Waiting for the Jobs Report
DOW + 44 = 16,943
SPX + 6 = 1993
NAS + 4 = 4707
10 Y – .02 = 1.83%
OIL + .05 = 34.71
GOLD + 24.40 = 1264.90
We have a batch of economic reports, so we’ll run through the data and then break down the implications.
The Institute for Supply Management’s non-manufacturing index dropped 0.1 point to 53.4%. Any reading over 50 signals expansion. ISM’s production gauge rose 3.9 points to 57.8%. Growth in the services sector has been expanding at a slower pace for the past four months, and that is now showing up as contraction in service sector employment. Details from the services survey showed the employment index declined to 49.7 from 52.1 in January, indicating companies last month started cutting staff.
The number of Americans who applied for unemployment benefits rose by 6,000 to 278,000 in the last week of February, but the overall pace of layoffs still hovered near post recession lows. The average of new claims over the past four weeks, meanwhile, fell by 1,750 to 270,250 and hit a three-month low. In a separate report, global out placement consultancy Challenger, Gray & Christmas said U.S.-based companies announced 61,599 job cuts last month, down from 75,114 in January. Layoffs remained concentrated in the energy sector. Tomorrow the Labor Department will publish the monthly non-farm payroll report; look for a net gain of 190,000 to 200,000 jobs.
The productivity of U.S. businesses fell at a 2.2% annual pace in the fourth quarter, a smaller decline than previously estimated 3% decline. For all of 2015, productivity rose a meager 0.7%, just one-third as fast as the post-World War II average. In the fourth quarter, output rose a seasonally adjusted 1% in the final three months of 2015 instead of a 0.1% advance. Hourly compensation for all workers, adjusted for inflation, rose 1.1% in the fourth quarter and 2.8% for the full year. It wasn’t so much an increase in wages as lower oil prices kept a lid on inflation.
Orders to U.S. factories increased in January by the most in seven months, while a key category that tracks business investment plans rose by the largest amount in 19 months. Factory orders rose 1.6 percent in January after two months of declines. It was the biggest jump since June, though it was driven by demand in the volatile category of commercial aircraft. At the same time, orders in a core sector that serves as a proxy for business investment rose 3.4 percent, the sharpest one-month gain since June 2014. Orders for durable goods, products meant to last at least three years, rose a revised 4.7% in January, down from prior estimate of a 4.9% gain. Orders for nondurable goods fell 1.4%.
Stocks spent most of the session today in negative territory, before a bit of buying in the final hour. The economic data was mixed; nothing bad, nothing great; the economy appears to be chugging along; we need to wait for the jobs report tomorrow morning because that is always the big report each month, and one of the few reports that can sway the Federal Reserve. A big gain in tomorrow’s jobs report would definitely put a near-term hike back on the table. The S&P 500 has jumped almost 9% from a 22-month low reached in February, though the gains have come with weak volume, signaling a lack of conviction in the rally.
The flippers are back. RealtyTrac reports the total number of investors completing a flip, 110,008, was the highest since 2007. Even so, the average number of flips per investor, 1.63, was at the lowest since 2008. The average gross profit from flipping homes hit a 10-year high of $55,000 in 2015. That represented a return on investment of 45.8%. RealtyTrac defines flipping as selling a property more than once within a 12-month time period to a buyer other than a family member. Flips made up 5.5% of all sales nationwide. In Arizona, flips made up 7.1% of all sales.
More deflationary pressures in the Eurozone are surfacing, raising the chances ECB President Mario Draghi will increase stimulus at a central bank meeting next week. Markit’s composite Purchasing Managers Index fell to 53 from 53.6 in January – its lowest level in 13 months – while the firm’s measure of output prices across manufacturing and services fell further below the key 50 level. Markit says the slowdown in business activity, slower hiring and price declines “suggest that the region’s recovery is losing momentum.”
Latin America’s largest economy shrank the most in a quarter century last year and no recovery is in sight as shriveling demand and political crisis pummel activity. Brazil’s gross domestic product contracted 1.4 percent in the three months ended in December, after a 1.7 percent drop the previous quarter; for 2015 Brazil’s GDP dropped 3.8 percent. Brazilian courts granted more than 5,500 bankruptcy filings in 2015, the most since 2008.
