Retail Sales, JPM, WFC

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The indices moved a little higher yesterday, but cautiously so. We are still at the start of earnings season and after the rather big jolt higher, some are wondering (of course) if we haven’t stretched our necks a little too much. There is some more economic data yet to come out, including Retail Sales, which will help give us a pulse on the domestic economy.


Retail Sales & Earnings

The Labor Department reported the largest drop in almost a year for March’s Retail Sales. The index fell 0.6% after increasing 0.7% in February. This was a larger drop than economists expected. Based on government data, the past 5 years has seen anemic growth on consumer spending. In fact, we haven’t even seen 1% annual growth in consumer spending, which is horrible. Add in the margin of error, and it is possible that consumer spending is flat to negative. The retail sales report just confirms that trend. So when politicians talk about the strong consumer, consumer demand, and jobs, I look at the consumer spending which hasn’t breached 1% and the unemployment rate (U3) which had more people fall out of the count (over 500,000) last month than jobs were created. No, the domestic economy is not doing well and further proof is that the Federal Reserve and the government have championed even more stimulus, monetary policy, money printing, and bond/mortgage buying. If consumer growth and jobs were great, don’t you think they would stop the billions a month in money printing and stimulus, or at least slow down? Instead, the government and Fed are doing the opposite. Makes you wonder what would happen if they stopped?


Retail Sales
Courtesy of Shadowstats

We also saw the release of the Producer Price Index (PPI), or the government’s inflation measure for producers. The BLS reported that it DECREASED 0.6% in March; “seasonally adjusted”, of course. That’s right, the BLS reported DEFLATION. Food actually increased 0.8% as well as finished goods being up 1.1%. What brought down the “seasonally adjusted” data was gas (energy), which fell 3.4%. Even with the “seasonal adjustments”, the core goods (non-food and energy) have risen every month for the last year.

The data, just like last week’s Labor Report, reflects a stagnant economy that is on the government life-line. How does that translate to the stock market? Two ways:

  1. First, weak retail sales just continues to feed the Fed that more QE and more printing are needed. Some Fed officials (Doves) believe that they should print MORE and we need MORE stimuli. This will help push equities higher as the Fed pushes down interest rates, making bonds unattractive. That’s bullish for the market, as we have seen.
  2. Second, it reflects that companies that rely on domestic spending will continue to maintain high productivity levels, (more layoffs and/or less hiring). Companies will continue to manage the cost side of the equation, as revenue/sales growth remains tepid. We could see more share buy-backs, which reduce the pool of float and, even on lower revenue, can boost future earnings (same dollars on fewer outstanding shares = higher per-share returns). This is not a good long-term sign for these companies as they certainly don’t want to ramp up share buy-backs after the stocks are heading higher. Note that we have seen the largest insider share selling this last quarter, at the same time companies are doing share buy-backs… makes you think!

The economic data, while not good, can be bullish because it just fuels the Fed money printing and stimulus measures. It also further confirms that treasury bonds will remain unattractive, that forces investors into the equity markets and NOT for the right reasons.

There remains good news, looking at those companies that continue to expand in the emerging markets and becoming less dependent on the domestic consumer (or consumers in the Developed World/West = Europe, US, and Japan). These companies are better long-term REAL growth alternatives.

Earnings:

JPMorgan Chase (JPM) reported earnings this morning that beat expectations. The company earned $1.59 a share (after a first quarter share buy-back). The company generated $25.8 billion in revenue, down 3% from a year ago. However, profits were up $6.1 billion from $4.6 billion. The company did announce planned lay-offs of 17,000, which has already started. The company also had more write-downs in its mortgage units, not as much as last quarter, but it was also able to unload many of those non-performers to the Fed, plus last year’s charge-off from their big loss from the “London Whale”, did help show a profit jump this quarter. If we just look at the headlines, the earnings look good, but when we peer into the HOW we see that revenue was down, the company is facing both government and shareholder problems, and the company is cutting costs with share buy-backs to boost profits. Jamie Dimon warned that the company would likely face more “corrective action” from regulators in the days to come. The Federal Reserve also requested the company to submit a plan addressing the “weaknesses” of its capital structure. Also, there has been some share-holder concerns as to whether Dimon should remain both Chairman and CEO of the company, some wish to split that role. The company is down slightly in the pre-market, as there are still more questions than answers, even if the headline number looks a little better than expected.


Dimon - JPMorgan
Courtesy of wikipedia

Wells Fargo (WFC) also reported earnings that beat expectations and a rise in profits similar to JPMorgan. The company’s revenue came in lighter than expected at $21.3 billion; down 9% from the previous quarter and down 2% from a year ago. However, the media is focusing on the rise in earnings, up over 20% to $0.92 cents a share and beating estimates. The company continues to cut costs faster than revenue declines. They cut 5% in costs on a year-over-year basis with a revenue decline of 2%. However, as we have seen, the revenue is falling faster on a quarter-over-quarter basis.

I scanned some of the media headlines on these two companies, and for the most part it is all focused on the earnings and NOT revenue. Most of the articles don’t explain HOW they are beating estimates. Few words are written about the year-over-year and quarter-over-quarter revenue declines, cost cutting, lay-offs, or even share buy-backs. I wish they could start putting the pieces of the puzzle together and ask HOW, rather than just posting the headline numbers. What we are missing is a news organization that gives a detailed comparison of quarter-over-quarter and year-over-year as to revenue growth, costs, how share buy-backs impact the price, insider trading, lay-offs, charge-offs, etc. It seems like most of these news agencies are just as easily fooled by corporate earnings as they are by government data.

The pre-market futures are off and so far only Bloomberg and a couple of analysts on CNBC have begun to mention a little concern on the JPM and WFC numbers – they talking about the revenue and cost cutting. The market is also probably coming off a little after a huge jolt rally and the need for some profit-taking heading into the weekend.


Support & Resistance

INDU 14,700
The futures are looking lower. I think we could visit 14,800 this morning and if we can’t hold there I would look at 14,700 as support. Weak retail sales are pushing down the pre-market futures.

NDX 2825
2800-2825 is the resistance band that we broke through. If we pull back today we could see support in the 2800-2825 range.

SPX 1580
I would watch the 1580 level as a support area for any pull back. The VIX is very low, but I expect it to jump this morning and possibly hit 13.

RUT 935
The broader based index did NOT confirm the huge break-out rally of the narrower indices and hit new highs. I believe that is a warning indicator that this rally needs a pull back to supports before it can be confirmed. The 10-year yield is heading lower, which means money is heading into bonds again and out of equities this morning.


Cyprus looks like it may make the front page again as the initial $17 billion they need to get through their problems is actually $23 billion. The EU had initially offered a bailout of $10 billion with Cyprus required to come up with the $7 billion. Now the EU has said they need to come up with $13 billion. Where is Cyprus going to get $7 billion, let alone $13 billion? The nation said it will cut pensions and government work force, but for an island nation of less than 700,000 people, cutting costs to come up with $13 billion is never going to happen. The nation is also selling its gold reserves as well, but that is not going to bring in enough. It looks like the odds are increasing for Cyprus to leave the EU.

North Korea has raised one of their missiles into firing position according to intelligence reports from South Korea and there is suspect rumor/news that they may even have an operational nuclear war-head. The North Korea story could hit headlines any day and a firing of a missile and/or any escalation could bring volatility to the market as well as relations between the US and Asia.

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