Monday, September 10, 2012

A different kind of September?

Is this September going to be different?

-In the past two weeks we have seen some big moves up in the equity market as continued slow growth means another round of easing. Manufacturing data in the US as well as worldwide are still signaling contraction as well as a slow employment picture. 

-On Friday, the Bureau of Labor Statistics released a +96,000 job increase for the month of August, well below analysts' expectations of 130,000. We can see from the deceleration of labor force as well that more people are becoming discouraged and dropping out to try and find an opportunity. Baby boomers are beginning to retire, but corporations are on a tight budget and are not hiring new people to replace them. I believe that this is the beginning of something new for big businesses, the labor force will continue to shrink as businesses use robots and machines to do the work humans have done. Why wouldn't they? It is a onetime fixed cost and you don't have to pay them on days off.

-Here is proof, the story is a couple years old, but it gets the point across:

-Earnings reports have had a mixed picture. We continue to see  strength in some of the consumer discretionary names while the strongest sector is consumer staples.
A review  of the last post:

-Heinz beat expectations growth in emerging markets, improved sales in North America and Australia, sales growth of 4.8% EPS was .87 a share vs .81 estimate. CEO commented, “despite the headwinds of a still weak economy and adverse foreign currency trends that reduced EPS by around four cents. Overall, our strong first-quarter results put Heinz on track to deliver our previously announced outlook for Fiscal 2013.” Not surprising at all, being heavily invested in North America and Australia, is where to be despite slow growth, it is better than Europe.
-Joy Global lowered its '12 outlook on slowing in China and weak US coal demand. Shares closed down 5% on the day the report came out, but has since rebounded strongly, up more than 10% along with the rest of the broad market on news of continued easing in Europe. CEO Mike Sutherlin does say he sees a bottom forming in the US and China manufacturing sector, but the recovery will be very sluggish, and could take years to be back to where it was post '08. Bookings fell 25% to $1.1 billion during the quarter, compared with the same 2011 period. Joy Global said commodities demand has slowed forcing its customers to cut capital expenditures, reduce overhead and trim production. Joy Global shares have been hard hit this year, trading down 48% from a 52-week high of $96 touched on Jan. 26.
-As I expected, Frontline once again missed its quarterly estimates, they were down -10.84% to $3.29 after releasing second quarter results.  Net loss was $11.2 million or loss per share of $0.14 compared to net income of $7.2 million or earnings per share of $0.09 in the first quarter. The Company had total cash and cash equivalents of $177.1 million as of June 30, 2012, market price is currently 30% above its cash per share price which is roughly $2.24. Costs on maintenance of all the tankers are hurting top and bottom line, this will continue to be a problem going forward.
-oil and gold have both had big runs in the past 2 weeks as weak data paints the picture for more Quantitative Easing from the Federal Reserve. If Obama is reelected, which as of right now it is looking to be the case, then we will probably get another round of easing.
Below, a chart of gold and oil futures $GC_F $CL_F performance this year.

Notice the gold breakout of the wedge, which was on the Jackson Hole speach, as well as oil, which was in danger of a breakdown Friday coming close to the 94.00 level, but bounced off and retraced up to 97.00 by pit close. Both to me as I see it remain in a long-term uptrend, oil looks more bullish to me than Gold, since it is more sensitive to monetary policy than oil.

Macro data this week is as follows:
3:00PM EST Consumer Credit
prev. $6.5 B Consensus $9.8 B (Range $5.0 B to $14.9 B)
The dollar value of consumer installment credit outstanding. Changes in consumer credit indicate the state of consumer finances and portend future spending patterns. Retail sales were strong in July but motor vehicle sales were down. So there is support for a gain in revolving credit in July but non- revolving credit may be soft unless student loans add lift.

7:30AM EST NFIB Small Business Optimism Index
prev. 91.2 Consensus 91.5 (range 90.0 to 93.0)

8:30AM EST International Trade
prev. -$42.9B Consensus $-44.3B (range -$47.1B to -$39.7B)
The trade deficit tends to get wider as the stock market/economy picks up. This means we are continuing to import goods rather than make them here. With a weak dollar, it is cheaper to import foreign goods rather tham manufacture and export American goods. Look for this pattern to continue, as well as drag on GDP, which it has done for the last 30 years.

8:30 AM EST Import and Export Prices
Export Prices prev. 0.5 % Consensus 0.5 % (range0.0 % to 0.9 %)
Import Prices prev. -0.6 % Consensus 1.5 % (range0.4 % to 1.9 %)
As the dollar has lost a considerable amount of value in the past month, look for prices of imports to become more expensive.

