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ETF Periscope: Will Good Earnings Trump the Sour Economy?

Posted on the 11 July 2011 by Phil's Stock World @philstockworld

Courtesy of Daniel Sckolnik, ETF Periscope

ETF Periscope: Will Good Earnings Trump the Sour Economy?

by Daniel Sckolnik of ETF Persicope

“It is a kind of spiritual snobbery that makes people think they can be happy without money.”  –  Albert Camus

ETF Periscope: Will Good Earnings Trump the Sour Economy?
The equity markets have been blustery for the last two weeks. That changed quickly on Friday, when the Bulls slowed their pace and shot a collective, quizzical look at the hard data that came out even before the market rang its opening bell.

Over the course of the last two weeks, the Dow Jones Industrial Average (DJIA) shot up over 700 points. The Dow seemed well on course to end the week even higher, potentially topping its 2011 high of 12,810. That would have required less than a 1% rise above Thursday’s close, not an uncommon move, particularly in light of today’s low volume, high volatility market. And, if the government’s Labor Department Report had been different, that high most certainly was in danger of being taken out.

If the Labor Department Report had been different.

That’s akin to saying “If Congress was functional, they’d actually get things done.” In other words, an extremely large and unruly “if.”

 

So, as is frequently the case, the economists once again got it wrong. The forecasts of numerous economists, who are, as a matter of course, polled prior to these sorts of data releases, indicated expectations of a rise of nonfarm payrolls in the range of 90,000 all the way up to 175,000. Instead, what we got was an anemic increase of only 18,000 jobs. You’d have to go all the way back to September to find a weaker reading than that.

As John Kenneth Galbraith famously said, “Economics is extremely useful as a form of employment for economists.” The problem is, there are not actually enough openings for economists to help offset the dwindling job prospects for the current 9.2% of the unemployed here in the U.S.

If that “official” number of 9.2% wasn’t bad enough, the government announced that there were actually 44,000 fewer jobs created over the course of April and May than previously stated.

Whoops.

These numbers are simply not indicative of a healthy national economy, especially when you take a closer look at some of the other data contained in the report. This included the fact that those classified as “underemployed” went up from 15.7% as of last March to 16.2%. And, in a trend that is likely to get a lot worse before it reverses, those in the government sector lost 39,000 jobs, including local and state governments. With less and less money allocated for government payrolls across the board, the layoffs are likely to keep coming for the foreseeable future.

The bottom line is this: Wall Street was apparently more than a little surprised to find that the recovery is not exactly continuing apace. The initial results were not pretty, with the Dow at one point dropping by over 150 points.

In spite of all this, the Dow bounced back strongly by day’s end and managed to cut its inter-day losses by more than half. This seemed to indicate that there remains a large number of investors and traders who can’t resist when certain stocks drop to certain price levels. There apparently remains a price point where they still “got to have it.”

Whether these price points remain where they are, or shift significantly lower, will be determined over the next couple of weeks as key 2nd quarter earnings are announced. If the underpinnings that caused the recent spat of poor unemployment numbers are reflected in the next round of corporate earnings reports, than investors will seriously question the state of the recovery. If that reevaluation leads to the conclusion that the troubles on Main Street have once again caught up to Wall Street, a significant correction could occur.

While hedging your positions is always recommended, now is a particularly ripe time to access what you’ve got cooking in the portfolio. Nobody likes a soufflé that has fallen. And a fallen soufflé will be the least of your worries if the new earnings season proves, on the whole, to be on the dark side of the Street.

ETF Periscope

Full disclosure:  The author does not personally hold any of the ETFs mentioned in this week’s “What the Periscope Sees.”

Disclaimer: This newsletter is published solely for informational purposes and is not to be construed as advice or a recommendation to specific individuals. Individuals should take into account their personal financial circumstances in acting on any rankings or stock selections provided by Sabrient. Sabrient makes no representations that the techniques used in its rankings or selections will result in or guarantee profits in trading. Trading involves risk, including possible loss of principal and other losses, and past performance is no indication of future results.

 


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