Bulls Employ Strong Labor Report

Charles Schwab: On the Market

Posted: 8/5/2016 4:15 PM ET

Bulls Employ Strong Labor Report

Domestic stocks managed to retain solid session gains on Friday with the S&P 500 finishing at a record-high close in the wake of the stronger-than-expected July U.S. labor report. Treasuries were lower and the U.S. dollar was higher following the jobs data, while additional domestic reports showed that the trade deficit widened and consumer credit expanded by a smaller-than-forecasted figure. Meanwhile, gold was sharply lower and crude oil prices lost modest ground.

The Dow Jones Industrial Average (DJIA) increased 191 points (1.0%) to 18,544, the S&P 500 Index added 19 points (0.9%) to 2,183 and the Nasdaq Composite gained 55 points (1.1%) to 5,221. In moderately-heavy volume, 849 million shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq. WTI crude oil was $0.13 lower at $41.80 per barrel, wholesale gasoline added $0.01 to $1.38 per gallon and the Bloomberg gold spot price fell $24.71 to $1,336.44 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—gained 0.5% to 96.24. Markets were higher for the week, as the DJIA increased 0.6%, the S&P 500 Index ticked 0.4% to the upside and the Nasdaq Composite advanced 1.1%.

Kraft Heinz Co. (KHC $89) reported 2Q earnings per share (EPS) of $0.85, above the FactSet estimate of $0.71, on revenues of $6.8 billion, in line with forecasts. As well, the U.S. food giant upped its dividend by 4.5% to $0.60 per share. Shares finished solidly higher.

Priceline Group Inc. (PCLN $1,414) posted 2Q EPS ex-items of $13.93, well above the $12.67 that the Street was expecting. Revenues increased 12% year-over-year (y/y) to $2.6 billion, which were mostly in line with projections, even though it said it saw softer travel demand in markets affected by recent terrorist attacks, particularly France and Belgium. As well, PCLN said the search for a new Chief Executive Officer continues, and that it will take the time needed to find the right candidate. PCLN was nicely higher.

Weyerhauser Co. (WY $33) announced 2Q earnings ex-items of $0.17 per share, below the expected $0.22, with revenues falling 5.5% y/y to $1.7 billion, versus the estimated $1.9 billion. Despite the miss, shares of WY gained ground.

Monster Beverage Corp. (MNST $163) achieved 2Q earnings of $0.99 per share, below the expected $1.03, on revenues of $827.5 million, which beat analysts' expectations for $804.2 million. The energy drink maker cited continued strength in the U.S. dollar and distributor transitions for the lower-than-expected results. Shares closed higher.

U.S. jobs jump, but unemployment remains steady

Nonfarm payrolls (chart) rose by 255,000 jobs month-over-month (m/m) in July, compared to the Bloomberg forecast of a 180,000 increase. The rise of 287,000 seen in June was upwardly revised to a gain of 292,000 jobs. The total upward revision to job gains in May and June was 18,000. Excluding government hiring and firing, private sector payrolls increased by 217,000, versus the forecasted gain of 171,000, after increasing by 259,000 in June, negatively revised from the 265,000 rise that was initially reported. Gains were seen in professional and business services, healthcare and financial services, while employment in mining continued to trend lower.

The unemployment rate remained at 4.9%, compared to expectations of a decline to 4.8%, while average hourly earnings grew by 0.3% m/m, above projections of a 0.2% increase, and June's 0.1% rise was unadjusted and average weekly hours ticked higher to 34.5 from June's unrevised 34.4 hours where it was expected to remain. Finally, the labor force participation rate increased slightly to 62.8% during July from June's 62.7%.

Consumer credit, released in the final hour of trading, showed consumer borrowing expanded by $12.3 billion during June, falling short of the $16.0 billion forecast of economists polled by Bloomberg, while May's figure was revised lower to $17.9 billion from the initially reported level of $18.6 billion. Non-revolving debt, which includes student loans and loans for vehicles and mobile homes, rose $4.6 billion, while revolving debt, which includes credit cards, rose by $7.7 billion.

The trade balance (chart) showed that the deficit widened in June to $44.5 billion, compared to the $43.0 billion Bloomberg estimate. May's deficit was revised to $41.0 billion from the $41.1 billion posted earlier. Exports rose 0.3% m/m to $183.2 billion, and imports rose 1.8% m/m to $227.7 billion.

