Equity market bouncing very nicely this morning ...

Let's start with the good news.  First, there's an overall expectation that this week's FOMC will sound more dovish.  Second, the latest Housing Market Index (HMI) of 52 for June was the highest it has been since 2006!  Third, the first two pieces of good news have pushed the S&P 500 up nearly 1%.  

The not-so-good news is the Empire State Manufacturing survey, as although it came in much higher than expected, seven of its nine sub-indexes declined and were either at 0.00 or in negative territory.  The overall index came in at 7.84, a huge improvement from last month's -1.43, and certainly above the expectations of no change.  We find it very difficult to explain such an encouraging figure when new orders, shipments, unfilled orders, inventories, number of employees, and average workweek, all declined significantly.  Number of employees sub-index dropped from 5.68 to 0.00, and all other sub-indexes stated earlier declined further into negative territory.  By the way, the 6-month forward looking index, along with what we consider as important sub-indexes, was also lower.  

We would like to say "don't let the smooth taste fool ya", but then again the equity market is already up 1% this morning.  Regarding the names that we follow, AVID is up 0.5%, BCOR up 1.8% and nearing its 52-week high, FB remains near where we think it should be valued at, but is up 2%, and IACI is approaching $50, up 1%+.

Performance Update for Week of 6/10 - 6/14

PPI, industrial production, and consumer sentiment all miss ...

Overall, today's economic figures were far from being impressive.  

At least based on the headline PPI number, the hope of tapering the taper talk was dimmed a bit.  May PPI increased 0.5% from April, higher than the economists' 0.2% estimate.  Excluding food and energy, the m/m increase was in-line at 0.1%.  Of course, many look at the figure that excludes food and energy due to the volatility of those two groups.  But then again, given the less elastic demand of food (or comparatively speaking, the inelasticity of demand for food), we think changes in food prices will impact everyone and should be taken into account.  Food prices alone went up 0.6%, mostly driven by increase in egg prices.  We wonder if different government organizations will now suddenly launch 'health campaigns' against egg consumption!  Crazier things have happened!

Energy prices increased 1.3%, driven mainly by gasoline prices.  This goes along with our assumption about the retail sales numbers that we mentioned earlier this week; however, those retail sales numbers did not verify the assumption.  We were probably one month too early.  We could see higher gasoline prices impact CPI in June, therefore also having an impact on June retail sales.  If next week's May CPI comes in a bit high though, then hopes of tapering the taper talk, especially within the FOMC statement, could be dimmed even further.

Industrial production remained pretty much unchanged, which is what we had anticipated.  However, that was slightly below the 0.2% consensus.  We note that the April m/m change was revised to -0.4% from -0.5%, which makes the 'adjusted' consensus for May 0.1%.  But again, the expectation was a bit high.  We also expected a miss on capacity utilization, which did take place, but the miss was around 20bps more than we had projected.  Capacity utilization came in at 77.6%, below our 77.8% and the Street's 77.9%.  The no-change in production, accompanied by nice decline in capacity utilization, is not good news when it comes to the state of employment, in our opinion.  

The University of Michigan consumer sentiment figure also missed expectations; 82.7 vs 84.5.  

With disappointing economic numbers, the market is barely down, especially given the fact that it spiked nearly 1.5% yesterday.  Again, the Hilsenrath impact cannot be ignored.  We will see if Mr. Hilsenrath has written an even more dovish version to be published just in case next week's CPI numbers come in too high.  We wouldn't be surprised, as these days (or the past 3+ years), Bernanke and Hilsenrath have done a very good job implementing behavioral and psychological strategies to 'force' most to take more risk without much fundamental or economic justification. 

Herr Hilsenrath demonstrates heroism once again ...

Well, as we assumed on Tuesday night (http://mogharabi.blogspot.com/2013/06/update.html), Mr. Hilsenrath went to work and published another great dovish article to help everyone relax a bit.  The result is today's huge turnaround with the S&P 500 jumping nearly 1.5% and closing at 1636.4.  

