MarketView for December 6

 

 

Summary 

 

The financial markets found their legs again on Friday, with the Dow Jones Industrial Average and the S&P 500 indexes ending a five-day losing streak after a robust jobs report gave the Street confidence that the economic recovery was gaining strength. As a result, the S&P 500 scored its best day in nearly a month, with all 10 S&P sector indexes solidly higher in the broad rally.

 

About two-thirds of the stocks traded on both the New York Stock Exchange and Nasdaq ended the day in positive territory, although both the Dow and the S&P 500 closed slightly lower for the week, snapping an eight-week rally for both indexes.

 

Meanwhile, the economy added 203,000 jobs to nonfarm payrolls in November, exceeding the forecast. As a result, at least in part, the unemployment rate fell to a five-year low of 7 percent in November from 7.3 percent in October.

 

Many market participants have expected the Fed to announce a cut in stimulus in March. The Fed has said it would slow its massive bond purchases when certain economic measures meet its targets, including a drop in the U.S. unemployment rate.

 

The S&P 500 recorded its best day since November 8, and the Dow's gain was its largest since October 16. After an eight-week run that pushed the S&P 500 up nearly 7 percent, the benchmark index had dropped 1.2 percent over the past five sessions, its longest losing streak since late September. For the week, the Dow fell 0.4 percent, and the S&P 500 dipped 0.04 percent, while the Nasdaq rose 0.07 percent.

 

Intel ranked among the S&P 500's top gainers, rising 2.3 percent to $24.82 after Citigroup raised its rating on the chipmaker to "buy" from "neutral."

 

J.C. Penney fell 8.7 percent to $8.08 after the department store chain said it had received a letter of inquiry from the SEC, seeking an explanation on the company's financial position. The stock is down almost 60 percent for the year so far. Barnes & Noble also disclosed an SEC investigation, and its stock slid 12 percent to $14.43.

 

Among the other economic indicators released on Friday, personal spending rose 0.3 percent in October, slightly higher than expected. The Thomson Reuters/University of Michigan's preliminary reading on the overall index on consumer sentiment index came in at 82.5 for December, up from a final November reading of 75.1.

 

About 4.85 billion shares changed hands on the major equity exchanges, according to BATS exchange data.

 

Unemployment at 5-Year Low

 

Employers hired more workers than expected in November and the jobless rate hit a five-year low of 7.0 percent, raising the paranoia on Wall Street that  the Federal Reserve could start ratcheting back its bond-buying stimulus as soon as this month.

 

Nonfarm payrolls increased by 203,000 jobs last month, following a similarly robust rise in October, the Labor Department said on Friday. The report, which showed broad gains in employment and a rise in hourly earnings, suggested strength in the economy heading into year-end.

 

The unemployment rate fell three tenths of a percentage point to its lowest level since November 2008 as some federal employees who were counted as jobless in October returned to work after a 16-day partial shutdown of the government. The decline came even as the participation rate - the share of working-age Americans who either have a job or are looking for one - bounced back from October's 35-1/2-year low.

 

Contributing to its firm tone, the jobs report showed that the length of the average workweek reached a three-month high and that 8,000 more workers were hired in September and October than previously reported.

 

In addition, a measure of underemployment that includes people who want a job but who have given up searching and those working part-time because they cannot find full-time jobs fell to a five-year low.

 

There is considerable thought that the will wait until March before dialing back its bond but there is a growing number now see December or January as likely.

 

While labor market and consumer spending indicators are strengthening, the housing market and business spending have slowed. Inflation is still low, which is one reason the Fed remains cautious with regard to pulling back its stimulus.

 

There is also the belief that the Fed will be wary of dialing back bond purchases before lawmakers strike a deal to fund the federal government. That could come as soon as next week, however. Congressional aides have said negotiators are down to the final details.

 

The drop in the unemployment rate brought it closer to the 6.5 percent level that policymakers said would trigger discussions over when to raise interest rates from their current levels near zero.

 

The job gains in November were broad-based, with 63.5 percent of industries increasing employment. Private-sector payrolls rose 196,000. But government employment also increased as hiring by state and local governments offset a drop in federal employment.

 

Manufacturing payrolls moved up 27,000, the fourth straight monthly gain and the largest since March 2012. Construction employment rose 17,000, building on an October increase even though the housing market has lost some momentum.

 

Growth in retail employment slowed, with the sector adding 22,300 last month compared to 45,800 in October. A late Thanksgiving holiday could have resulted in some seasonal hiring not being captured in November's report.

 

Leisure and hospitality, as well as professional and business services payrolls, rose but at a slower pace.

 

Average hourly earnings rose by four cents last month, while the length of the workweek edged up to an average of 34.5 hours from 34.4 hours - both bullish signs for the economy.

 

Non-Farm Payrolls Up Sharply

 

The Labor Department reported on Friday that employers hired more workers than expected during November with non-farm payrolls increasing by 203,000 new jobs. In addition, the Department reported that the unemployment rate fell three tenths of a percentage point to a five-year low of 7.0 percent, its lowest level since November 2008. That in turn could fan speculation over whether the Federal Reserve will begin its tapering program this month. The closely watched employment report was released little more than a week before the Fed's December 17-18 policy-setting meeting.

 

Job gains for September and October were revised to show 8,000 more jobs created than previously reported, lending more strength to the report. Other details were also upbeat, with employment gains across the board, average hourly earnings rising and the workweek lengthening. In addition, the jobless rate fell even as the participation rate - the share of working-age Americans who either have a job or are looking for one - bounced back from a 35-1/2-year low touched in October.

