Look to Data for Fireworks

Earnings Preview 7/1/11

Earnings season is over for the first quarter, and we are starting to see the early second quarter firms report, those with May fiscal periods. Its still very light, with a total of just 18 firms are due to report, none of which are from the S&P 500. The firms reporting this week include: AAR Corp (AIR - Analyst Report), A. Schulman (SHLM - Snapshot Report), Greenbriar (GBX - Snapshot Report) and WD-40 (WDFC - Snapshot Report). Most of the fireworks will likely be in the sky, not in the earnings reports this week.

With few earnings to chew on, the market is going to be mostly focused on the economic data. We start out light but the pace of data will pick up as the week goes on. We start with Factory orders on Tuesday and then get the ISM Service numbers on Wednesday. Thursday is the set up for the big Friday numbers as the ADP report comes out. Friday brings us the all-important employment report.

Monday

• Fireworks and cookouts. Have a happy and safe 4th of July.

Tuesday

• Factory orders are expected to have increased by 1.0% in June, partially reversing the 1.2% drop in May.

Wednesday

• The ISM Services Index is expected to drop to 54.0 from 54.6 in May. This is also a “magic 50” index, so we could see a decline and still indicate that the service side of the economy is still growing. A reading of 54.0 is still fairly strong, indicating solid growth. As with the ISM manufacturing index, the behavior of the key sub-indexes of business activity, new orders and employment are at least as interesting as the overall level of the index.
• We get the appetizer for the employment report in the form of the ADP employment survey. The consensus is looking for ADP to report a gain of 60,000 private sector jobs, up from the very weak 38,000 it estimated in May (and the BLS level of 83,000 private sector). As the firm that actually cuts the checks of most companies payrolls, ADP is in an excellent position to gauge the strength of the job market. However, its numbers are often quite different than the private sector jobs numbers that are reported by the BLS on Friday. The BLS numbers do tend to be revised in the direction of the ADP numbers.

Thursday

• Weekly initial claims for unemployment insurance come out. They had a very nice decline early in they year, but then had a very rough month or so in April and May. Last week they fell by 1,000 to 428,000. Another slight decrease is expected next week, falling to 425,000. The four-week moving average will probably stay well above the 400,000 level, where it has been for the last ten weeks (and weekly claims have been above the level for 12 weeks now). The sharp rise in initial claims were an early warning of the weak jobs report for May. Robust job expansion is generally associated with initial claims below the 400,000 level.
• Continuing claims have also in a downtrend of late, but the road down has been bumpy. Last week they fell by 12,000 to 3.702 million. That is down 893,000 from a year ago. I would expect a small decline this week. The consensus is looking for a level of 3.700 million. Some of the longer term decline due to people simply exhausting their regular state benefits which run out after 26 weeks. But those don’t last forever, either. Federally paid extended claims fell by 27,000 to 3.926 million, and are down by 1.010 million over the last year. Looking at just the regular continuing claims numbers is a serious mistake. They only include a little over half of the unemployed now given the unprecedentedly high duration of unemployment figures. A better measure is the total number of people getting unemployment benefits, currently at 7.512 million, which is down 31,000 from last week (there are some timing issues so the change in continuing and existing claims does not exactly match the change in the total). The total number of people getting benefits is now 1.839 million below year-ago levels. What is not known is how many people have left the extended claims via the road to prosperity, finding a new job, and how many have left on the road to poverty, having simply exhausted even the extended benefits. Given the differential between job growth and the decline in total people getting benefits, it looks like about 1 million people have simply run out of benefits, and have not found new work. Make sure to look at both sets of numbers! Many of the press reports will not, but we will here at Zacks.