Hilsenrath's article heading says it all: Analysis: Fed Likely to Push Back on Market Expectations of Rate Increase. (http://blogs.wsj.com/economics/2013/06/13/fed-likely-to-push-back-on-market-expectations-of-rate-increase/?mod=WSJ_hpp_LEFTTopStories)

Although such a move was very easy to anticipate, as we did, we must ask who (or what group) knew exactly when Hilsenrath was going to publish this?  The market jumped before the article came out, and one cannot say it was driven by the 'good enough' economic news.  Whether it is economic data or the publishing of an article by an 'influential' 'journalist', the ones that get the info first always win.  

From a technical standpoint, MACD turned up a bit today, so the upwards trend, which has been in the market since mid-Nov. '12, has not changed yet.  Slope of the regression line increased slightly, moving the latest linear regression level to 1619.9, from 1617.  

In addition to Hilsenrath's article, a miss in tomorrow's PPI, industrial production, or University of Michigan consumer sentiment could further taper the talk of tapering, which could push the equity market a bit higher.  No one wants good economic data!  So it is not too difficult to realize that the market remains very dependent on the Fed. 

Update on Economic Data ...

Initial jobless claims came in better than expected with no revisions for the prior week; 334K (down 12K from prior week) vs 350K. Of course, the seasonal factor did its job as the non-seasonally adjusted figure was up more than 37K from the prior week. But as they say, these seasonal adjustments get cancelled out over the year; at least we hope so. 

Headline retail sales m/m change of 0.6% was higher than the 0.5% consensus. However, excluding auto and gas, the 0.3% increase was inline with expectations. 

The equity market is responding as well as it can with the S&P 500 being up 0.12%. 

BCOR: H&R Block Misses Q4 Expectations

H&R Block (HRB) disappointed on the top and bottom-line with EPS of $2.54 and revenues of $2.2bil, missing the $2.60 and $2.3bil estimates, respectively.  While this, along with profit taking, may explain Blucora's (BCOR) decline lately, it will likely push the stock down a bit further.  Of course, BCOR is up 18.2% since we suggested it, compared with S&P 500's 6.9% gain. And BCOR did hit its 52-week high of $18.92 in late May. 

When it comes to BCOR, we believe the HRB miss will be forgotten about soon.  As a reminder, BCOR's fiscal calendar is the same as the regular calendar.  For this reason, most of BCOR's tax services revenues were already reported in its Q1 report, and were impressive.  In addition, the very narrow-range guidance that the Company provided for Q2 tax service revenues, $23.0MM - $23.5MM, shows that management had a pretty good idea about revenues coming in during Q2.  For this reason, the risk of BCOR missing on the top-line in Q2 is minimal.

May '13 Industrial Production Estimate ...

S&P 500 had another bad day, closing down 0.84% at 1612.5.  It also closed below the 1617 regression line that we touched on yesterday.  Of course, today's decline cut the MACD nearly in half to 2.44.  It is closing in on the zero line with the average still above it at 8.04.  The upward trend has not only stopped, but it is set to turn into an effective downward trend unless helped by some economic data and/or the Fed.  Retail sales and initial jobless claims data will be released tomorrow, followed by May PPI and industrial production on Friday.  

Again, we think May retail sales may have been helped with slight uptick in gasoline prices during the second half of May.  Auto sales will likely be flat after the nice 1% pop last month.  So, while the headline figure might come in-line or better than the 0.5% m/m change consensus, we think retail sales, excluding autos and gasoline, could come in slightly below the 0.3% consensus.  

Initial jobless claims are pretty difficult to project, especially given the seasonal factors applied and BLS' consistency with its revisions.  The consensus is 350K. 

Regarding Friday's industrial production number, given the continuing disappointment in ISM-manufacturing, we think it will come in pretty much unchanged at 98.76 (a mere 0.02% change) compared with April's 98.74.  The consensus is for a 0.2% change or 98.94.  Although most of the regional surveys' work week figures declined in May, we think given lower production, capacity utilization remained at 77.8% compared with economists' estimate of 77.9%.

