We saw a pretty solid performance from stocks this week, with the averages closing in the green and holding their recent string of gains. The only bump in the road was Friday’s weak jobs report, where stocks fought back from a tough morning session to close with a marginal loss.
The jobs report was definitely the hot topic on Friday.
Expectations ran high into the release because the day before, the ADP job report, considered the appetizer to the main event, came in at double the consensus with a gain of 158,000.
But when nonfarm printed at a very flat gain of 18,000 jobs for the month of June, the Street shook its head and immediately sent the Dow down almost 200 points from the high.
But over the course of the day an interesting conversation developed.
A lot of people started saying that ADP was the one that had it right.
That’s a big deal because the Beauro of Labor Statistics (BLS) non-farm payrolls has always been the undisputed king of the jobs report. Having spent three years on a trading floor I can tell you there is no bigger or closely watched number. ADP is the new kid on the block, only followed by the Street in the last few years.
The emphasis on ADP definitely had something to do with people wanting to be optimistic, but it also had a lot to do with the fact that the company is a private-sector mega giant in payroll software and in a good position to monitor these things. So it definitely padded the impact of the terrible number from the government’s BLS.
And here’s something else to consider. Unemployment isn’t a new story, everyone knows jobs are hard to come by. But in spite of those head winds, and higher energy prices, consumers are still finding a way to spend.
That showed up on Thursday when June retail sales came in at their best level since 1999. Those numbers are accompanied by news of jean retailer True Religion (TRLG) preparing to release a $375 pair of jeans and yoga-apperalist Lululemon Athletica (LULU) being unable to hold any inventory of mens yoga pants. As you can see, consumers are still finding a way to spend.
So for the time being the market was able to mostly shake off the bad job report. It was definitely a victory for the bulls because stocks are sitting on huge gains over the last two weeks, where we have yet to see any kind of meaningful pullback or profit taking.
Moving forward we’ve got a couple of key issues on tap. The first is the debt ceiling. Something needs to happen over there pretty quickly or the market could start to get real nervous. Understand that a technical breach of the debt ceiling carries absolutely massive implications for the market. Debt covenants are broken, collateral is devalued and interest rates get jumpy.
Other than that, Q2 earnings are set to kick off this week. We haven’ heard many companies warning about profits being weak, so that’s a good signal. And with a little encouragement from the consumer lately, we might actually be in good shape. Remember, earnings growth has been the bright spot of the recovery, so let’s look for that trend to continue and support the market.
Updates:
Double Gold (DGP) traded ahead of the market, closing the week with an outsized 7.5% gain. As we all know, gold is a Dollar trade, so when the Euro strengthened this week on the Greece deal, the Dollar took a hit. That dynamic also gave the basket of Junior Gold Miners (GDXJ) a boost, closing the week close behind with a 7.4% gain.
We also saw some nice movement from Apple Corp (AAPL), closing the week with an outsized gain of 4.85%. The little bump came on an analyst upgrade, citing continued strong sales growth in the iPhone and iPad and poor traction from its long list of competitors. The analyst also pointed out that Apple looks extremely undervalued at $360, with the current year estimates just shy of $25. That means Apple has a forward P/E of 14.4X, a discount to its peers and the overall market. We will get an update on Apple’s business in two weeks when it reports Q2 earnings. A lot of people have been down on Apple these days and calling for its demise. It could be a great chance for the company to step up, produce a great number, and stimulate another leg higher.
VeriFone Systems (PAY) was also a top performer, catching a bid with the market and gaining 4%. Shares definitely got a boost off news the company had completed its acquisition of a South African payments provider. That’s an example of VeriFone’s strategy to capitalize on emerging market growth. The company has also been discussing the pending release of its new payment system for tablets. That gives VeriFone more exposure to the Apple juggernaut. But beyond the recent good news, the broad view says this is a very big trend in financial services. Mobile payments are growing quickly and there is lots of innovation in the space. It’s a good place to be looking for big long-term gains with a leading name.
We also saw a nice 5% gain from EZCORP (EZPW), building on its recent upward momentum. This stock is up pretty big over the last 2 weeks, about 20%. It could be big institutional players looking for a quick pop. When a stock like EZCORY falls into favor with the hedge funds on speculation of a great quarter or buyout, shares can take a pretty big ride pretty quick. But keep in mind that when the hot money gets cold feet, you will probably see some profit taking. That’s fine, we’re in this one for the long haul because this is a small capper with serious room to grow. But for the time being, the short-term interest has given us a nice boost with a portfolio leading gain of 31%.
And finally, we saw a solid performance from our energy services company Baker Hughes (BHI), adding 3% on the week as the sector gained from higher crude. This is a more conservative energy investment, a conglomerate in the oil field and drilling services space. Baker Hughes is also a big company, with a market cap of $31 billion that gives it global reach. This stock probably isn’t going to blast through the sky, but with a 6% in the last 3 months it is outperforming the market and provides good exposure to the bullish energy scene.
That’s all for this week, until next time, here is a quick little piece that discusses the implications of a US debt default. It’s not pretty. Enjoy.
If Debt Limit Isn’t Raised…What Next?
Your Investment Partner,
Mike