 

The stronger-than-expected reading on job growth in November could stir speculation the central bank might reduce its current pace of bond purchases this month, but most economists feel the Fed will want further signs of economic progress before acting.

 

Minutes from the Fed’s last meeting in October indicated that officials were preparing to scale back their monthly $85 billion bond-buying campaign in coming months as long as the economy continues to improve.

 

Economic data so far for the fourth quarter have been mixed, with labor market and consumer spending indicators firming. However, the housing market and business spending have slowed.

 

Nonetheless, there is also a high probability that the Fed will not want to pull the trigger before lawmakers on Capitol Hill strike a deal to fund the government. Congressional aides have said budget negotiators were down to the final details as they appeared to close in on sealing a two-year deal. And while there are some economists who look for the Fed to scale back its purchases in December or January, most expect it will hold off until March, and some believe it may wait until June, given that inflation remains low.

 

Job gains in November were broad-based, with government payrolls also rising as hiring by state and local governments offset a decline in federal government employment.

 

Manufacturing payrolls increased 27,000, rising for a fourth straight month. Construction employment advanced 17,000, adding to October's gains even as the housing recovery has slowed.

 

Retail employment slowed, adding 22,300 last month compared to 45,800 in October. A late Thanksgiving holiday could have resulted in some of the seasonal hiring not being captured in November's report. Both leisure and hospitality sectors, as well as professional and business services sectors showed payroll gains, but at a slower pace than in October.

 

Other details of the report showed average hourly earnings rose by four cents. The length of the workweek edged up to an average of 34.5 hours from 34.4 hours.

 

Consumer Sentiment Rises

 

Consumer sentiment rose sharply in December as Americans' outlook on the economy and job prospects improved, a survey released on Friday showed.

 

The Thomson Reuters/University of Michigan's preliminary reading on the overall index on consumer sentiment jumped to 82.5 for December, up from a final reading of 75.1 in November. This was the highest reading for the index since July.

 

The survey's barometer of current economic conditions reached 97.9, up from 88.0 in November, exceeding expectations for a reading of 90, while its gauge of consumer expectations rose to 72.7 from 66.8, above an expected 68.

 

The current conditions index was at its highest since July, while the consumer expectations index was at its highest since August.

 

The one-year inflation expectation rose to 3 percent from 2.9 percent, while the survey's five-to-10-year inflation dipped to 2.8 percent from 2.9 percent.

 

Holiday Discounts Could Hurt Retail Earnings

 

Consumers have feasted on discounts this holiday season, but it means thinner profit margins for retailers from Wal-Mart Stores Inc (WMT.N) to Neiman Marcus, and car makers, a red flag for investors who have ridden a sector rally all year.

 

This week, apparel retailers including Aeropostale and Guess lowered fourth-quarter earnings forecasts, and on Thursday, several major U.S. retailers posted disappointing sales for November.

 

The discounting is expected to continue as retailers seek to hold onto market share. Shares of retailers, big winners this year, are starting to look expensive and some investors are positioning themselves to profit from a decline.

 

Most of the major retailing sectors have seen their margins on earnings before interest expenses and taxes, or EBIT, decline from last year to the most recent quarter, according to Thomson Reuters. A group of 11 multiline retailers, including Target and Macy's, have seen that margin fall to 5.2 percent from 6 percent, while the auto companies have dropped to 1.5 percent from 3.6 percent.

 

One notable divergence is in the specialty retailers, which includes a number of luxury goods companies, apparel names and home improvement companies. Their margin has risen to 9.8 percent from 9.2 percent, in part due to Home Depot, Signet Jewelry and O'Reilly Automotive.

 

Major sellers of apparel and other goods are expected to face cost pressures throughout the final quarter. The most recent report on third-quarter gross domestic product showed a surprising increase in inventories - indicating some overly optimistic sales expectations that will have to be adjusted for through lower prices.

 

L Brands, the parent of Victoria's Secret, reported on Thursday that same-store sales fell 5.5 percent, while analysts were expecting a 1.1 percent decline. It said profit margins had taken a hit because of ramped up deals but would not say by how much. The company also noted that in its Victoria Secret online business it had to mark down unsold apparel.

 

On Wednesday, Express shares fell as much as 24 percent in afternoon trading, making the fashion retailer the top loser on the New York Stock Exchange after it forecast a weaker-than-expected holiday quarter amid intense promotions.

 

Thomson Reuters data for consumer discretionary stocks shows earnings growth estimates for the fourth quarter have fallen 4.4 percentage points to 9.8 percent since October 1. The overall S&P has seen its estimates fall 3.1 percentage points to 7.8 percent, but some think the consumer sector has further to go.

 

Operating margins had already been dropping for Best Buy which has been matching rivals' online prices and spending on revamping its stores. They fell to negative 0.3 percent so far in 2013, compared with 2.1 percent in 2012 and 4.8 percent in 2010 and 2011.

 

While major automakers reported their best U.S. sales month in 6-1/2 years this week, manufacturers provided incentives averaging more than $2,500 per vehicle in November, according to TrueCar.com.

 

Shares of General Motors Co (GM.N) and Ford Motor Co (F.N) slid more than 3 percent on Tuesday as some investors worried that the discounts signaled a return to the practices that eroded industry profits in the years before the 2007-2009 recession.

 

As a result, investors have begun to hedge against a potential decline in the retail sector. The number of shares being borrowed, a proxy for short-selling, has surged in the last few days in some big names like Wal-Mart and Best Buy.

 

Best Buy, its stock up about 260 percent so far this year, was another with high short interest, seeing a 30 percent rise in the last couple of days.