Summary – Sinai’s Employment Conference Call – 5/4/12

Posted May 7, 2012 by CLeahey

[private][private]April Jobs Report:  Normal Ebb and Flow, or Something Worse?

Soft Employment Report Relative to Consensus

The April Employment Report was soft but in-line with DE expectations for a “soft-side” report.

Nonfarm Payrolls rose only 115K (Consensus +160K; Decision Economics: +138K). The unemployment rate ticked down to 8.1% for the wrong reasons, as the labor force shrank along with a lesser decline in Household Survey Employment (persons not jobs).

Was the result weather-related, reflecting a normal ebb and flow of monthly data, or the start of something worse, much like the weakness in 2010 and 2011?

The current situation is NOT like the last two years, with a path for real GDP growth in coming quarters ranging from 2-1/4% to 3%, and 2.6% to 2.7% for 2012Q4/Q4—an unchanged view. DE remains strategically (long-run) bullish on stocks, with a new strategic fair value range for the S&P500 of 1375 to 1450, up from 1350 to 1400—the result of very, very strong earnings results.

There was some weather impacts, perhaps as large as 30,000 in nonfarm payrolls. Therefore, a 130-160K nonfarm payroll figure would be more real, in-line with what is now a more “normal” performance going forward, given demographic trends, suggesting no falling out of growth prospects. But, financial markets will understandably weigh downside risks more heavily in the short-term.

Strategically Bullish Equities, but Near-Term Headwinds and Risks to be Noted…

• Because financial markets will note the confluence of a soft employment report with rising Eurozone Crisis risks, tactically we would not get in the way of equity market moves to the downside, despite maintaining a strategically bullish stance. 
• The employment report is positive for fixed income in the near-term as well, and leaves the DE outlook for long-term interest rates flat, perhaps even surprising to the downside as investors continue to move away from Europe into “safe-haven” paper including the Japanese yen. 
• The #1 risk remains the economic, political, and financial Eurozone Crises.

A deeper Eurozone recession is likely—now looking to be a 0.7% to 0.8% decline from ‑0.5% before.  But, will problems spread to France and Germany?  And, how bad will it get in Spain and Italy?  Austerity with growth-focused measures, the new new direction of the Eurozone, will be tough to pull off, leaving open the possibility that global and U.S. growth prospects may become seriously impacted.

…While Reiterating Potential Upside Risks to the Outlook

• DE continues to stress a healthier U.S. consumer, and better performance in the U.S. economy than many think, reflecting the positive effects of easy monetary policy after the longest lags in modern history. Autos and housing have been beneficiaries. All of this should support no less than 2%, and likely 2.5% average trend growth for consumer spending.
• China growth appears to be bottoming-out, to pick up later this year, and better in 2013, supporting other Asian economies, and global growth more generally.
• Company earnings results have been very positive, with the DE track 8% to 10% y/y growth in Q1, about 4 to 5 percentage points higher than coming into the quarter—which was already slightly higher than market expectations. Europe’s impact has been felt, but not as strongly as feared.

Longer-Run Investment Themes and Outlook Intact

DE remains strategically bullish on stocks, with a new fair value range estimate for the S&P500 of 1375 to 1450, up from 1350 to 1400.  Why?  Earnings strength, mainly, with continuing extremely low interest rates the factors.  Also the passage of time as the equity market takes into account some of next year’s earnings prospects.  The “Fiscal Cliff,” although a big risk, on common sense, will be hypothesized not to be hugely Draconian. 

The S&P500 Operating Earnings estimate for 2012 is maintained at $105, but taken down to $112 for 2013, only a little lower than the previous $113. As a later 2012 target on the S&P500, 1450 remains, with 1500 possible if more favorable Scenarios evolve on the Eurozone and Fiscal Cliff risks; also depending on the Presidential Election.

DE would not encourage bearish views on the 10-year Treasury. As Europe skirts from crisis-to-crisis, U.S. Treasuries will remain bid.

Long-term interest rates, supported by the Federal Reserve, will remain low, along with a continuing flat profile for the yield curve, perhaps even potentially surprising to the downside. Any Fed policy shift? No, DE still thinks QE3 is not in the cards given the DE underlying outlook.

Employment Conference Call Summary 5-4-12[/private][/private]