Update ...

S&P 500 dipped around 1% on Tuesday as, very surprisingly, Japan paused central planning for a bit.  As we mentioned on 5/11, we believe the equity market is overvalued, partially due to the ever-present QE premium.  Of course, as is the case with any centrally managed/controlled economy and equity market, once those central planners see signs of economic weakness or not as much growth as desired, they begin to taper the talks of tapering.  Do not be surprised if this takes place sometime this week.  Who knows, Mr. Hilsenrath and Bernanke may be discussing variety of strategies each with behavioral impact on some institutional investors but certainly on 100% retail investors; or so they hope.  We still value the S&P 500 at around 1475.  We are not saying it will get there tomorrow or next month, but at some point, we think within the next 12 - 18 months, the reality of fundamentals will take over, no matter how many 'green shoots' or 'sugar highs' Bernanke throws at the market.

From a technical standpoint, at 1626.13, S&P 500 is not far away from going below its linear regression level of 1617.  Before getting there, it will have to break through and stay below the 'semi-support' level of 1625.  By the way, since we last discussed the MACD level being too high (5/22), it has dropped from 24.05 to 4.67 (as has S&P 500, from 1687 to 1626), but it remains below its average.  For this to reverse, we think MACD would have to start up-trending and cross above its average, which currently stands at 9.45.  One more thing on the technical side, the next level of the Fibonacci Retracement is around 1595, which if the market goes below, it can dip all the way to the 1540 - 1550 range.  But as is with technical analysis, everything can change very quickly.

Some potential market moving economic indicators being released later this week include the May retail sales, weekly initial jobless claims, May PPI and May industrial production.  

We think May retail sales may have been helped with slight uptick in gasoline prices during the second half of May.  Auto sales will likely be flat after the nice 1% pop last month.  So, while the headline figure might come in-line or better than the 0.5% m/m change consensus, we think retail sales, excluding autos and gasoline, could come in slightly below the 0.3% consensus.  

Initial jobless claims are pretty difficult to project, especially given the seasonal factors applied and BLS' consistency with its revisions.  Economists have projected a seasonally adjusted figure of 350K.  As usual, most of them are likely being 'uber conservative' with their estimates. 

We will post our industrial production and capacity utilization estimates by Thursday.

Performance Update for Week of 6/3 - 6/7

May '13 NFP Pretty Much In-line with Expectations ...

Our NFP projection track record certainly is not improving.  With all the news about NSA/PRISM and basically the 'Big Brother' watching over everyone (http://www.washingtonpost.com/wp-srv/special/politics/prism-collection-documents/), who knows which numbers released by BLS are legitimate or accurate.  But the market continues to move based on these figures, so we have to pay attention.  May change in NFP was 175K, which included a net -12K adjustment in NFPs for March and April.  For this reason, that 175K change should be looked at as 163K which is pretty much in-line with the consensus, and significantly higher than our 95K guesstimate.  

The winners were jobs in retail trade and temp help services with net changes of +27.7K and 25.6K, respectively.  Jobs in healthcare, and leisure and hospitality also grew.  Weakness was evident in manufacturing, as jobs in that sector declined for the third consecutive month.  Government jobs also declined, but the rate of decline has been decelarating the last couple of months.

With all of those good numbers, average weekly hours remained flat, and hourly earnings went up by only a penny.  Wages continue to lack growth.

On the household survey, the number of people unemployed for more than 27 weeks increased in May, unlike in March and April.  Decline in unemployment duration of 5 - 14 weeks and 15 - 26 weeks was more than offset by increase in  the ones unemployed for less than 5 weeks.  

The U-6 unemployment rate went down 10bps to 13.8%, matching the March level and below last year's 14.8%.

S&P 500 futures up 0.65%.  Of course, such initial positive reaction is not a surprise.  We must note that the talk of QE exit strategy will resurface which could put the QE premium that is everpresent in the equity market at risk.  Lastly, watch what you do and say as the 'Big Brother' is watching you!