TIB Weekly Newsletter “The stock market pulse”
($49.95/month Value)
June 2nd 2008 Edition
Weekly review of the markets
Last week
Last week the market was technically seriously damaged. The little bull run we had was abruptly interrupted. The fact that the Fed indicated further interest cuts were unlikely had a lot to do with it; thus that week’s backdrop was negative.
After holiday Monday, Tuesday the market opened strong but around 10AM, the consumer index came out a little lower than expected and put us back in the bear trend.
In the afternoon Yellen, one of the Fed’s presidents, said that the current measure in place would be sufficient to insure a growing economy while controlling the inflation. At the same time Warren
Buffet predicted a long and nasty recession.. At the end of the day, the markets finish up on the day.
Wednesday the durable goods orders report came out positive just before the open. We were expecting -1.5% and we came in at -0.5%; still negative but much better than expected which gave us a slightly positive open that day.
Oil prices which fell to $126 the day before crawled back to $130.88 which kept the market in negative territory most of the day but a late rally saw the markets close positive... Noteworthy though: The oil price last two closes were its lowest in a the last month… Its first sign of weakness in months!
Thursday once again we had good news when the GDP was revised up from 0.06 to 0.09. The annual number is still under 3% but still out of recession territory. When oil fell to $126 again investors had a goodtime until some profits were taken. Nevertheless we had a third consecutive positive day.
Friday, Personal income and outlays came out lower than expected. This factor is very important since it represents 2/3 of the economic activity… on top of that the inflation expectation increased 3.4%, its highest level cine 1995. Through it all the markets managed to open higher and the earlier close acted as support making the day uneventful and without a clear direction.
This Week
The “take home” message from last week is that the indexes measuring past performances still don’t confirm a recession but consumer sentiment remains low but not overly dramatic.
Technically, last week’s run is still a classic retracement.
So, this week will be quite busy on the economic front but there are mainly two reports to keep an eye out for this week:
First, the ISM reports, ie the manufacturing index, Monday at 10AM and the second is the non-manufacturing Thursday at 10AM.
Second, the Employment situation Friday at 8:30AM.
Watch out for excessive reactions to any bad news this week, in my opinion.
Technically, we can expect sellers to step up at these levels, except maybe for the Nasdaq which is suspected to be resilient to the slowing economy
With Nasdaq I would look out for a possible double top around 2550. If we push through we should be OK but watch for it because t could bounce of it and go North in a hurry…
But, if the oil prices continue to show weakness, we could be in for a nice ride up. But that’s a big IF…
Economic calendar
(Main reports with definitions and expectations)
Monday
Construction Spending
10:00ET
Consensus is 0.6%
Definition
The dollar value of new construction activity on residential, non-residential, and public projects. Data are available in nominal and real (inflation-adjusted) dollars.
Why Do Investors Care?
Construction spending has a direct bearing on stocks, bonds and commodities because it is a part of the economy that is affected by interest rates, business cash flow and even federal
fiscal policy. In a more specific sense, trends in the construction data carry valuable clues for the stocks of home builders and large-scale construction contractors. Commodity
prices such as lumber are also very sensitive to housing industry trends.
Businesses only put money into the construction of new factories or offices when they are confident that demand is strong enough to justify the expansion. The same goes for individuals making the investment in a home.
A portion of construction spending is related to government projects such as education buildings as well a highways and streets. While investors are more concerned with private construction spending, the government projects put money in the hands of laborers who then have more money to spend on goods and services.
That's why construction spending is a good indicator of the economy's momentum.
ISM Mfg Index
10:00ET
Consensus is 48.5%
Definition
The Institute for Supply Management surveys more than 300 manufacturing firms on employment, production, new orders, supplier deliveries, and inventories. A composite diffusion index of national manufacturing conditions is constructed, where readings above (below) 50 percent indicate an expanding (contracting) factory sector. Export orders, import orders, backlog orders and prices paid for raw and unfinished materials are also measured, but these are not included in the overall index. (Institute for Supply Management)
Why Do Investors Care?
Investors need to keep their fingers on the pulse of the economy because it dictates how various types of investments will perform. By tracking economic data such as the ISM
manufacturing index, investors will know what the economic backdrop is for the various markets. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers less rapid growth and is extremely sensitive to whether the economy is growing too quickly and causing potential inflationary pressures.
The ISM manufacturing data give a detailed look at the manufacturing sector, how busy it is and where things are headed.
Since the manufacturing sector is a major source of cyclical variability in the economy, this report has a big influence on the markets. More than one of the ISM sub-indexes provides insight on commodity prices and clues regarding the potential
for developing inflation. The Federal Reserve keeps a close watch on this report that helps it to determine the direction of interest rates when inflation signals are flashing in these data. As a result, the bond market is highly sensitive to this report.
Tuesday
Motor vehicule sales
Consensus is 10.8M
Definition: No need for a definition here right?
Factory Orders
10:00ET
Definition
Factory orders represent the dollar level of new orders for both durable and nondurable goods. This report gives more complete information than the advance durable goods report which is released one or two weeks earlier in the month.
Why Do Investors Care?
