Today's Trading Session
By: David Silver, Research Analyst
The market has spent most of the day under pressure as investors are preparing for what tomorrow's jobs report will bring. There were rumbles of up to 100,000 in job creation during the month, but the official expectation is for a gain of 10,000 jobs. This doesn't seem to be supported by the initial jobless claims data which has increased in four of the past five weeks. The dollar is stronger today, but the real hit came from the bank of England which indicated that inflation was beginning to rear its ugly face. Rates were left unchanged but the wording intimated that perhaps a rate hike is in the near future for the United Kingdom. Also pressuring equities today is what the future of highly leveraged economies in Spain and Greece will be like. Will the ECB come to the rescue or will Greece be on its own to lessen its debt load, which now sits at approximately 12% of GDP.
The news out of Toyota (NYSE:TM) today that the braking system for the Prius is a computer problem has many more ramifications for the company, which reported strong earnings this morning an also guided higher. The Department of Transportation is actively involved in the process which could be a bad thing if this process is run as inefficiently as many other government activities. Until a definite fix is found for the sticky gas pedals and now the brakes, the stock will continue to be under pressure.
The Dollar and Economic Questions
By: David Urani, Research Analyst
Once again, the dollar is on the run upwards which is acting as a sign of relative strength in America, but at the same time is adding fuel to the market meltdown today. And who can blame the dollar for rising after the worries in Europe continue to pile up. The ECB held rates at 1.0%, and the prospect of that rate remaining low for longer is increasing with the likes of Greece, Portugal, and Spain still causing some panic. New developments from that saga today include Spain raising its deficit projection to 9.8% of GDP for 2010 and Greece's biggest union, the GSEE, voting to walk out on February 24 to protest government spending cuts. Consequentially, commodities are largely in the red, including oil down 5.2% and gold down 4.5%.
We did receive one piece of good news today in factory orders, which increased by 1.0% in December, the fourth monthly increase in a row. It's another report that underscores the idea that manufacturing is getting back online, but as we learned from the fourth quarter GDP report, mere inventory adjustments are definitely playing a huge role. The question people are asking is what the story is in the other parts of the economy. Reports from the service sector, for instance, have been tepid. Tomorrow we might just find out the true story… maybe.
Actually the idea of tomorrow's jobs report giving us a solid conclusive picture of things one way or another is doubtful. As we have found out in the last couple of monthly jobs reports, seasonal adjustments and other factors are putting many cracks in the Labor Bureau's integrity. The VIX volatility index, a.k.a. the "fear index", is spiking ahead of tomorrow's report as confidence in the big economic data is waning, backed up by the disappointment in initial claims readings in recent weeks. Overall though, volatility is still well below year ago levels as there is still underlying confidence in the market that business can continue to improve in the long- term.
The Action in Retail Stocks Today
By: Brian Sozzi, Research Analyst
Given today's trading activity in retail stocks one would think that January sales took a walk off a short pier and that guidance for 4Q was Debbie Downer-ish. The numbers and guidance were quite the contrary, with most retailers beating comp estimates and offering up stronger outlooks than sell-side estimates. In our view, I think the lack of euphoria by the market today on the sector reflects the following items:
1. There were a diminishing number of earnings raises.
2. For those companies that did raise guidance the magnitude was lower than evidenced earlier in the year. Face the facts, retailers have already trimmed their cost structures significantly, they need sales to drive added upside to consensus forecasts.
3. There is chance that initial 1Q guidance, presented when the sector reports 4Q earnings at the end of this month, will be in line to disappointing (if we receive any guidance at all).
4. Retailers are rebuilding inventory; many are unsure whether this is a good strategy in a tepid consumer recovery
Going into the holidays, we were cautious on retail stocks, harnessing the view that the market priced-in a fair amount of the probable cost savings/low inventory driven upside to EBITDA margin/EPS. The stocks generally traded sideways from November to January. As we enter the important spring and back to school selling seasons, there are opportunities within the sector. One just has to do a deep dive into the numbers and broader trends (or follow our work!).
Will the Unemployment Rate Disappoint Tomorrow?
By: Carlos Guillen, Research Analyst
So far the signs for the unemployment rate are not looking very good. This morning's initial claims result for the week ending January 30 totaled 480,000, which increased from the 472,000 revised number reported for the prior week and landed above the Street's estimate of 455,000. Perhaps this would be considered just noise in the data, but these figures have been trending higher over the last four weeks. In fact, as it can be seen in the chart below, the trailing four-week average, which tends to smooth out some of this noise, has been on the rise. Although the increase is not sharp, the direction is certainly not encouraging at all.
It is also discouraging that, although expectations seem to be favorable for employment, the initial claims results have actually missed the Street's consensus estimate for the last four weeks. We believe the current initial claims level is still extremely high. In our opinion, an initial claims level of less than 400,000 would need to be reached in order to help bring the unemployment rate lower. As it stands, the unemployment rate expectation for January is 10%, which is flat with what was achieved in December. So, given the initial claims figures we've been witnessing, we believe the unemployment rate is likely to disappoint tomorrow.