Weekly Market Commentary 7-11-2011

July 11, 2011

Setting Up for Something Big

Tim Phillips, CEO – Phillips and Company

Last Friday, The U.S. Bureau of Labor Statistics released the June Employment Report. The numbers were dismal, and well below consensus.

  • Only 18,000 total nonfarm payroll jobs added (consensus was 80,000)
  • Revised down April and May payrolls numbers
  • The unemployment rate increased from 9.1% to 9.2% (consensus was 9.1%)
  • The participation rate declined to 64.1%
  • The average workweek declined to 34.3 hours (consensus was 34.4)

Despite the dismal report, The Dow Jones Industrial Average closed down a little over 60 points (.48%) on Friday and was still up 722 points (6.16%) for the last two weeks. The numbers may have been below the consensus but the market wasn’t surprised.

In fact, if you look at the unemployment forecasts from the beginning of the year you can see we are still within the forecasted range.

United States Unemployment Forecasts

Moody's

9.30%

Morgan Stanley

9.20%

Goldman Sachs

9.50%

Phillips & Co.

9.30%

If the market begins to expect slower than normal growth and the economic data is going to be range bound, then the market should be surprised if we see normal or even higher than normal growth. So the question is where is there an opportunity to surprise the market with better growth numbers? We believe the answer is 2nd quarter earnings season, which Alcoa Inc. (NYSE:AA) will kick off today after the close.

We had a lot of one-time events last quarter:

  • Flooding throughout the Midwest of the United States
  • A massive earthquake in Japan followed by tsunamis and a nuclear meltdown
  • Politics playing brinkmanship with United States budget and debt ceiling
  • Threats of default across Europe
  • The end of Quantitative Easing 2

It’s no wonder why analysts have been lowering forecasts. According to Bespoke Investment Group, “This is now the tenth week in a row that this reading has declined, representing the longest streak since at least late 2007.”

s&p 1500 net earnings revisions by sector

Investor sentiment looks to still be low and there is plenty to be worried about, but right now we’re trying to focus on where the high probability surprises will be.

As always we appreciate all of your feedback. Please Email your thoughts and comments to me directly.

Tim Phillips, CEO – Phillips & Company

tphillips@phillipsandco.com

@PHCOAdvisors

Primary Research done by:
Adam Gulledge, Associate – Phillips & Company