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5/31/2012 1:41 PM
By Charles Payne, CEO & Principal Analyst
The market was poised to rebound today, but a slew of disappointing economic data has derailed the notion of a small bounce. Consequentially, the major indices have violated their respective 200-day moving averages (exponential) and are on the cusp of breaking very important technical support points (on closing basis).
Yesterday we discussed the LTRO, and the irony is the next leg down for the market takes the major indices back to where they were when that massive money injection occurred (December 2011).
The good news is that, if these numbers hold, they could provide an inflection point. I suspect some very late buying ahead of the close.
Then there are headlines coming out of Europe that could shape the rest of the session. Right now scuttlebutt about the IMF preparing a contingency plan for Spain has stock buyers feeling better, although the Dow moving into the plus column first underscores the level of anxiety and desire to be in quality first and foremost.
The market is oversold without a doubt but extraordinarily vulnerable, too. Let's see if these key numbers hold up here.
Employment Heading in the Wrong Direction
By Carlos Guillen
Initial Claims data posted earlier today is beginning to get worrisome, as the result showed an accelerating number of Americans filing for jobless benefits. According to the Labor Department, initial claims during the week ended May 26 totaled 383,000, increasing from the 373,000 revised figure reported for the prior week and landing above the Street's estimate of 368,000. Initial claims numbers had been slowly ramping higher, but now it appears that the number of firings is accelerating, clearly giving investors a warning sign that consumer spending may take a hit during the second quarter, slowing gross domestic (GDP) growth. This can turn into a vicious circle where companies may be reluctant to hire, or may even lay off staff as sales decline, causing higher unemployment and even slower GDP growth.
Also very concerning was that private sector job additions failed to meet expectations. According to ADP, 133,000 private sector jobs were gained during May, lower than the Street's estimate calling for a gain of 157,000 jobs but higher than the 113,000 added jobs in April. The report showed that the weakest job sectors were manufacturing, which lost 2,000 jobs in May, and construction, which lost 1,000 jobs, both experiencing the second month of declines.
Given the strong correlation between ADP's data and that of the Labor Department, ADP's private sector jobs failure to meet expectations today is serving to bring doubt about whether tomorrow's nonfarm jobs gains will be able to meet estimates. So far, nonfarm data has missed the Street's estimates for two consecutive months, only adding 154,000 jobs in March and 115,000 in April. Street expectations for May's nonfarm jobs currently stand at 150,000, but given the poor employment data most recently, the odds are high that estimates will not be met. Moreover, the unemployment rate is also unlikely to tick lower, and may even rise unless more people throw in the towel and move out of the workforce, just like what occurred in April.
Employment Looks Shaky, Producers Feeling the Heat
By David Urani
The disappointment of the day comes from the Chicago PMI manufacturing index, which posted the lowest reading since September 2009. At 52.7, it was well below the 56.1 consensus estimate. The result included new orders and production figures that were also the worst since September 2009.
Comments from survey respondents show a picture of uncertainty about the global economy as well as in pricing. One comment simply states "slowing down," while another says "A decrease in order intake and backlog over the past three months has caused our first workforce reductions since the Carter years."
And speaking of layoffs, Challenger, Gray and Christmas' monthly layoff report showed a big increase in May, to 61,887 from 40,559 in April. That's the highest amount of layoffs since September. Year to date, job cut announcements have been greater than last year in each month except for March, and are up 20% in total.
The weakness can largely be narrowed down to big increases in three industries: computer, transportation and consumer products. Hewlett Packard vaulted computers to the top spot with its big 27,000 layoff announcement earlier this month.
And add to that a month which saw four weeks in a row of increasing jobless claims, and the outlook for tomorrow's big employment report isn't too pretty.
Of course, the ADP report earlier today showed 133,000 job gains for the private sector in May which is isn't disastrous and was even higher than April's 113,000. That being said, it was all in the service sector as goods producers cut jobs on net. Meanwhile, it was small and medium-sized businesses doing the brunt of the hiring.
Yields out of Sync
It's come to my attention that we are at a strange point where yields on treasuries are below those of stock dividends. In fact, approximately 60% of companies in the S&P 500 carry dividend yields greater than that of the 10-year treasury. This almost never happens, and it suggests something is askew; either stocks are undervalued or treasuries are overvalued.
One might say that dividend yields are too high, or that Companies are paying out an exceptionally large amount; after all companies have been sitting on a lot of cash lately. But that doesn't seem to be the case because total S&P dividends per share are right around late 2007 levels, when earnings per share were also similar. Looking at it the other way one might suggest stock prices, then, are too low (given that price is the denominator in the dividend yield). But that doesn't seem to be the case either, because by historical standards, dividend yields are relatively low at 2.08%; the historical average is 4.4%. To me, dividend yields are not out of whack and do not suggest stocks are undervalued. And on that note, it is the treasuries that are looking overvalued.
This might be a good time to take advantage of low mortgage or other lending rates, and perhaps to look out for a falling dollar as well as it's been trading largely in sync with treasuries for the last month.
|Charles, this doesn't bode well - hopefully it turns around|
David Intintola on 5/31/2012 6:07:30 PM
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