Market talk was all about the jobs report last week and Friday's numbers did not disappoint. The SPDR S&P500 (SPDR S&P 500 Trust ETF: SPY) rallied almost 2% to erase Thursday's losses and finish the week up more than a third of a percent. Payrolls in the United States increased by 163,000 in July versus expectations of around 100,000 and disappointing gains over the last three months. While the report was welcome, investors should be extremely cautious going into each Thursday's initial claims and next month's jobs report.
The Household Survey, which includes self-employed and farming jobs, has fallen over three of the last four months and reported a loss of 195,000 jobs in July. Worse is the fact that much of last month's strength in jobs is attributable to a seasonal adjustment process by the Bureau of Labor Statistics. Auto makers did not shut down factories for annual retooling last month in order to meet higher demand which caused an overestimation in the BLS estimates. The seasonal adjustment added 377,000 jobs to the report on Friday to compensate for the annual anomaly of summer retooling. These seasonal adjustment additions will not be as high in the coming weeks and may cause the reports to come in lower than expectations, sending the markets down on the fear that the economy is weakening.
This week will offer less in economic data, but will offer plenty of quarterly reports to move the markets. Companies have done fairly well beating, notably lower, expectations for earnings, but have been mostly through margins and less through revenue gains.
Productivity is a Mixed Bag for this Market
Nonfarm productivity is released on Wednesday with expectations for a 1.4% annualized rate off of a decrease of 0.9% in the first quarter of the year. The year-over-year growth has been down sequentially in each quarter since the first quarter of last year and is typical of the latter stages of a recovery. A further slowdown in productivity could mean that employment will start to pick up in the coming quarters, but will also push unit labor costs upwards. The increased employment will help to improve sentiment in the markets, but investors will need to rethink the margin assumptions they are using for valuation.
General Electric Company (GE) has seen its operating margin improve over the last three fiscal years from 6.4% in 2009 to 13.6% in 2011. The first and second quarter of 2012 showed some pressure with the operating margin falling to an average of 11.3%, so there is evidence of some cost pressures on the company. The company managed to grow revenue at 2.5% over the same period last year and beat earnings expectations by a penny to $0.38 per share. The shares trade for 14.7 times trailing earnings and pay a 3.24% dividend yield.
Ford Motor Company (F) has seen more weakness in its operating margin, with sequential declines in every quarter from Q2 2011 to the first quarter of this year. Margins improved in the second quarter, but are still lower than the same period last year. The fiscal year 2011 operating margin was 5.6%, lower by 0.2% from fiscal year 2010. Revenues in the second quarter fell by more than 6% as continued weakness in every region, but North America, slowed sales. The company beat on earnings by $0.02 to $0.30 per share, but still saw EPS decrease by 11.7% from the same quarter last year. The shares trade for 7.4 times trailing earnings and pay a 2.2% dividend yield.
It's All about Jobs
Thursday's jobless claims are expected to increase marginally from last week's report of 365,000 initial claims filed. The consensus is for claims of 370,000, which is still well under the four-hundred thousand mark that signals higher unemployment. The risk is to a surprise report to the upside in claims as this week is the first since the end of the summer shutdown season and there will be fewer adjustments in the data. While recent data on the service sector has been strong, both the factory and ISM manufacturing reports have been exceptionally weak lately.
Microsoft Corporation (MSFT) added about 2,900 employees last year, an increase of about 4% and the most since major cuts in 2008 and 2009. International employment grew by 6%, while that in the United States grew by only 2% in 2011. The shares have languished between $25 and $30 for the last 12 years though revenue has grown by a compound annual rate of 10% over the last 10 years. The company beat earnings expectations in the second quarter by $0.05 to $0.67 per share and $2.73 for the last four quarters. The shares trade relatively cheaply at 10.9 times trailing earnings and pay a 2.7% dividend yield. The rollout of Windows 8 and Office 2013 later this year should help to boost sentiment and valuation past the psychologically important $30 mark.
Intel Corporation (INTC) reports in its annual filing (pdf) that employment increased to 100,100 last year from 82,500 in 2010, though the majority of the increase was due to acquisition of McAfee and the WLS business of Infineon. Employment in 2010 grew by 3.4% after two years of cuts during the recession. The company beat earnings for the second quarter at $0.34 per share, flat over the same period last year. Revenue has grown by a compound annual rate of 7.2% over the last 10 years. The shares sell for 11.1 times trailing earnings and pay a 3.4% dividend yield.
Disclosure: I am long INTC.