10:00 AM EST Wholesale Trade
prev -0.2 % Consensus 0.4 % (range 0.0 % to 0.8 %)
Measures the dollar value of sales made and inventories held by merchant wholesalers; a component of business sales and inventories.

8:30AM EST Jobless Claims
Prev 365 K Consensus 370 K (range 365 K to 380 K)

8:30 AM EST Producer Price Index
Prev 0.3 % Consensus 1.4 %  (range 0.2 % to 1.8 %)
less food & energy Prev 0.4 % Consensus 0.2 % (range 0.0 % to 0.2 %)
Average change over time in the prices received by domestic producers of goods and services.

12:30 PM EST FOMC Announcement
Prev 0-.25% Consensus 0-.25%
Expect rates to stay low where they have been.

2:00 PM EST Treasuery Budget
Prev. $-69.6 B Consensus  $-160.0 B (range $-175.0 B to $-155.0 B)
Simply put: our government spends more than it takes in, so there will be deficits for a long time, until we get our spending problem under control. Consensus shows that this will be the biggest monthly deficit since March, nothing to be taken lightly.

8:30 AM EST Consumer Price Index
Prev. 0.0 % Consensus 0.6 % (range 0.2 % to 0.9 %)
less food & energy Prev. 0.1 % Consensus 0.2 % (range 0.1 % to 0.2 %)
Look for CPI to tick up a considerable amount this month as equities have done quite well along with the depreciation of the US dollar.

8:30 AM EST Retail Sales
Prev 0.8 % consensus 0.8 % (Range 0.3 % to 1.5 %)
Retail Sales less autos  prev. 0.8 % Consensus 0.8 % (Range 0.3 % to 1.5 %)
Less Autos & Gas prev. 0.9 % Consensus 0.4 % (range 0.3 % to 0.8 %)
Looking for little if any change in Retail Sales this month, though yearly percentage change is still in a downtrend as shown below.

9:15 AM EST Industrial Production
Production Prev. 0.6 % Consensus -0.1 % (range -1.0 % to 0.3 %)
Capacity Utilization Rate prev. 79.4 % Consensus 79.2 % (range 78.6 % to 79.5 %)
Manufacturing prev. -0.2 % Consensus (range -0.5 % to 0.2 %)
The Federal Reserve's monthly index of industrial production and the related capacity indexes and capacity utilization rates cover manufacturing, mining, and electric and gas utilities. Not surprising here that industrial and manufacturing are expected to be lower.

9:55 AM EST Consumer Sentiment
prev. 74.3 Consensus 73.5  (range 73.0  to 75.0)

10:00 AM EST Business Inventories
prev. 0.1 % Consensus 0.5 %  (range 0.1 % to 0.6 %)
What I'm watching here is the strong uptick in the inventory-sale ratio we saw last month, whch was the highest since Oct. '09.

As far as earnings reports this week, there is not much going on, as we are seeing the light at the end of the tunnel for Q2 reports. In less than a month, it will be back to square one again, and we will get a read on how corporations did this summer.

I am looking at Pall Corporation this week; they are a supplier of filtration, separation and purification technologies with two market segments: Life Sciences and Industrial. The Life Sciences business group is focused on developing, manufacturing and selling products to customers in the medical, biopharmaceuticals and food and beverage marketplaces. The Industrial business group is focused on developing, manufacturing and selling products to customers in the Energy and Water, Aeropower and Microelectronics markets. This to me can be seen as half discretionary half consumer staple based on where they do their business. A larger portion of their business deals with the industrial side and that worries me. Currently, they are trading at 20 p/e with net income declining from the previous reporting quarters. The big problem here are expenses/costs which are roughly 85% of the company's revenue. Short term and for this quarterly report, I'd be a bit bearish on the numbers, seeing as we had a slow beginning of the year into the summer, but long term, it may recover nicely due to monetary policy.

Above is a YTD Chart of Pall with two of its main competitors, notice Pall's underperformance compared to the two others.

As a side note, the SIMM Boot Camp was held last Friday, was a great time to get to know some alumni, I am seeing a bright future this year for the fund.

Follow @BonaSIMM which is our long fund @simmenergyfund which is our $250K energy hedge fund (both 100% student run). This year I will be an analyst for crude oil, learning how to make trades on calendar spreads.

Have a good week all!