Last Monday I Wrote the Upcoming Week Could be a Volatile Given the Extremely Busy Economic and Earnings Calendar.

Last Monday I wrote the upcoming week could be a volatile given the extremely busy economic and earnings calendar.  Unfortunately I was correct as all indices declined about 2.0%.

This week is the inverse.  The economic calendar is sparse and the earning season is largely over.  Both revenues and earnings have surprised considerably on the upside with the latter increasing by the largest amount since 3Q11.

Commenting upon revenue gains as it relates to earnings and job growth—the economy has produced over 200,000 jobs per month for the past six months, the greatest six month average increase since 1997—revenues have to rise for earnings gains, an increase that will produce jobs.

As noted many times and as inferred above, the productivity numbers have suggested job creation should have commenced many quarters ago.  As widely discussed, it was only four months ago the economy finally created all the jobs lost from the recession even as the economy today is $2 trillion or 13.3% larger than the economic apex in December 2007.

In other words, it took 58 months to recover all lost jobs in the recession according to the BLS.  Historically all lost jobs are recovered within 15 months after the recovery commenced.

I will skip the possible whys and therefores for this anemic job creation but write companies will only increase hiring when absolutely economically necessary.  Ifrevenues continue to rise, so will job creation thus permitting the labor participation rate (LPR) to also rise.

Speaking of the LPR, August’s LPR rose from its lowest level since March 1978, a  0.1% increase to 62.9%.  August’s unemployment rate also edged 0.1% higher to 6.2% as more workers re entered the work force.  Is this a function of increased confidence one will be able to find a job or was the increase the result of the cessation of unemployment benefits?

I believe the latter but I will skip the diatribe as to why I have this view.

I like many are concerned about wage inflation given the dearth of qualified workers.  July’s jobs data suggested the opposite as average hourly earnings were unchanged versus rising by the consensus estimate of 0.2%.

Generally speaking, I think the data relieved some fears the Fed will act sooner rather than later as wage inflation in this report appeared nonexistent.  Before the data was released, equity futures indicated a sharp decline at the opening but instead opened flat, the result of the above the interpretation.

Equities however got hammered during the day on sovereign debt and European bank solvency concerns.  Treasuries rallied.  However by the end of the day, shares retraced about half of their declines as “prices represent a relative bargain given recent declines” as reported by one financial website.

Friday I wrote:

The question now at hand, have we had the correction all were predicting and are shares now a value thus buying commences, utilizing some of today’s massive cash balances earning nothing?

I will answer this question differently.  If yesterday’s drop was indeed the much needed “correction,” this is the shortest, smallest and least painful correction the market has ever experienced.

What will happen today?

Last night the foreign markets were up.  London was up 0.45%, Paris up 0.71%  and Frankfurt up 0.11%.  Japan was down 0.31% and Hang Sang yup 0.28%.

The Dow should open moderately higher.  72 S & P 500 companies post profits this week.  Will revenue gains continue?  The 10-year is off 1/32 to yield 2.49%.


The information is the personal views of Kent Engelke and is not necessarily indicative of those of Capitol Securities Management. The information contained herein has been compiled from sources believed to be reliable; however, there is no guarantee of its accuracy or completeness. Any opinions expressed here are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results.

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