Some key economic data comes out on Thursday and is followed by the employment report on Friday. While the labor market has clearly lost momentum lately, there is reason to be optimistic and to position for a surprise upside in the reports. Factory orders, while just as important but given less attention, could take some of the positive sentiment out of the market with a surprise downside report.
Risk to downside in factory orders
Factory orders will be released on Thursday with expectations for an increase of 0.4% for the month of June. The report is often overshadowed by other reports and investors will be looking more closely at the initial claims data released the same day. The trending data is important and significant in GDP forecasts and investors can look at some of the sub-components for further detail.
The May report showed orders dropped by the most in three years with a decrease of 2.1% in March. Non-durable goods contracted 1.0% that month, while orders for non-defense capital goods excluding aircraft, a key measure of business spending, dropped 0.1% on the month. Orders since rebounded to a gain of 0.7% last month, after declining 0.7% in April.
The Institute for Supply Management's survey came in extremely weak and signaled a contractionary environment with a reading of 49.7 in June, its lowest level since mid-2009. The new orders index was exceptionally weak and may signal a below consensus report for factory orders - which could send shares of large manufacturers down on the day.
The multi-industry conglomerate giant General Electric (GE) could see a sharp drop on another surprise downside to factory orders. Shares have hit new 52-week highs lately and are fully valued at around 14.6 times trailing earnings, above the average for stocks in the S&P500. Revenues from Europe account for 20% of the total and should remain weak for the rest of the year. Revenues by industry are fairly well-diversified and should grow around the rate of the general economy. For the ten years to 2011, revenues grew by a compound annual growth rate of 1.2%.
Boeing (BA) shares have been basically flat since 2010, despite a forecasted increase of 25.5% in revenue to $80.7 billion and a 6.3% increase in earnings per share for fiscal year 2012. Sales this year should be supported by deliveries of 737s and the 747-8, while defense spending will most likely avoid the ominous fiscal cliff. Shares are priced at 12.8 times trailing earnings, just below the industry average of 13.2 times trailing. Cargo demand is low due to problems in Europe and slower growth in China, but the company reported its best year on record for jet orders in May.
Employment numbers take center stage with a positive skew
The report on initial jobless claims will also come out on Thursday, with expectations for around 380,000 versus last week's 353,000 report. The seasonal adjustment process has caused some volatility lately because auto makers have not shut down plants for annual retooling because of increased demand. This has caused some downward bias to the headline figure and may reverse in coming weeks as the seasonal adjustment is removed.
While Thursday's report should come in below the important 400,000 reading, there is a good chance that resulting weeks could see a report over the amount that economists say is the breakeven for unemployment rate gains or losses. This could drive sentiment sharply lower and lead to losses until the Federal Reserve could step in with its next round of quantitative easing.
Investors will also be watching the non-farm payroll report for the month of July out on Friday. The report has disappointed the market for three consecutive months with an average of just 75,000 jobs created versus an average of 226,000 jobs in each of the first three months of the year. The trend has become too strong to blame on an unseasonably warm winter pulling employment forward, the labor market recovery has clearly lost momentum.
Expectations for July are for a rebound to about 100,000 jobs from last month's 80,000 gain. With expectations so low and prior months so consistently disappointing, there is the possibility for a surprise upside report on strength in auto manufacturers. Retailers and consumer cyclical stocks should react most strongly to a surprise upside in employment or another low jobless claims report.
Nike (NKE) missed earnings expectations by $0.20 per share when it reported fourth quarter results last month. The shares are down 3.8% since the report, but still trade for 19.7 times trailing earnings. The world's largest supplier of athletic footwear announced that it would divest its Cole Haan and Umbro businesses, accounting for revenues of $797 million in fiscal year 2012. As with other international brands, some of the recent weakness in Nike has been due to fears of slower sales in China going forward. I believe this is premature and the company is well placed to benefit from a growing middle class. The company's operating margin of 12.4% and return on equity of 22% are well above the industry average and the shares pay a 1.5% yield.
Coach (COH) reported a fairly solid fourth quarter yesterday, with a 27% increase in earnings per share and growth in revenues of 12% to $1.16 billion. Despite management's guidance that the lower-than-expected revenue growth was due to a drop at factory stores and that comps had started to pick up, investors punished the shares with an 18.6% drop. The shares pay a dividend of 2.4% and now trade at just 14 times trailing earnings, well below the average of 19 times for the industry. The company still managed to grow earnings per share by almost 21% and revenues by 15% over the last fiscal year. The brand remains strong and shares should rebound in future quarters.