Treasuries were lower following the jobs report, with the yields on the 2-year and 10-year notes rising 8 basis points (bps) to 0.72% and 1.58%, respectively, while the 30-year bond rate was 6 bps higher at 2.31%. Bond yields have seen some pressure in the wake of the decision in the U.K. to cut rates and add to its asset purchases, the unchanged monetary policy stance from the Fed, and severe miss in 2Q GDP growth.

Schwab's Chief Investment Strategist, Liz Ann Sonders provides analysis of last week's Fed's decision in her commentary, A Hopeful Transmission: Fed Holds Rates Steady, But… and Schwab's Chief Fixed Income Strategist, Kathy Jones discusses in her article, With a Whimper Instead of a Bang: Is the Great Bond Bull Market Over?. Read both articles at www.schwab.com/marketinsight and follow Liz Ann and Kathy on Twitter: @lizannsonders and @kathyjones.

Europe sees gains on Bank of England and U.S jobs buoyancy, Asia mixed

European equities finished soundly higher, getting a boost from the better-than-expected U.S. July labor report. Meanwhile, yesterday's monetary policy decision by the Bank of England (BoE) to cut its benchmark interest rate and unexpectedly boost its asset purchase program also helped to further soothe uncertainty post-Brexit. Financials continued to be a point of focus amid attention on the Italian banking sector, as the Bank of Italy's governor said it cannot rule out public support for the nation's troubled banks.

The euro and the pound were lower versus the greenback following the U.S. labor report, while bond yields in the region were higher. Amid the continued elevated global volatility that has been amplified by economic growth uncertainty and divergent monetary policy actions, Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, offers Three Reasons Why Now is Not the Time to Retreat from Global Diversification and Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, provides an updated look at sectors in the aftermath of Brexit in the latest Schwab Sector Views: Brexit's Impact on Sectors, Part Two. Read both articles at www.schwab.com/marketinsight and be sure to follow Schwab and Jeff on Twitter: @schwabresearch and @jeffreykleintop.

Stocks in Asia finished mixed ahead of today's U.S. labor report and as investors continue to assess the divergent monetary policy around the globe. Japanese equities finished flat, unable to hang on to early gains and getting little help from some weakness in the yen as an upbeat wage report was met with lower-than-expected consumption figures and a flat read on the nation's Leading Index. Mainland Chinese stocks nudged lower, while securities trading in Hong Kong finished with solid gains. Indian listings ticked higher, with investors continuing to gauge the possible effects of the nation's largest tax reform in decades, per Bloomberg, with the goods-and-services tax bill passed by the upper house of parliament yesterday. Schwab's Director of International Research, Michelle Gibley, CFA, offers a look at the global political landscape in her article, Performing Reformers: How Political Change Can Affect Stocks, at www.schwab.com/oninternational. Meanwhile, Australian stocks advanced, led by energy and materials issues, while South Korean equities gained ground.

Stocks finish week higher despite slow start

After an initial sluggish start, the Dow was able to end its seven-session losing streak and U.S. equities finished the trading week higher. An end-of-week rally transpired on the heels of the better-than-expected July labor report amid the backdrop of 2Q earnings season, which continued to roll out results that, more often than not, topped analysts' forecasts. In the recent Schwab Market Perspective: Is the Recent Rally for Real?, our experts highlight that this doesn’t mean the economy is off to the races as the business community remains relatively cautious, despite a largely better-than-expected earnings season. In the article, Schwab's specialists dive deeper into the earnings scene and note that interestingly, when we step back from the seasonal pattern we can see that after about two years of declines a rising trend in earnings estimates appears to be emerging. Read the whole perspective at www.schwab.com/marketinsight, and be sure to follow Schwab on Twitter: @schwabresearch.

Dow members Pfizer Inc. (PFE $36) and Procter & Gamble Co. (PG $87) bested both top and bottom line expectations, CVS Health Corp. (CVS $98) beat on earnings and Time Warner Inc. (TWX $78) also topped per share profit forecasts, while MetLife Inc. (MET $40) reported figures that were well south of estimates. In the recent article Earnings estimates are rebounding: what it means for stocks, Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, discusses how analysts’ improving outlook for corporate earnings has tracked the trend of better-than-expected economic data, helping to support stocks in the face of negative geopolitical events. Read more of Jeff's insights at www.schwab.com/marketinsight, and be sure to follow him on Twitter: @jeffreykleintop.