Friday

• The most important report of the week is the employment report. May was extremely disappointing with 83,000 added in the private sector offset by the loss of 29,000 State and Local Government jobs. Growth should continue in March, but total payrolls will likely again be lower than private sector payrolls, as State and Local governments continue to lay people off to deal with their dismal fiscal situations. Consensus estimates expect total growth of about 80,000 in total and 110,000 on the private side. I think the total will be about where the consensus is, but with more from the private sector and more than the implied 30,000 government layoffs. Revisions to prior month’s numbers will also be important. Last month they were negative, but had been strongly positive earlier in the year. The unemployment rate is expected by the consensus to be unchanged from its 9.1% May level. Much of the change in the unemployment rate will depend on the civilian participation rate, was unchanged at 64.2% in May, but has been in a general downtrend. If it continues to decline, the unemployment rate will also decline. If the participation rate starts to rebound, as usually happens in a recovery, the unemployment rate will likely drift upwards. That would not really be all bad. The key measure will be the percentage of people who are actually working. That was at 58.5% in May (unchanged). It is still extremely low by historical standards. The consensus is expecting the report to show that average hourly earnings increased 0.2% in April, after being up 0.3 in May. The average workweek is expected to be unchanged at 34.4 hours. Overall, that adds up fairly weak report, but not as bad as May. Keep an eye on the duration of unemployment numbers, which remain at historically very high levels.
• Consumer Credit (not including mortgage debt) is expected to have expanded by $3.5 billion in June, down from a $6.5 billion rise in May. That would be the 8th rise in a row after a long, and highly unusual, string of declines as consumers have tried to repair their balance sheets. Most of the increase will probably come from revolving debt, such as credit card. Growth in non-revolving credit like auto loans was probably held back by weak sales due to supply chain issues stemming from the Japanese disaster. I suspect that the number might come in below consensus.

In the Earnings Calendar below, $999.00 should be read as N.A.

Earnings Calendar

Company	Ticker	Qtr End	EPS Est	Year Ago EPS	Last EPS Surprise %	Next EPS Report Date	Time	Daily Price
AAR CORP	AIR	201105	$0.45	$0.31	7.14	20110706	AMC	$27.09
AMER SUPERCON	AMSC	201103	($0.34)	$0.12	22.22	20110706	BTO	$9.04
DRAGONWAVE INC	DRWI	201105	($0.19)	$0.26	-56.25	20110706	AMC	$6.05
MILLER ENERGY	MILL	201104	($0.08)	($2.18)	0	20110706	AMC	$6.40
OCZ TECHNOLOGY	OCZ	201105	($0.01)	($0.12)	-400	20110706	AMC	$8.00
SCHULMAN(A) INC	SHLM	201105	$0.64	$0.48	18.18	20110706	AMC	$25.19
CHINA GERUI ADV	CHOP	201106	$0.25	$0.26	-9.09	20110707	BTO	$3.82
CONMED HEALTHCR	CONM	201106	$0.04	$0.02	0	20110707		$3.65
HELEN OF TROY	HELE	201105	$0.79	$0.60	26.56	20110707	BTO	$34.53
HI TECH PHARMA	HITK	201104	$0.71	$0.50	25.4	20110707	BTO	$28.93
INTL SPEEDWAY	ISCA	201105	$0.27	$0.22	2.08	20110707	BTO	$28.41
KAYNE ANDSN EGY	KED	201105	$0.25	$0.16	3.33	20110707	AMC	$18.13
PENFORD CORP	PENX	201105	$0.10	($0.49)	-425	20110707		$5.30
SEMILEDS CORP	LEDS	201105	($0.08)	$999.00	-171.43	20110707	AMC	$6.45
WD 40 CO	WDFC	201105	$0.53	$0.54	-20.9	20110707	AMC	$39.04
ZEP INC	ZEP	201105	$0.32	$0.30	0	20110707	BTO	$18.90
GREENBRIER COS	GBX	201105	$0.21	$0.25	0	20110708	BTO	$19.76
PRICESMART INC	PSMT	201105	$0.47	$0.40	7.14	20110708	BTO	$51.23

Read the full analyst report on GBX

Read the full analyst report on WDFC

Read the full analyst report on AIR

Read the full analyst report on SHLM