The prolonged recession has made it tougher for the government to shore up its finances. Consumer and investor confidence levels have rebounded this year from record lows, which would normally suggest that the economy is bottoming but there are no real signs of recovery. The Organization for Economic Cooperation and Development forecasts the Brazilian economy to contract 4 percent this year, while the International Monetary Fund sees a 3.5 percent recession. Both forecast stagnation next year, which would mean no growth until 2018.
Oil prices have bottomed, according to the International Energy Agency. The price rally, however, will be capped in the medium term by a potential increase in the U.S. shale oil production once a rise in oil prices makes it profitable again. But prices are expected to grow throughout 2016 and into 2017, unless US shale producers have stronger than expected survivor skills. But other than that, the IEA says oil has bottomed and the price will probably hit $60 a barrel within the next 12 months.
Count hedge funds as among those licking their chops and loading up on energy companies, on a bet that happy days will be here soon for oil. Meanwhile, Blackwell Global says the recent rally above $30 is “largely a dead-cat bounce. Subsequently, expect crude to challenge the downside in the coming weeks, as the screaming hordes of market pundits stop declaring that crude oil’s bullishness is here to stay.” Which all sounds reasonable enough, or you could submit your own guess.
Former Chesapeake Energy CEO Aubrey McClendon died in a car crash yesterday after being indicted for conspiring to rig bids for leases in the oil and natural gas industry. McClendon slammed into an embankment while traveling at a “high rate of speed,” according to the Oklahoma City Police Department, which also said “he pretty much drove straight into the wall.” Chesapeake shares soared 24% on Wednesday and 25% today – not related to the fatal accident – after the company said it did not expect to face criminal prosecution or fines related to the indictment.
Costco posted an 8.7% decline in second-quarter profit, though the warehouse chain’s comparable-store sales increased. Kroger said its earnings rose 7.9% in the latest quarter, though revenue missed expectations and same-store sales growth slowed.
M&A roundup: Cisco has announced a $320 million deal to buy Leaba Semiconductor, an Israeli company that designs networking chips. Samsonite is close to buying luggage maker Tumi Holdings, in a deal that could be valued at $2 billion. MGM Resorts has reached an agreement to sell its Shops at Crystals mall in Las Vegas to a Simon Property Group partnership for $1.1 billion.
There are also vague rumors that PayPal is considering a $47/share offer from American Express. Yahoo is exploring the sale of $1 billion to $3 billion of patents, property and other “non-core assets.” General Electric’s proposed deal to sell its appliance business to China’s Haier Group for $5.4 billion has received approval from U.S. anti-trust authorities.
IBM has filed a lawsuit against Groupon, alleging that the daily deals website operator builds its business model using patents without authorization. “Groupon has refused to engage in any meaningful discussions about reaching a license agreement to end its infringement of IBM’s patents,” the firm’s complaint said. Big Blue filed a similar lawsuit against Priceline last year, accusing it of patent infringement in running its travel and dining websites.
U.S. carriers are set for a dogfight over newly opened flight rights to Havana, but their interest in other Cuban destinations appears to be lukewarm. Airlines had until the close of business on Wednesday to submit applications to the Department of Transportation that outlined the routes they would like to fly. That came after a February agreement paved the way towards restoring commercial air service between the two countries for the first time in decades.
What did they know and when did they know it? Volkswagen disclosed that former executives Martin Winterkorn and Herbert Diess were briefed internally about diesel emissions issues on U.S. vehicles, months before the firm publicly acknowledged its defeat devices. At issue is whether VW management waited too long to inform investors of potential liabilities that would later cause a massive erosion of the company’s share price and market value.
When a company’s stock price falls off a cliff, it’s hard to rally the troops, but it can be done. Case in point: LinkedIn Chief Executive Jeff Weiner is declining his 2016 annual stock compensation (a reported $14 million) in order to pass it on to workers at the professional social network. LinkedIn’s stock had dropped nearly 38% since its disappointing Q4 results on Feb. 4. Weiner isn’t the only one employing the strategy. Back in October, Twitter CEO Jack Dorsey paid out $200 million in stock to employees.