April Market Strategy Summary - Analyst Blog
April 05 2013 - 12:57PM
Zacks
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
Tobacco. Food 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). 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). 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). 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). 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). 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). 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). 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.
APOLLO GLOBAL-A (APO): Free Stock Analysis Report
CULP INC (CFI): Free Stock Analysis Report
CALUMET SPECLTY (CLMT): Free Stock Analysis Report
CDN PAC RLWY (CP): Free Stock Analysis Report
STN HBR-EMTIF (EDI): ETF Research Reports
PACKAGING CORP (PKG): Free Stock Analysis Report
SANDISK CORP (SNDK): Free Stock Analysis Report
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