Heavy dose of data expected

Next week's domestic economic docket will heat back up, with key releases of retail sales and the preliminary University of Michigan Consumer Sentiment Index for August. In the recent Schwab Market Perspective, our experts note that consumer confidence remains relatively healthy according to the Conference Board, likely due at least in part to a continued healthy job market. This has helped to move wages higher after years of largely tepid or nonexistent gains according to the Atlanta Fed Wage Tracker, which could have aided the recent move up in the retail sales estimates for 2016 by the National Retail Federation. Read more at www.schwab.com/marketinsight, and be sure to follow Schwab on Twitter: @schwabresearch.

Other significant U.S. reports next week include: preliminary 2Q nonfarm productivity and unit labor costs, the NFIB Small Business Optimism Index, wholesale and business inventories, the JOLTS Job Openings report, the Import Price Index, and the Producer Price Index.

International economic releases for next week are expected to include: China—trade data, CPI, PPI, industrial production and retail sales. Japan—trade data, machine orders, PPI and the Tertiary Industry Index. India—trade data, CPI and industrial production. U.K.—industrial and manufacturing production, construction output and trade data. Germany—the Wholesale Price Index, CPI, preliminary 2Q GDP, industrial production and trade data. Eurozone—industrial production and preliminary 2Q GDP.

FINANCIAL REVIEW

Some Outcomes Are So Predictable

Sinclair Noe — November 18, 2014

Podcast: Play in new window | Download (Duration: 13:16 — 6.1MB)

DOW + 40 = 17,687
SPX + 10 = 2051
NAS + 31 = 4702
10 YR YLD – .02 = 2.32%
OIL – 1.34 = 74.32
GOLD + 9.80 = 1198.00
SILV + .07 = 16.31

Record highs for the Dow Jones Industrial Average (26th of 2014) and the S&P 500 Index (43rd of the year). While there are plenty of reasons for concern, the major stock indices have been climbing a wall of worry. Today, health care stocks pulled the market higher.

Wholesale prices in the US increased in October as higher costs for services and food outweighed a slump in energy. The Producer Price Index was up 0.2% compared to a 0.1% drop in September. Wholesale prices excluding food and energy rose 0.4 percent after no change a month earlier. Compared with 12 months earlier, producer prices rose 1.5% and the core index increased 1.8 percent in the year ended October. Prices for goods dropped 0.4 percent last month, the most since April 2013. Energy costs decreased 3 percent last month, the biggest decline since March 2013. Wholesale food costs climbed 1 percent as prices of vegetables, eggs and meats increased. The cost of services increased 0.5 percent in October, and this is a major reason why the overall index was higher. Now normally services don’t jump that much. What happened?

The nationwide average price of a gallon of regular unleaded gas was $2.89 on Nov. 16, its lowest level since the end of 2010. Oil prices have been falling fast but gas prices, the price at the pump, has not dropped as fast; there was a lag. At gas stations and other retail fuel vendors alone, margins jumped 26.1 percent, the most in more than four years; and that showed up in the inflation report under “cost of services”. It looks fairly clear that if gas stations had passed on lower prices faster, there would have been little of no increase in the PPI.

Gas stations aren’t the only ones who are refusing to pass along savings from lower fuel prices. In the 12-month period ending in September, U.S. airlines burned through nearly 16.2 billion gallons of fuel. They paid an average of $2.97 a gallon, down from $3.07 the prior year. That 10-cent drop saved the industry $1.6 billion. Fuel prices have since fallen further. United Airlines estimates it will pay $2.76 to $2.81 a gallon during the last three months of the year.

Are airfares falling? Well, of course not. The average domestic airline ticket during the 12-month period ending in September rose 3.5 percent to $372. That figure doesn’t include another $56 in taxes and fees that passengers pay. And if you want to check luggage, well, take out a loan. You may remember that when fuel prices were higher, the airlines responded by limiting the number of flights to fall just short of demand, giving them the power to charge higher fares.

What are the airlines doing with their newfound profits? They are buying more planes; 10,000 new orders for more fuel efficient jets in the past 5 years. In the first nine months of this year, US carriers spent $10.2 billion on capital improvements, or a little more than $1 billion a month.

The National Association of Home Builders/Wells Fargo gauge measures homebuilders’ confidence; a reading above 50 indicates confidence. The gauge rose four points to 58 in November. Confidence has not yet resulted in a building boom. Later this week the government will report on new-home construction, and economists expect that the pace of residential starts was just about unchanged in October.

