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Better Than Expected Data Gets Overlooked

|Includes: INTC, LOW, SNE, Toyota Motor Corporation (TM)
By: Brian Sozzi, Equity Research Analyst

Stocks have started the week in typical fashion ahead of a shaky jobs report, with little bias to the upside. Headline non-farm payrolls for August are expected to have declined 150K, a number skewed by the disappearance of temporary Census workers. Still, when extracting Census workers from the equation, the private sector was not exactly expected to go gangbusters on hiring in the month. The reasons by companies to refrain from adding to payrolls are obvious: small to medium-sized businesses, already dealing with cutbacks in demand from large companies, are nervous of higher taxes and healthcare costs. Large businesses, on the other hand, are content to whip increased productivity from existing workers or offshore tasks that were once reserved for Americans. Of course, there is the common thread of demand/growth uncertainty on a global scale (China and Germany can't steer the world to prosperity).

The report on consumer spending and income today sparked further interest in bonds. Boy, any modest hint of inflation is going to send the bond crowd running...most likely to equities. Just figure that money made in bonds will have to go somewhere to earn a return. I can't imagine fund managers will totally sit on cash when a wager on beaten down equities could earn them a superior performance relative to peers. I almost think the bond goers will come back to big-cap, high dividend yield paying names. I mean if bond market investors are still scared of the market, but are forced to flee that trade, they would still be nervous, but still want yield as opposed to growth. From within my own coverage universe, retail, the selloff has certainly made yields look juicy. Companies absolutely have the cash to continue paying, if not raise, dividends. Home improvement retailer Lowe's (NYSE:LOW) for example has tons of cash, and the stock now yields over 2%.

Back to the consumer spending and income report. Consumer spending rose 0.4% in July against a 0.3% expected gain. However, after tax incomes declined 0.1% in the month. What does this suggest? To me, it implies that consumers are dipping back into their savings accounts to make basic and conspicuous purchases due to job loss or tepid wage growth. Ultimately, the spike in July consumption is unsustainable if job creation and wages continue to stagnate; there is only so much one can dip into savings without depleting funds or bringing them to a level of uncomfort. In order to drive suitable consumer spending, hourly wages need to gain ground, as opposed to elongated workweeks that stand to be curtailed if demand slows. Additionally, there continues to be a preference by employers to dole out bonuses instead of wages; in doing so, employers are creating uncertainly as bonuses are just that, a bonus, which in many cases are not guaranteed.
The unease regarding the consumer is etched all over the S&P Retail Index (RLX). Since peaking in late April of this year, fueled by rampant optimism in retail land (when incoming sales numbers were solid), the index has fallen sharply. It remains in a tight range as back to school shopping has been mixed to slightly disappointing. As a result, there is missing visibility into holiday season sales and earnings for the sector, and a lack of a catalyst to push estimates higher on major sector names.
Color on Crude
By: Conley Turner, Research Analyst

The price of crude is tracking lower today in tandem with the swoon occurring in the broader equity markets. Stock prices edged lower as economic data showed that personal income rose less than expected in the month of July. It should be pointed out that this report is not among the primary data points that investors look at in order to assess the progress occurring in the economy. However, the fact that the number fell below forecasts on income only reinforced the message being sent by a series of similar prior reports that the broader economy was slowing. Combined with all of the other economic data, oil prices continued to be under pressure as overall demand in the U.S. continues to be weak. The most recent inventory report indicated a build of 4.1 million barrels of oil. The data points to the fact that there is just not enough demand for energy to deplete existing supplies.

Also playing a factor in the price movement is the fact that the value of the dollar index has increased in recent weeks against a basket of other international currencies, including the euro. Oil trades inversely to the value of the dollar. The commodity has declined sharply from the $82.00 a barrel achieved in recent weeks, but continues to trade at the low end of the current trading range.

The decline has been so dramatic that many investors are viewing it as a trading opportunity. Furthermore, the market, backed by OPEC, is viewing the $70.00 and $80.00 per barrel range as the comfortable range. Eventually, the commodity will catch a bid, and have a sustained move to the upside. The near-term forecast, however, is for volatility.

