Top of the Charts


“To the toppermost of the poppermost, Johnny!” – The Beatles

The tape makes the news. Perhaps the most salient example of this dictum I can show you in this week’s holiday edition of MarketWeek is a story from Reuters that breathlessly speculates in tabloid fashion that double-digit profit growth may return in the second quarter. Best of all, first-quarter earnings growth for the S&P 500 is reported at – wait for it – 5.6% after all!

True journalism at its twenty-something, still-learning-the-business (while working for next to nothing), isn’t-the-stock-market-exciting? best. According to FactSet (which does aggregate earnings reports for its living), S&P 500 earnings growth for the quarter was 2.1%. Zacks (which also specializes in earnings reports) reports it at 1.3%. But the Reuters reporter discovered something else – probably some brokerage report that came up with its own “real” version of “operating earnings,” which shockingly enough were higher than reported ones. Oh well, like the good book says, there is nothing new under the sun.

The Dow finished over 17,000, a new record (the S&P also had its record close), and in the last hour CNBC set its own new record for mentioning how many times the venerable index had broken it. “GDP is wrong and the payroll report is right!” exclaimed MarketWatch.

I was writing months ago that the delayed onset of warm weather would produce some rebound numbers that would surely be accompanied by exaggerated cheering; that moment has come. I also wrote in my first quarter report that a correction would probably come late in the second quarter; that moment has not yet come, thanks principally to lavish promises (or statements interpreted as such) by central bankers.

Don’t be surprised if next week brings this weekend’s parade of triumphant chest-beating to at least a pause. Markets are seriously overbought on a short-term basis, and we are due at minimum for some consolidation action. Estimates for second quarter earnings growth have been tumbling, to 4.9% (FactSet) and 2.9% (Zacks). Given that estimates are rigged to allow a 2%-3% buffer, we should expect earnings growth of about 5%-7%, not all that impressive in view of the fact that the second quarter is the rebound quarter from the Worst Winter Ever (according to the average brokerage house strategist). Early guidance, though, has had a decidedly downward cast.

Does any of that matter? Probably not. Despite protestations to the contrary, this market isn’t running on earnings and hasn’t for ages. It’s moving on momentum and the belief that the central banks won’t let them fail. Shades of 2007.

A Happy Fourth of July long weekend to my U.S. readers!

The Economic Beat

The highlight of the week was the first day of July. Staying true to form, it rallied as it usually does, this time on low volume, but what does that matter when everyone is afraid to sell? The report of the week was the jobs report from the Bureau of Labor Statistics (BLS).

You might have seen some of the headline prints: new jobs with a 288,000 print, and the unemployment rate down to 6.1%. In a curious twist, April and May were revised upward (seasonally adjusted), though the raw data was revised downward. It’s not the first time that’s happened this year, and I can only wonder why.

The good news: June year-on-year growth has a preliminary estimate of plus 1.87%, the best June showing since – oops – 2001. However, it isn’t that much better than last year’s rate of 1.69% and may have been influenced by the weather, so I’m hesitant to draw any broad conclusions. Growth for the first six months (unadjusted) stands at 1.08%, the best showing since 2006. At a seasonally adjusted 6.1%, the unemployment rate is at its lowest since September 2008.

The less-good news included no changes in: average workweek from last month or last year; year-on-year hourly earnings growth (+1.97%); the ultra-low participation rate; the bottom-heavy composition of new jobs – as one asset manager fretted on CNBC Thursday, “we’re becoming a nation of burger-flippers.” Other drawbacks: The outsized proportion of part-time jobs – the number of new “part-time for non-economic reasons” jobs (840K) was double the number of new jobs in the household survey (407K); the year-on-year increase in household employment of 2.15mm lags the increase in the “not in labor force” category of 2.4mm; and the growth in local government employment was a seasonally-adjusted freak (due to the make-up of bad weather days, many schoolteachers had to work past the June 14th cut-off date for sampling) that will be paid back next month.

All in all, much better than a poke in the eye with a sharp stick. But still a rebound number that will have trouble meeting the same bar next month. Incidentally, kudos to ADP, the private sector payroll processor that produced a spot-on estimate of 281K the day before. Having lagged the BLS data this year, I have been wondering when they would rejigger their calculations to fit BLS (which they try to anticipate, not produce a competitor report). Interestingly, ADP did not issue upward revisions for April or May. Kudos as well to the King Report, which produced a good detailed breakdown of the numbers in the wake of their issue.

The two ISM surveys came out during the week, with manufacturing reporting 55.3 (50 is neutral, consensus was 55.6) and non-manufacturing reporting 56.0 (consensus 56.2). Ignore changes of less than a point with these – both readings are decent and virtually identical to the previous month. The HSBC China PMI rose above 50 (50.7) for the first time in months, setting stimulus junkies on fire. The EU PMI was also essentially unchanged at 51.8. The Chicago PMI, which has run noticeably stronger since it was taken over by a stock-exchange operator, eased to 62.6, below consensus but still an elevated reading. Dallas (+11.4, 0 neutral) may have been the only one of these surveys with a June result higher than May – at least higher oil prices (the July 4th national average for gasoline prices is the highest since the “peak oil” craze in 2008) are benefiting one region.

Pending home sales rose 6.1% in what is probably the end of the selling season rebound, as mortgage-purchase applications in June were significantly weaker. Factory orders declined more than expected on the first estimate, while construction spending was up 0.1%, less than expected, though the initial number is typically subject to very large revisions (i.e., April revised from +0.2% to +0.8%). The year-on-year rate slipped to 6.6%.

The European Central Bank did little at its latest meeting but cut back on its meeting schedule. Next week’s economic highlights should be the FOMC minutes on Wednesday, sure to attract extra attention after the jobs report raised questions about whether the Fed might move more quickly to a less-accommodative stance. In that respect, the labor turnover report (JOLTS) on Tuesday bears watching as well. Alcoa (AA) kicks off the earnings season after the close on Tuesday.

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