Yesterday, Japan announced its economy contracted 1.65 in the third quarter, officially moving into another recession. Today, Prime Minister Shinzo Abe called an early election and delayed for 18 months a second planned sales-tax increase after the first installment in April led consumer spending to stagnate.

Clearly Japan is still struggling; the Eurozone likewise; and the emerging economies are getting clobbered by a downturn in commodities. China’s economy is still growing but at a much slower pace, and Russia is tumbling toward its own unique catastrophe. Here in the US, the economy looks moderately acceptable and the stock market is hitting record highs. So the big question is whether the US economy can carry the world, or if the world will drag down the US economy, or whether there will be a decoupling.

In today’s edition of “Banks Behaving Badly” we feature Bank of Tokyo-Mitsubishi UFJ, a familiar name; you may recall that last year the bank was fined $250 million by the New York Department of Financial Services for hiding information about transactions with Iran, Burma and Myanmar, countries that were under sanctions. The bank “misled” the department in reaching the 2013 settlement, with key information deleted from a supposedly objective report; and so now they face an additional $315 million fine for submitting a whitewashed report. PricewaterhouseCoopers, which produced the 2008 report for the bank, agreed in August to pay $25 million and refrain from certain work in New York for two years after the regulator accused the consulting firm of altering its findings under pressure from bank lawyers and executives.

Now, this is just crazy on several different levels. First, the bank hid information about transactions with countries on the sanction list; then they put together a report which hid information about how they hid information; and to do this, they had to bully their auditor. Then the regulator actually allowed the accused bank to put together a report explaining how they had violated the rules, and then the regulators were apparently shocked that the report whitewashed the bad behavior. This is something like have the crooks fill out the police report and serving as a consultant for the prosecutors. What could go wrong?

If you are wondering how regulators could be such puppets of the banks, we offer the case of JPMorgan. ProPublica reports that the Federal Reserve Bank of New York put a team of regulators in JPMorgan to supervise the nation’s largest bank, and then JPMorgan bankers blocked the investigators from investigating; and when the investigators complained, the Federal Reserve Bank of New York did …, pretty much nothing. And what followed was the London Whale trading scandal resulting in about $7 billion in combined losses and fines. The new report essentially says that if the investigators had been allowed to do their job, things might have turned out different.

A US Senate subcommittee report was more blunt, saying: “[T]he whale trades exposed a bank culture in which risk limit breaches were routinely disregarded, risk metrics were frequently criticized or downplayed, and risk evaluation models were targeted by bank personnel seeking to produce artificially lower capital requirements.”

Remember when JPMorgan’s CEO Jamie Dimon bragged about how clean JPMorgan was compared to all the other banks? Now we know that he really meant JPMorgan was better at hiding its dirt from investigators.

Some outcomes are so predictable.

Fortunately, there are still some great mysteries. And a little, dishwasher sized spacecraft has been trying to unlock the mysteries of the universe. The spacecraft is called the Philae, and it is the landing craft of the Rosetta craft that flew 300 million miles and then launched the Philae onto Comet 67P. The Philae bounced and landed a couple of times in the low gravity conditions, and then it came to rest on the side of a cliff, in darkness; it’s solar powered battery packs were unable to recharge. And you probably thought that was the end of the story. Not exactly. Before the batteries ran out, the Philae detected carbon-based, organic molecules.

It isn’t clear whether they included the complex compounds that make up proteins. One of the key aims of the mission is to discover whether carbon-based compounds, and through them, ultimately, life, were brought to early Earth by comets. Scientists are analyzing the data to see whether the organic compounds detected by Philae are simple ones, such as methane and methanol, or a more complex species such as amino acids, the building blocks for proteins. A drill on Philae also obtained some material from the comet’s hard surface, but data about organic molecules from that experiment have yet to be fully analyzed. The little unmanned spacecraft wrapped up its mission on the comet’s surface on Saturday after radioing back data from a series of experiments and then its battery ran out. And that is probably the last we will ever hear from this historic spacecraft.

The comet is now speeding toward the sun, where it may explode, or maybe the sun’s gravitational pull will slingshot the comet into the far flung reaches of the galaxy. And as the comet hurtles toward the sun, maybe, just maybe some light will hit the solar panel on the Philae, and the battery will recharge, and we will learn something that we never knew before.