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U.S. Payrolls, Fair Value and Earnings Season

 

ADP payroll numbers of +158,000 for March came out in early April and spooked an over -extended five month long rally.  A troll (hopefully) put together very weak weekly unemployment claims numbers that followed.  

How about March Labor Dept. payroll numbers?

At first blush, the March Fed payroll number was weak. But that may not be the right takeaway from this report.  The right takeaway may be the U.S. economy has not changed with the introduction of the latest Money Printing in December.  

Given the lags, that makes more sense than the market thinks.

Yes, the Labor Dept.’s non-farm payroll number edged up in March +88,000. However, the change in total nonfarm payroll employment for Jan was revised up from +119,000 to +148,000.  Change for Feb was revised up from +236,000 to +268,000. Over the prior 12 months, jobs growth averaged +169,000 per month.

It looks like Jan added +30K more than preliminary numbers said.  Feb added +30K more.  Tack +60K revisions onto +88K and, lo and behold, we get +148K net additions over the last three months.  The U.S. economy needs +125K a month to supply a labor force growth rate of +1% a year.  Once again, this macroeconomic ship is on the same course it has been on over the last three years.

Payroll growth of this magnitude knocks out +0.5% from the unemployment rate each year.  

At 14.65 times this year’s conservative earning estimate, S&P 500 stocks look to be trading at fair value.  

Consider the average stock market P/E is 15. Apply that to $113 per share optimists expect for the S&P 500 in 2013. That computes to fair value at 1695!  If you say those earnings projections are high (we would agree), trim to a conservative $105 per share. That gives S&P 500 fair value of 1575.

As we enter Q1 reporting season, estimates seek -2.6% earnings growth and -2.4% revenue growth above last year. For Q4-12, S&P 500 companies reported earnings and revenues up +2.2% and +1.5% y/y, respectively.

That is a low earnings bar to beat.

Outside the U.S., What’s Happening?

The gloom in Europe is palpable.  

Yet, the ECB and the Bank of England left policy rates alone this week.  Short rate are no longer the vanguard of stimulus.  Look for Plan B out of the ECB.  

Small and middle sized banks with footprints only in Europe and concentrations of risk in places like Spain and Italy is the likely conduit for contagion; and conversely, for positive increases in lending to hurting populations.  Big banks have piled into U.S. treasuries and are diversified. 

The ECB could lower long-term rates in those countries, by buying their sovereign bonds.  And/or provide these types of institutions more bank liquidity directly, ECB style. A targeted infrastructure spending package could help too.

Tidy German economic managers won’t like it either way.  It shuffles negative consequences their way.  The euro area is a teenager.  It either grows up and gets more federal and communal, in this way, or it stagnates.

In Japan, the Money Printing bandwagon just got louder.  

The BoJ said it would buy longer-term Japanese government bonds. The average maturity of holdings go to seven years from three years, expanding Japan’s monetary base to ¥270 trillion by March 2015 (synced up to the U.S. Fed no doubt). Under that plan, the bank buys ¥7 trillion of bonds (roughly $75B) each month.  With an economy at $6T in U.S. terms, that’s a quantitative easing program roughly equivalent to the U.S., for an economy less than 40% the size.  

Money printing in Japan isn’t likely to gear up slack resources, like it does currently in the USA and Europe (but not Germany).  This is not the hoped-for result.  The BoJ wants money to flow directly through to prices in the economy and create inflation. Prices rise, profit margins expand, stocks go up, investment rises, and loan values from the past look better. GDP growth goes up, deficits shrink, and the elected government is happy.  Honda’s stock did surge.

Today, we celebrate and wait for +2% Japanese inflation to arrive.  Tomorrow, watch for unintended consequences, with asset inflation in unwanted parts of its financial system. Too much-too little inflation is also a tricky plank to walk.

Zacks Sector, Industry and Company Telescope

Here are April themes:

Consequences of our much earlier Money Printing exercises, mind you.

