CHICAGO, May 17, 2011 /PRNewswire/ -- Zacks.com announces
the list of stocks featured in the Analyst Blog. Every day the
Zacks Equity Research analysts discuss the latest news and events
impacting stocks and the financial markets. Stocks recently
featured in the blog include: AK Steel (NYSE: AKS),
Caterpillar (NYSE: CAT), Cummins (NYSE: CMI), Dow
Chemical (NYSE: DOW), United Health (NYSE: UNH) and
Valero (NYSE: VLO).
(Logo: http://photos.prnewswire.com/prnh/20101027/ZIRLOGO)
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Here are highlights from Monday's Analyst Blog:
Earnings vs. Macro Factors
Earnings are, and are going to remain, the single most important
thing for the stock market. Interest rates are an important -- but
distant -- second.
That does not mean that all is smooth sailing ahead. We are now
at the softest part of the year (historically). There is a fair
amount of truth to the old adage "Sell in May, but remember to
return by November."
The fight over raising the debt ceiling is now underway. If it
looks like it will not happen, watch out. The Government of
the United States defaulting on
its debt is likely to have a somewhat larger impact on the markets
and the economy than the impact of Lehman Brothers defaulting on
its debts.
However, when push comes to shove, I find it hard to believe
that Congress would let that happen. While not the most likely
case, the chance of no increase by the time the ceiling is hit is a
very real possibility. Given the disastrous potential consequences,
taking out some insurance in the form of deep out-of-the-money puts
would make a lot of sense at this point.
We are already feeling the impact from lower government
spending. First quarter GDP growth came in at just 1.8%, down from
3.1% in the fourth quarter. Total government spending was a drag of
1.09 points, up from being a 0.34 point drag in the fourth quarter.
In other words, 75 of the total 130 basis point growth slowdown
(57.8%) was due to increased austerity in Government spending.
Job creation remains sluggish, but had been starting to show
signs of picking up. We created 268,000 jobs in the private sector
in April, up from 231,000 in March, and 260,000 in February, but
that is after a big upward revision to the February numbers.
However, governments laid off a total of 24,000 people for the
month, on top of 10,000 pink slips the month before.
Recently, though, the trend in Initial Claims for Unemployment
has taken a nasty turn for the worse, with the four-week moving
average moving back above the 400,000 level. While we got some
relief this week, with a drop of 43,000 new claims, we need to see
that number continue to decline. Those numbers were not reflected
in the April jobs report, but they are not a good omen for the May
report.
Unemployment Rate
The unemployment rate bounced back up to 9.0%. This was not due
to, as many assume, people coming back into the labor force. It was
due to the fact that the unemployment rate is derived from a
separate survey from the one that measures the number of jobs
gained or lost. The civilian participation rate has been stuck at
the same low 64.2% level since January.
Given that the unemployment rate has been higher than that in
just 6.17% of the months since 1960, one might expect that bringing
down unemployment would be top of the agenda at both the Fed and on
Capitol Hill. However, at Bernanke's recent press conference, the
focus was mostly on inflation. The rate of headline inflation has
been moving higher, but it is only up 3.2% over the last year. That
is lower than what we have experienced for most of the last 40
years.
Furthermore, commodity prices have just fallen sharply, so we
might start to see some relief very soon. Core inflation remains
very low, up just 1.3% over the last year. This fear of phantom
inflation is keeping further monetary easing off the table for
bringing down unemployment.
International Concerns Remain
The international situation clearly has the potential to abort
the recovery as well. The disaster in Japan will clearly slow its economy
dramatically in the first quarter, although much of that growth
will be made up later in the year as the reconstruction process
gets underway. Many U.S.-made products have parts which are made in
Japan, and that is likely to
disrupt production here.
Still, there appeared to be no impact on Industrial Production
in March as manufacturing output climbed 0.7%. The turmoil in the
Middle East is not going away, and
that is likely to keep oil prices both high and volatile. High oil
prices will also act as a depressing force on the economy.
The debt crisis in Europe is
not going away with Portugal now
also getting bailed out, even as the ECB makes life tougher on the
PIIGS by raising rates. Rates for the Greek, Irish and Portuguese
debt are substantially higher than when the crisis first started.
The austerity campaigns have weakened those economies and
undermined tax revenues, and so the bailouts have not made the
situation much better.
Here at home, the housing situation has not been showing many
signs of improvement, and I doubt we will see much in the
housing-related numbers due out this week. Note that the
Construction sector is the weakest in terms of both surprises and
estimate revisions.
Remaining Bullish Overhead
On balance I remain bullish, and I think we will end the year
with the S&P 500 north of 1400, but that does not mean we will
have a smooth ride between here and there. Strong earnings are
trumping a dicey international situation, and the drama in DC.
However, be prepared to move to the exits (or have some put
protection in place) if it looks like the debt ceiling will not be
raised.
As far as individual stock picks are concerned, look for the
combination of a Zacks #1 Rank, with moderate P/Es and a reasonable
dividend yield. The current issue of Earnings Trends has a list of
the firms with the largest positive revisions for this year.
The best hunting ground for such firms seems to be in the
Industrial, Materials and Energy sectors, but things are not
limited to them. Some of the names to consider among the S&P
500 include AK Steel (NYSE: AKS), Caterpillar (NYSE:
CAT), Cummins (NYSE: CMI), Dow Chemical (NYSE: DOW),
United Health (NYSE: UNH) and Valero (NYSE: VLO).
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