Bob’s Journal for 11/7/19

Some Notable Events That Grabbed My Attention This Week

The main part of earnings season is over, and there was good news and not-so-good news in the reports.

The not-so-good news is that earnings are down from a year ago. All the data isn’t in, but it looks like overall earnings will be about 2.5% lower than 12 months ago.

That’s the biggest decline since 2016, when many analysts were talking about an earnings recession. The good news is that most companies beat their reduced earnings expectations.

The percentage of companies beating earnings expectations steadily declined for the previous seven quarters, but it looks like the latest third-quarter earnings will reverse that trend. The percentage of companies beating expectations is likely to be around 70%.

Yet, the percentage of companies beating revenue expectations is only around 58%. That’s about average historically but well below the levels of 2017 and 2018.

Also, a small majority of companies are indicating that expectations for the next quarter are too optimistic. But it’s normal for a majority of companies to lower guidance.

After the earnings surge of 2017 and 2018, it’s not a surprise that there’s a pause in earnings growth, especially considering the Fed’s tightening policy and the trade conflicts. It is likely that the pause in earnings growth this year will make it easier for companies to beat earnings expectations in 2020.

Bad News in Bitcoin

It looks like the bitcoin market hasn’t been safe for investors. When the price of bitcoin soared to a peak of $20,000 two years ago, a single market player was manipulating the price higher.

A new study concluded that about half the price increase was due to the manipulation scheme of that market player. The study was written by two professors and has been accepted for publication in the Journal of Finance.

The market manipulator operated from an account at the cryptocurrency exchange Bitfinex, according to the report. The researchers couldn’t determine who the manipulator was but suggest the exchange executives knew of the scheme and might have aided it. Details can be found here.

Channel Caution to Combat Cyber Crooks

Cyber crooks are becoming more sophisticated and email remains a major tool for them, according to Rachel Wilson, the cyber security chief at Morgan Stanley, in an interview with Barron’s.

One common technique is for the crooks to do a lot of research about the person they are targeting. Then, they’ll send a spoof email to the targeted victim from an individual at a firm where the would-be patsy does business. The email often has enough details to be convincing.

Once the scammers have the victim’s confidence, they can obtain key personal and financial information from the victim. The crooks can use this information to send instructions to financial firms where the target does business. The instructions often are to direct the firm to send money from the victim’s account to an account controlled by the crooks. Or the electronic thieves can have the money sent to one of the victim’s accounts. But the crooks have obtained access to the account from their earlier research and can transfer it to their own account.

Also, many cyber criminals can obtain access to email servers at major firms. The scammers use this access to monitor emails and obtain important customer bank account information. They then later can use that information to drain money from the accounts.

It is important not to send personal or financial information to anyone in an email, even at major financial firms. Emails simply aren’t safe.

The Data

The ISM Manufacturing Index improved a bit in October but still indicates the sector is contracting. The September index caused a brief panic in the markets when it slid below 50.0 for the first time since early in the economic recovery and hit a 10-year low at 47.8. The index came in at 48.3 for October. That’s better but still indicates manufacturing is contracting.

The PMI Manufacturing Index continues to paint a brighter picture than the ISM counterpart. The PMI Index came in at 51.3 for October compared to 51.1 for September.

Factory Orders for September continue the negative manufacturing news. Overall orders declined 0.6% compared to a 0.1% decline in August. Core capital goods orders, which are a key measure of business investment, declined 0.6%.

But the larger service sector appears to be picking up. The ISM Non-Manufacturing Index rose to 54.7 in October from 52.6 in September. The growth was in domestic activity, while exports remain weak.

The PMI Services Index was not as strong. In October, it was 50.6, which is down from 50.9 in September. That’s a three-year low for this index. Any measure above 50.0 indicates growth, so this report says the service sector is barely growing.

Productivity declined by 0.3% in the third quarter, compared to a revised 2.5% increase in the second quarter. That’s the first quarterly decline in almost four years. Unit labor costs increased 3.6%. Compensation increased 3.3% for the quarter.

The big problem for productivity was that hours worked increased, while output decreased. This likely means that firms are hiring more employees but aren’t willing to invest in new equipment that would increase productivity.

New unemployment claims declined by 8,000 to 211,000. The four-week average rose slightly because of increases in previous weeks.

Last Friday’s Employment Situation reports indicated most of the labor market still is strong. There were 128,000 new jobs created in October. The September number were revised higher to 180,000 from 136,000. Even though the number of manufacturing jobs declined, other sectors of the economy made up for those losses.

Average hourly earnings increased 0.2% for the month. Over the past 12 months, average hourly earnings are up 3.0%. Strong job growth and steadily rising wages are why household confidence remains high and consumer spending is supporting the economy.

The more detailed JOLTS (Job Openings and Labor Turnover Survey) report continues to show that while the labor market is strong, there are some signs of weakening. Job openings continue to decline. They fell 3.8% in September. Openings are down 5.0% over the last 12 months and are at the lowest level since March of 2018.

Even so, hiring rose 0.8% in September and rose 4.7% in the past 12 months. Also, the number of workers quitting jobs declined 2.9%, which is a large drop for one month and indicates workers believe the labor market is less favorable than it had been. Overall, it appears the labor market still is positive but might have peaked.

The Markets

The S&P 500 rose 0.97% for the week ended with Wednesday’s close. The Dow Jones Industrial Average gained 1.13%. The Russell 2000 added 1.22%. The All-Country World Index (excluding U.S. stocks) increased 1.24%. Emerging market equities improved 1.96%.

Long-term treasuries lost 0.82% for the week. Investment-grade bonds fell 0.22%. Treasury Inflation-Protected Securities (TIPS) rose 0.52%, while high-yield bonds gained 0.07%.

In the currency arena, the U.S. dollar increased 0.53%.

Energy-based commodities rose 1.70%. Broader-based commodities gained 1.01%. However, gold fell 0.42%.

Bob’s News & Updates

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