No Touchdown by Dallas
By: David Urani, Research Analyst

The Dallas Fed put out a weak report on Texas manufacturing, posting a reading of -13.5 versus consensus estimates for -10.0. In general, 28.4% of those surveyed reported a worsening of business conditions. Among the components, new order volume posted a reading of -9.3, prices received was -5.7, and employment was -5.1. Meanwhile, prices paid for raw materials were +24.3. Interestingly, 23.4% of respondents said that the moratorium on Gulf drilling negatively affected their business. On one hand, the impact from the drilling ban can put a positive spin on the report, indicating it would have been better otherwise; however, it also goes to show the far-reaching impact of the policy decision.

The Dallas report goes in tandem with a previous report from the Philly Fed showing a -7.7 reading. Together, the reports don't bode well for Wednesday's upcoming ISM report on manufacturing, which the Street currently expects to decline to a reading of 53.0 from 55.5.
Techs Continue to Slide
By: Carlos Guillen, Research Analyst

So far in today's trading session, the Philadelphia Semiconductor Index (SOX) has continued to trend lower despite a couple of rather encouraging bits of news. From a technical perspective, the index is reaching its next support level at approximately 320. A fall below this level may take the SOX further down, perhaps another 10% lower. Certainly, the news from Intel (NASDAQ:INTC) on Friday is not helping the tech sector today.
Earlier today, positive data from the Semiconductor Industry Associations (SIA) has not really been accepted with open arms by investors. According to SIA, sales during July continued to ramp higher, and reached yet another record high. Global semiconductor revenue in July totaled $25.2 billion, increasing year over year by 37.0%, and increasing sequentially by 1.2%. While the sequential growth rate is respectable, I must point out that the rate did run below its normal seasonal trend of about 1.7%. So, for the first time in over a year the sequential growth rate was lower than seasonality. Although this is not catastrophic, combining this with Intel's negative guidance adjustment is certainly concerning. It is becoming apparent that growth may have been overstated by many management teams. That is not to say that there will not be growth, it is just that growth will be attenuated.
For instance, although Intel said that revenues were running softer than expected, they will still see sequential growth. The company lowered its prior revenue guidance to $11.0 billion, plus or minus $200 million, from the previous expectation of $11.6 billion, plus or minus $400 million. However, the midpoint of the new guidance range still represents sequential revenue growth of 2.2%.

According to Intel, revenue is being affected by weaker than expected demand for consumer PCs in mature markets. Nonetheless, I believe that the softness in PC demand will not be enough to derail overall semiconductor industry growth as demand for semiconductors continue to grow into a wider range of products that go beyond computers.

Yen Playing Godzilla to Japanese Exports
By: David Silver, Research Analyst

Japan's government took a few modest steps to curb the appreciation of the Yen on Monday, but the tepid response from the market is leaving the government on the hook for possibly doing more. Japan is one of the world's largest exporters, with companies such as Toyota (NYSE:TM) and Sony (NYSE:SNE) dependent on the goods it ships overseas. However, with the strengthening yen, their goods become less attractive overseas. Economic Minister Satoshi Arai said, the government "announced the outline of the package today to give the impression that its economic measures and the Bank of Japan's monetary easing steps are properly coordinated." The government may consider additional economic stimulus measures if the yen remains strong.

The 920 billion yen ($10.78 billion) stimulus is part of a two-pronged approach to prevent the surging yen from undermining Japan's fragile, export-led recovery. At an emergency meeting Monday, the Bank of Japan's policy board voted 8-1 to offer domestic financial institutions 10 trillion yen of six-month loans, in addition to the 20 trillion yen in three-month loans it has been offering.

President Obama hopes to double exports by 2015, and a rebound in the greenback (similar to the yen) could put a dent into those goals. A weakening dollar makes America produced goods more attractive to overseas consumers. The U.S. dollar hit a 15-year low of 83.58 yen last week, near its 1995 record low of 79.75 yen. There are hopes that the Japanese government will do more to quell the yen's rise, just as similar calls have been rising for the Administration to do another round of stimulus to help boost the faltering recovery. The Federal Reserve has used "quantitative easing" to help the economy turn, seeing its balance sheet swell to $2.3 trillion, while in Japan, the quantitative easing has left the BOJ's balance sheet roughly unchanged at 117.3 trillion yen. The Federal Reserve's balance sheet increased $226 billion year over year (equivalent to the BOJ adding another 19 trillion yen of debt). Hopefully, whatever the next steps the Fed (or Administration) takes to help the economy rebound will have a greater effect than those instituted in Japan.