Jobs, Jobs and Jobs

Earnings Preview 9/30/11

We are starting to see a few companies report their third quarter results (periods ending in August, September or October). Just a trickle so far, but those might provide some clues as to how well the rest of the market will fare in the upcoming earnings season.

There will be just 26 firms reporting, but 5 of those are in the S&P 500. The firms reporting next week include Constellation Brands ( STZ - Analyst Report ) , Costco ( COST - Analyst Report ) , Marriott ( MAR - Analyst Report ) , Monsanto ( MON - Analyst Report ) and Yum! Brands ( YUM - Analyst Report ) .

It will be an important for economic data. The focus will be Jobs-Jobs-Jobs, with the employment report due out at the end of the week. However, there are other important releases. We get both of the ISM indexes and auto sales data as well. Aside from jobs, the major focus of the market will (again!) probably be developments in Europe.

Monday

• The ISM manufacturing index is expected to fall slightly from 50.6 in August to 50.5 expected for September. It was as high as 61.2 in April, which indicated extremely fast growth. As a “magic 50" index, any reading over 50 means that manufacturing is growing. Thus the consensus is looking for almost no change in manufacturing activity. Given the very poor readings from many of the regional mini-ISMs, I would say the risk is to the downside on this one. In addition to the overall index, pay close attention to how some of the key sub-indexes which cover production, new orders and employment are performing.
• Construction Spending fell by 1.3% in July. The consensus is looking for a smaller decline of 0.5% for spending in August. That seems a tad optimistic to me, but construction has been hit hard for a long time, so maybe it will just stay close to the current very depressed levels.
• Auto and light truck sales probably rebounded from the 12.1 million seasonally adjusted annual rate they posted in August, to something more like a 12.7 million rate (around where they were in the spring). That is well over the under-10 million pace at the depths of the Great Recession, but a far cry from the 16 to 17 million annual rates that were the norm before the recession. It will be a very long time before we hit those levels again, but we will continue to see vehicle sales slowly recover. The supply chain disruptions (from the Japan disaster) to auto production are easing, which explains the rebound. On the other hand, the automakers have to deal with a tapped-out consumer.

Tuesday

• Nothing of particular significance.