Investors want to keep their fingers on the pulse of the economy because it usually dictates how various types of investments will perform. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers more moderate growth which is less likely to cause inflationary pressures.
By tracking economic data like factory orders, investors will know what the economic backdrop is for these markets and their portfolios.
The orders data show how busy factories will be in coming months as manufacturers work to fill those orders. This report provides insight to the demand for not only hard goods such as refrigerators and cars, but nondurables such as cigarettes and apparel. In addition to new orders, analysts monitor unfilled orders, an indicator of the backlog in production. Shipments reveal current sales. Inventories give a handle on the strength of current and future production. All in all, this report tells investors what to expect from the manufacturing sector, a major component of the economy and therefore a major influence on their investments.
Wednesday
ISM Non-Mfg Survey
10:00ET
Consensus is 51.0%
Definition
The non-manufacturing ISM surveys nearly 400 firms from 60 sectors across the United States, including agriculture, mining, construction, transportation, communications, wholesale trade and retail trade. Beginning with the January 2008 report, a new composite index was made public and is now the headline number. It is considered an indicator of the overall economic conditions for the non-manufacturing sector and consists of four equally weighted indexes: business activity, new orders, employment, and supplier deliveries.
Why Do Investors Care?
Investors need to keep their fingers on the pulse of the economy because it dictates how various types of investments
will perform. By tracking economic data like the ISM non-manufacturing survey's business activity index, investors will know what the economic backdrop is for the various markets. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers less rapid growth and is extremely sensitive to whether the economy is growing too quickly-and causing potential inflationary pressures.
The ISM manufacturing index has a long history - dating to the 1940s. This new report (beginning in 1998) was originally not adjusted for seasonal variation, but the ISM has since established seasonally adjusted figures for several of the ISM non-manufacturing components (including the business activity index) since 2002 and a composite index starting in 2008. As a result, the ISM non-manufacturing survey has garnered more attention and is almost as widely followed by financial market participants as its manufacturing cousin.
Thursday
Jobless Claims
8:30ET
Consensus is 374K
Definition
New unemployment claims are compiled weekly to show the number of individuals who filed for unemployment insurance for the first time. An increasing (decreasing) trend suggests a
deteriorating (improving) labor market. The four-week moving average of new claims smoothes out weekly volatility.
Why Do Investors Care?
Jobless claims are an easy way to gauge the strength of the job market. The fewer people filing for unemployment benefits, the more have jobs, and that tells investors a great deal about the economy. Nearly every job comes with an income that gives a household spending power. Spending greases the wheels of the economy and keeps it growing, so a stronger job market generates a healthier economy.
There's a downside to it, though. Unemployment claims, and therefore the number of job seekers, can fall to such a low level that businesses have a tough time finding new workers. They might have to pay overtime wages to current staff, use higher wages to lure people from other jobs, and in general spend more on labor costs because of a shortage of workers. This leads to wage inflation, which is bad news for the stock and bond markets. Federal Reserve officials are always on the look out for inflationary pressures.
By tracking the number of jobless claims, investors can gain a sense of how tight, or how loose, the job market is. If wage inflation threatens, it's a good bet that interest rates will rise, bond and stock prices will fall, and the only investors in a good mood will be the ones who tracked jobless claims and adjusted their portfolios to anticipate these events.
Just remember, the lower the number of unemployment claims, the stronger the job market, and vice versa.
Friday
Employment Situation
8:30ET
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Definition
The employment situation is a set of labor market indicators. The unemployment rate measures the number of unemployed as a percentage of the labor force. Nonfarm payroll employment counts the number of paid employees working part-time or full-time in the nation's business and government establishments. The average workweek reflects the number of hours worked in the nonfarm sector. Average hourly earnings reveal the basic hourly rate for major industries as indicated in nonfarm payrolls. (Bureau of Labor Statistics, U.S. Department of Labor)
Why Do Investors Care?
If ever there was an economic report that can move the markets, this is it! The anticipation on Wall Street each month is palpable, the reactions are dramatic, and the information for investors is invaluable. By digging just a little deeper than the headline unemployment rate, investors can take more strategic control of their portfolio and even take advantage of unique investment opportunities that often arise in the days surrounding this report.
The employment data give the most comprehensive report on how many people are looking for jobs, how many have them, what they're getting paid and how many hours they are working. These numbers are the best way to gauge the current state as well as the future direction of the economy.
Nonfarm payrolls are categorized by sectors. This sector data can go a long way in helping investors determine in which economic sectors they intend to invest.
The employment statistics also provide insight on wage trends, and wage inflation is high on the list of enemies for the Federal Reserve. Fed officials constantly monitor this data watching for even the smallest signs of potential inflationary pressures, even when economic conditions are soggy. If inflation is under control, it is easier for the Fed to maintain a more accommodative monetary policy. If inflation is a problem, the Fed is limited in providing economic stimulus.
By tracking the jobs data, investors can sense the degree of tightness in the job market. If wage inflation threatens, it's a good bet that interest rates will rise; bond and stock prices will fall. No doubt that the only investors in a good mood will be the ones who watched the employment report and adjusted their portfolios to anticipate these events. In contrast, when job
growth is slow or negative, then interest rates are likely to decline - boosting up bond and stock prices in the process.
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