August Times


“Deep summer is when laziness finds respectability.” – Sam Keen

Yes, August is here again. No, the recent decline isn’t the end of the world, nor its omen, and yes, we will probably get a “silly season” rally anyway in the two or three weeks that run up and into Labor Day weekend. It’s just the way the market likes to be in August – weak in the first part, then a steady rally into September. The volume may be low, but stop complaining and enjoy the weather.

If there was unexpectedly disconcerting news last week, it came from the jobs report and the oil sector. The former was about right on consensus (about 215K), disappointing traders who had hoped that the ADP jobs report two days earlier – only 185K – might signal a disappointing jobs report for July from the government, thus putting a potential September rate increase by the Fed on hold. In the case of the latter, a 25-basis point move by the Fed would have only symbolic value and mean little to nothing for the real economy, but hey, you gotta bet on something. Unfortunately the jobs report wasn’t worse, and oil continues to be weak. When trading the latter, remember that prices are deservedly weak because global demand is weak, but when trading stocks, remember that prices are deservedly high because global demand is fine. It’s easy.

There wasn’t much help last week from corporate earnings. As we wind our way to the end of the quarterly earnings season, 436 of the S&P 500 companies have reported according to FactSet and the “blended” rate (actual plus estimates for the remaining) remains stuck on (-1.0%). There aren’t many companies left to pull the total into the black, but have no fear if it doesn’t drag itself across the finish line – it’ll all get blamed on oil, the dollar, and other special, one-time, it-doesn’t-really-count-this-time factors. We’ll be treated to earnings excluding energy, earnings excluding bad stuff, and specialized versions of “operating” earnings that somehow prove it was all okay.

S&P 500 revenue declines are currently running at (-3.3%) blended, strongly implying a second consecutive quarter of aggregate revenue decline. If we exclude the naughty energy sector, the rate jumps to a booming 1.6% – less than the rate of inflation. Estimated earnings growth for 2015 has now fallen to 1.2%, also less than the rate of inflation, but you just have to exclude the negative sectors. Then things look much better and besides, it’s only reasonable.

Don’t expect to hear talk of weakness from the denizens of the Street. Despite a weak earnings season – it’s the only way to characterize an aggregate loss of 1% with nearly 90% reporting – I keep hearing that earnings were fine. After all, didn’t a lot of companies beat estimates? They usually do of course, the historic rate being about two-thirds, so what’s the problem. One thing you don’t hear a lot of is corporate management talking about great everything is. Some are doing well, but apart from a handful of social media companies stealing page views and ad dollars from their competitors, good news has been spotty and caution rules (though your company, dear stockholder, held up every well. You know, all things considered).

Keep in mind that August is vacation month, particularly in Europe, and while anything can happen, the schedule looks benign. The market is oversold, though not hugely so, and any seven-day losing streak (the Dow Jones industrials) begs for a reversal. We’re done with the Fed until next month, earnings season is almost over, and even FactSet is talking a two-week break. Any further economic weakness might be taken as bullish, used as an excuse (at least in trader minds) for more help from the central banks. And as well all know, the latter can manage the business cycle. Can’t they?

The Economic Beat

The highlight of the week was the jobs report, though as most-watched highlights go it was kind of a bore – one of those rare releases that hit consensus (215,000) right on the nose and held almost nothing new.

The number itself is only a provisional guess, seeing as the actual job count (estimated) doesn’t go up in July, it goes down, with the end of the first half always seeing a lot of separations and transitions. It’s not as big a drop as the one at year-end, but it’s still substantial – over a million disappear from the estimated count. The adjustments usually work out alright, and the year-on-year comparisons for the actual totals look fine – though the first seven months, the unadjusted job count is up 0.22%, not quite as good as last year’s 0.37%, but a better rate than the years preceding that all the way back to 2006, which was also up 0.22% over the same period.

So beware of sweeping conclusions or hype, like the “unexpected jump” in manufacturing jobs. I don’t know where the extra seasonal boost came from- in 2014, an increase of 8K in the unadjusted July estimate for manufacturing jobs was reported as a 14K increase adjusted, but this year a 1K increase got reported as 15K! – but I suspect difficulty in adjusting for automaker schedules. I have my doubts.

Much data remained unchanged from June or nearly so – the unemployment rate stayed at 5.3%, the participation rate remained at its near-forty year low, the change in hourly earnings went from 2.0% to 2.1%, the U-6 “underemployment” rate went from 10.5% to 10.4%. Some data was on the weakish side – the household survey reported an increase of only 101K, the not-in-labor-force (NILF) category continues to grow at a healthy clip (144K). On the positive side, there were mild revisions to the previous two months for a total gain of 14K, though a gain like that could disappear or double in the next report. In sum, it wasn’t a report of something new and different.

The week led off with news on June personal income and spending, not too much of a surprise with the GDP report the prior week comprising much of the information. Like employment, it’s not much of a leading indicator. The year-on-year growth in real disposable income (annualized, seasonally adjusted) eased to 3%, down from the previous month’s 3.2%, which happens to be the average over the last year. It isn’t a significant change.

The ISM manufacturing survey was supposed to follow income and spending at 10:00 AM, but somehow it got out early; in the end the reading of 52.7 was little changed from the previous month’s 53.5. The growth-contracting score was a reasonable 11-5 and responder comments might be characterized as “modest to moderate,” to borrow a phrase from the Fed. Two days later the non-manufacturing index caused a storm of misreporting when its activity index reported a value of 60.3, a jump from the previous month’s 56.0 and the highest read in 10 years.

It was a good read, to be sure, but does not mean that the non-manufacturing sector is the strongest in ten years, nor does it mean that it’s growing the fastest. It might actually be growing quite slowly, though I don’t think it to be true in this case. It’s a good number, with a good growth-contraction score of 15-2 and positive comments, but it doesn’t measure the depth of improvement. What matters more with these surveys are sustained readings. Last July was nearly as strong and the readings tend to peak in the summer.

Factory orders rose an expected 1.8% in June, the report not containing significant changes from the prior week’s release of durable goods. New orders in aggregate are down 5.9% from 2014 on a year-to-date basis. Construction spending only rose 0.1% in June, but the number is subject to large revisions – the previous month was revised from +0.8% to +1.8%. International trade showed a slightly larger deficit than expected, which will be a small negative for the next revision of the quarter’s GDP estimate. Same-store sales numbers were weak, but the sample is very small; Redbook’s numbers weren’t strong either, but the year-on-year comparison might be concealing a better-looking monthly result. July retail sales are slated to be reported next Thursday, the consensus estimate of 0.5% doesn’t expect weakness.

Over the weekend, China released more weak economic data, showing deepening declines in exports and producer prices. No doubt a stimulus-hope rally will follow, though stimulus to date has done almost nothing for its economy. Next week also includes the latest release on productivity and wholesale trade (Tuesday), the labor turnover (JOLTS) report on Wednesday, import-export prices on Thursday, producer prices on Friday, and the week’s other significant report, industrial production on Friday.

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