Wednesday

• The ISM Services Index is expected to drop to 53.0 from 53.3 in August. This is also a “magic 50” index, so we could see a decline and still indicate that the service side of the economy is growing. A reading of 53.0 is still OK, indicating about average 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 48,000 private sector jobs, down from the relatively strong (and wrong) 91,000 it estimated in August. Last month they were WAY off the BLS number of 17,000 private sector jobs added. 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. That all said, however, 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 the year, but have been recently in a trading range above 400,000. This past week they broke out of that trading range to the downside, falling by 37,000 to 391,000. That was a massive, and very unexpected decline. I suspect it might have been a bit of a fluke. I would expect a small increase this week. The consensus is looking for 401,000, which might be on the optimistic side. The 400,000 level is important psychologically in that it has historically been the inflection point below which we tend to create enough jobs to bring down the unemployment rate. Thus the dip below that level was very good news and was greeted by the market with a big rise. The four-week moving average will stay above the 400,000 level. The week-to-week numbers can be very volatile, so the four-week average is the thing to focus on. Keep an eye on the prior week’s revision as well as the change from the revised number.
• Continuing claims have in a downtrend of late, but the road down has been bumpy. Last week they fell by 20,000 to 3.729 million. That is down 733,000 from a year ago. I would expect a small decline this week. The consensus is looking for 3.725 million, a very small decrease. Some (most?) of the longer-term decline due to people simply exhausting their regular state benefits which run out after 26 weeks. Those, however, don’t last forever either. Federally paid extended claims rose by 75,000 last week to 3.581 million, but are down 1.298 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 6.985 million, which is up 95,000 from last week (there are some timing issues, so the change in continuing and existing claims does not match the change in the total). The total number of people getting benefits is now 1.945 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. Unless the program is renewed (unlikely given the current Congress) then all extended benefits will end in January. 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. August was extremely disappointing with just 17,000 added in the private sector offset by the loss of 17,000 Government jobs (mostly State and Local). Growth should resume in September, but total payrolls will likely again be lower than private sector payrolls. State and Local governments continue to lay people off to deal with their dismal fiscal situations, and the Federal Government is starting to let people go as well. Consensus estimates expect total growth of about 60,000 in total and 90,000 on the private side. Those numbers look reasonable to me. Revisions to prior month’s numbers will also be important. The last two months they were negative, but had been strongly positive earlier in the year. The unemployment rate is expected by the consensus to remain at 9.1% for the third month in a row. Much of the change in the unemployment rate will depend on the civilian participation rate, which ticked up to 64.2% in August, but that was from a 28-year low in July. If the downtrend resumes, the unemployment rate may 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 58.2% in August, also up a tick from a 28-year low in July. It is extremely low by historical standards. The consensus is expecting the report to show that average hourly earnings increased 0.2% in July, after being down 0.1% in August. The average workweek is expected to be unchanged at 34.4 hours. Overall, that adds up to fairly weak report, but not as bad as August. 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 $7.0 billion in July, down from a $12.0 billion rise in August. That would be the 11th rise in a row after a long, and highly unusual, string of declines as consumers have tried to repair their balance sheets. Growth in non-revolving credit like auto loans probably grew as auto sales rose due to the easing of the supply chain constraints. 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
K12 INC	LRN	201106	0	-0.04	30	20111003	AMC	$26.57
TEAM INC	TISI	201108	0.25	0.2	10.42	20111003	AMC	$22.01
WOLVERINE WORLD	WWW	201109	0.75	0.7	4.35	20111003	BTO	$35.19
GLOBAL PAYMENTS	GPN	201108	0.75	0.67	4.11	20111004	AMC	$40.43
LANDEC CORP	LNDC	201108	0.07	0.09	33.33	20111004	AMC	$5.64
RESOURCES CNCTN	RECN	201108	0.05	0.04	0	20111004	AMC	$9.94
SEMILEDS CORP	LEDS	201108	-0.24	0.01	-137.5	20111004	AMC	$3.86
YUM! BRANDS INC	YUM	201109	0.82	0.73	8.2	20111004	AMC	$49.54
ACUITY BRANDS	AYI	201108	0.8	0.67	-1.59	20111005	BTO	$37.09
CHRISTOPHER&BNK	CBK	201108	-0.38	-0.07	183.33	20111005	AMC	$3.55
COSTCO WHOLE CP	COST	201108	1.09	0.97	1.28	20111005	BTO	$82.98
DRAGONWAVE INC	DRWI	201108	-0.2	0.03	-47.37	20111005	AMC	$3.34
EASYLINK SVCS	ESIC	201107	0.11	0.05	280	20111005	AMC	$4.38
MARRIOTT INTL-A	MAR	201109	0.27	0.22	0	20111005	AMC	$28.70
MONSANTO CO-NEW	MON	201108	-0.27	-0.09	13.51	20111005	BTO	$63.15
NATL AMER UNIV	NAUH	201108	0.08	0.05	-25	20111005	AMC	$7.24
OCZ TECHNOLOGY	OCZ	201108	0.03	-0.09	100	20111005	AMC	$4.97
RICHARDSON ELEC	RELL	201108	0.09	0.47	100	20111005	AMC	$14.10
RPM INTL INC	RPM	201108	0.58	0.53	1.89	20111005	BTO	$18.83
RUBY TUESDAY	RT	201108	0.05	0.17	-19.35	20111005	AMC	$7.45
ANGIODYNAMICS	ANGO	201108	0.08	0.08	10	20111006	AMC	$13.50
CONSTELLATN BRD	STZ	201108	0.66	0.52	5.41	20111006	BTO	$18.39
HELEN OF TROY	HELE	201108	0.86	0.75	-1.27	20111006	BTO	$25.82
IDT CORP-CL B	IDT	201107	0.29	0.31	N/A	20111006	AMC	$21.05
INTL SPEEDWAY	ISCA	201108	0.31	0.25	-3.7	20111006	BTO	$23.50
ROBBINS & MYERS	RBN	201108	0.75	0.53	0	20111006	BTO	$36.21