levels obtained back in early 2008.