(A) With a rise in Q1 U.S. jobs numbers and upward 2013 jobs revisions, the stock market hit multi-year highs.  In a positive feedback loop, the personal and home sides of Consumer Discretionary are highest ranked:  Apparel, Media and Home Furnishing-Appliance ranked at the top of the pack.

Basics in Consumer Staples are now at Market Perform:  Beverages, Autos-Tires-Trucks and TobaccoFood and Non-Food Retail is here too.

Consumer industries that showed us very weak Zacks Ranks had business model issues: Food, Publishing and Consumer Electronics-Retail.

See Culp, Inc. (CFI - Snapshot Report).  Culp ranks as one of the two largest producers of mattress fabrics known as mattress ticking in North America, as measured by total sales, and one of the three largest marketers of upholstery fabrics for furniture in North America, again measured by sales. It is a Zacks Rank #1 and a Zacks Outperform stock.

(B) High Zacks Ranked industries from building U.S. momentum in the Finance sector focused on home finance and the stock market. Real Estate, Finance, Thrifts & Mortgage Finance and Investment Banking & Brokering industries showed up even stronger in April.  

See Apollo Management LP (APO - Snapshot Report).  The company operates in three business segments: private equity, capital markets and real estate. It is a Zacks Rank #1 (Strong Buy) and a Zacks Outperform stock.

(C) Marked improvement in the domestic outlook pushed up parts of the Materials sector. Strength was apparent in high Zacks Industry Ranks for Containers & Glass and Paper.

See Packaging Corp. of America (PKG - Snapshot Report). The company is one of the largest producers of containerboard in the U.S. and also one of the largest manufacturers of corrugated packaging products. It is a Zacks Rank #1 (Strong Buy) and a Zacks Outperform stock.

(D) In addition, there is strength inside the Industrials sector on a stronger domestic outlook.   Electrical Machinery, Construction-Building Services, Transportation and Industrial Products-Services remain attractive.  

Business Products, Pollution Control and Airlines (one victim of higher oil prices) struggle.

See Canadian Pacific Railway (CP - Analyst Report). The company operates a transcontinental railway in Canada and the U.S. The company owns approximately 10,700 miles of track. An additional 4,700 miles of track are owned jointly, leased, or operated under trackage rights. It is a Zacks Rank #2 this week, a #1 last week (Strong Buy), and a Zacks Outperform stock.  

(E) IT looks stronger, but with different drivers.  Semiconductors became the most attractive industry here, with growth in Asia-Pacific.  Telco Hardware, Computer Office and Computer Software & Services ranked as market weight industries. Misc.Tech and Electronics fell back to become slight underweight Zacks Ranked Industries.

See Sandisk Inc. (SNDK - Analyst Report). Sandisk is the major flash memory chip provider, which is one of the strongest growing areas in semiconductors worldwide. It is a Zacks Rank #1 (Strong Buy) and a Zacks Outperform stock.  

(F) Stronger gasoline at the pump prices played out within the Energy Sector.  We saw Oil-Misc. with its Refiners do best in the Zacks Ranks. There was a Zacks Rank rise in Drilling and E&P. Integrated Oil companies and Pipelines further downstream remain market underweights.

Alternative Energy and Coal remain the victims of low natural gas prices.
 
See Calumet Specialty Products Partners, LP (CLMT - Snapshot Report). Calumet is a leading independent producer of high-quality, specialty hydrocarbon products in North America. Calumet processes crude oil into customized lubricating oils, solvents, and waxes used in consumer, industrial and automotive products. It is a Zacks Rank #1 and Zacks Outperform stock.

(G) The Utilities sector, interestingly, got a noted upgrade in April.

See Edison International (EDI - ETF report). The company looks attractive owing to the inherent business strength of its regulated utility Southern California Edison. It is a Zacks Rank #1 with a Zacks Outperform rating.

To read the full Market Strategy Report, please click here: U.S. Payrolls, Fair Value and Earnings Season

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