Week 36 Performance.....Puzzling Performance

This market left allot of people scratching their heads this week.  What looked to be a crushing jobs report on Friday following a monster rally on Thursday due to more talk about solutions from Mario Draghi and the ECB, the equity markets barely moved at all on Friday.

When we saw the jobs number come out we thought we were going to be in for a rough ride and expected to give back all of Thursday's gains.  Instead the markets started up early then began to moderately descend and finally stage a rebound in the afternoon to finish positive.

Let's recap some of the economic data for the week starting with the jobs report released on Friday:  Source data from Barron's

• Payroll jobs in August gained 96,000 vs. analyst projections of 125,000, following gains of 141,000 in July (originally 163,000) and 45,000 in June (previous estimate of 64,000). The net revisions for June and July were down 41,000.   The unemployment rate slipped to 8.1 percent from 8.3 percent in July due to a sharp drop in the labor force
• Auto Sales released on Tuesday saw a 2.8 percent monthly boost in August. Sales for the month are an annualized 14.5 million units which matches February as the best rate of the year. August's gain is centered in domestic cars and domestic trucks where strength offsets slight monthly weakness on the import side.
• ISM Manufacturing numbers release on Tuesday at 49.6 were lower than the projected 50.0.  August, showed their third straight monthly contraction and at the deepest rate since April 2009. New export orders are definitely part of the problem, at 47.0 for what is also the third straight month of contraction. Manufacturers, as they wait for new orders to return, are increasingly drawing down their backlogs which are at 42.5 for the fifth straight month of contraction.
• Productivity released on Wednesday showed growth for the second quarter.  Nonfarm business productivity rose an annualized 2.2 percent in the second quarter, compared to the initial estimate of a 1.6 percent gain and compared to a 0.5 percent dip in the prior quarter. The consensus forecast was for a 1.9 percent increase for the second quarter. Unit labor costs were revised down to an annualized 1.5 percent increase, compared to the first estimate of 1.7 percent, and following a 6.4 percent surge in the first quarter. Expectations were for a 1.4 percent rise. 
• New jobless claims fell sizably in the September 1 week to 365,000 for the lowest level in 4 weeks. This is right at the best end of expectations. The weekly decline of 12,000 is the best in 6 weeks. A slight offset is a 3,000 upward revision to the prior week.  Another offset to the latest week's improvement is upward movement in the 4-week average to 371,250. This unfortunately is the highest level in 7 weeks and is slightly higher than the month-ago trend. Yet the 4-week average was trending more favorably during the August 18 week which was the survey period for tomorrow's employment report.

 

• The ISM's non-manufacturing sample reports wide strength in August with the composite index up 1.1 points to 53.7 for the best monthly rate of general growth since May. The rise in the composite is led by a 4-1/2 point surge in employment to 53.8 which is the best reading since April and which points to strength for tomorrow's employment report. A slowing in delivery times, which is a sign of rising demand, also boosted the composite.

So what does this all mean?  To us it means that people and companies are not buying new good with the exceptions all automobiles which does give us some confidence in the consumer.  However the only consumers who can afford a new vehicle are those who are comfortable in their current employment situation which we find to be potentially shrinking.

We believe that unemployment is going to remain stubbornly high due to structural changes within our economy.  Those that have been out of work the longest are having the hardest times breaking back into the job sector which is evidence in the historically low labor participation rate.  People are just falling off of the roster which is what drove the unemployment rate down.  This is not a good thing.

As productivity continues to either strengthen or at worst case, stay level, employers do not need to hire new workers especially when there is weak demand for their products.  This continues to support our theory about the two halves of America .  Those that have a job and can buy a car, iPhone, etc. and those that cannot who have been unemployed and are facing extreme challenges.  The great recession is far from over for most of these people.

We think, unfortunately that the only reason why we didn't see a drop in the markets on Friday after the jobs report is that this data gives the Fed the support they are looking for to put together another quantitative easing program this fall.  We rallied Thursday off of the European news that he ECB was in essence going to do whatever it takes to keep the insolvent countries going in the European Union.  Same things we have already been hearing but this is what it takes to make the markets go these days.

We had another big week in the DWCM Fund, up another 2.2% which puts us up 26.8% for the year beating all four major equity market benchmark by.  We are beating 3 of the 4 indices by almost 2 fold.

We did make four moves this week exiting out of our BMW and K12 positions making room for Lindsay and Intel.  Although we continue to like BMW which has been a consistent performer for us all year, we wanted to take profits and maintain our cash position level.  K12 was a reduction in our speculative risk profile.

Lindsay fits into our agriculture strategy as it is a manufacturer of irrigation equipment.  Intel is the behemoth chip manufacturer who just reached our buying point despite cutting it's revenue forecast on Friday.

The Week Ahead
This week doesn't pack as much economic data punch as last week.  However, things will really heat up on Thursday when the FOMC releases it's forecast and Bernanke holds his press conference.  This will likely move markers one way or another as the anticipation of additional QE in our opinion is already baked into these markets.

Friday is the major day of economic release with CPI, Retail Sales, and sentiment survey results.

• Mon -  Consumer Credit 
• Tue -  NFIB Small Business Optimism Index 
• Wed - FOMC Meeting Begins
• Thu -  Jobless Claims,  Producer Price Index,  FOMC Meeting Announcement,  FOMC Forecasts,  Chairman Press Conference
• Fri -  Consumer Price Index,  Retail Sales,  Industrial Production,  Consumer Sentiment,  Business Inventories

Have a Great Week!

DreamWorks Capital Management
FREE LECTURE:  Our next finance lecture will be on Tuesday September 18th at the The Community House.   The topic will be Balancing Your Changing Investment Needs: Emergency Fund, Investments, Retirement, Education, and Philanthropy.  We will cover significant points regarding creating, developing, and executing on your wealth management plan.  We hope to have another interactive group, so be sure to sign up by emailing me directly at pfenner@dwcmllc.com or by contacting The Community House at 248-644-5832.  There is no charge and light refreshments will be served.