The Zigmont Report (Daily Market Recap for 10/6/17)

Mike Zigmont

Mike Zigmont, author of the Zigmont Report, is a partner at New York-based Harvest Volatility Management, a hedge fund with over $10B AUM, offering volatility management solutions to its investor base worldwide.  Mike has been publishing his daily newsletter (Monday-Friday) privately for the firm’s investors and his personal contacts in the investment business since 2008, sending it daily shortly after the market close.


The opinions expressed below are my own

Weather-related.  The big data of the day was the nonfarm payrolls (-33k vs 80k & 169k prior revised from 156k).

The market reacted a little bit but mostly dismissed this large surprise.  This is the first net loss of jobs since 2010.  The market didn’t react much however because weather-related distortions were already expected.  They weren’t expected to be this large but that’s not that big of a deal.  Why?

The market may have mis-estimated the magnitude of the labor impact but the impact is temporary.  The market is viewing this as a bump.  The bump was bigger than expected but we’re past the bump.  The prior month’s revision was positive and other metrics reinforce the story of a healthy economy and tightening labor market.

Bond yields climbed today and the Fed Funds futures market now price in an 80% chance of a December hike.  November is still 0%.

Here’s the bottom line on today’s nonfarm payrolls data and the market reaction.  The data was a surprise for sure but the transient nature of the labor weakness was confirmed.  The market interprets this as situation normal, Fed plan on track.

US equities experienced a touch of weakness today.  Whether the selloff should continue or not is an argument not worth having.  Dip-buyers gonna dip-buy.  Today’s data won’t derail them.

Let’s change subjects quickly.  Earnings season begins next week.  I think stocks have to deliver good numbers for the rally to continue.  Thursday is the first day of note but here’s the schedule for S&P 500 names.

Wed 10/11

BlackRock
Fastenal
Delta Airlines

Thurs 10/12

JP Morgan
Citigroup
Progressive
Omnicom

Fri 10/13

PNC Financial
JB Hunt
Bank of America
Wells Fargo

Let’s also check in on bottom’s up estimates, just to get a feel for expectations prior to the season.

Show me the money

Bottoms up estimates vs. 16 weeks ago

Earnings:

’16 earnings were $118.73
’17 estimates are $130.42… up $0.71
’18 estimates are $145.08… down $0.07
’19 estimates are $159.84… down $0.02

With the S&P ~2,549:

’16 PE is 21.5
’17 PE is 19.5 and earnings growth is ~10% YoY
’18 PE is 17.6 and earnings growth is ~11% YoY
’19 PE is 15.9 and earnings growth is ~10% YoY

And revenues…

’16 rev were $1,256
’17 rev estimates are up $9 to $1,335… rev growth +6.3% YoY
’18 rev estimates are up $6 to $1,401… rev growth +4.9% YoY
’19 rev estimates are up $11 to $1,468… rev growth +4.8% YoY

Book value is up $6 to $771

’16 PxBE is 15
’17 PxBE is 13.6
’18 PxBE is 12.3
’19 PxBE is 11.1

Profitability

’16 profitability was 9.5%
’17 profitability is unch @ 9.8%
’18 profitability is unch @ 10.4%
’19 profitability is down 0.1% to 10.9%

ROB

’16 ROB was 15.4%
’17 ROB is down 0.1% to 16.9%
’18 ROB is down 0.1% to 16.1%
’19 ROB is down 0.1% to 15.3%

Valuations are a bit high and earnings growth for the whole market is expected to be ~10%.  Revenue growth is expected to be ~5%.

Those strike me as pretty optimistic but the market is trading as though those numbers can be bumped higher.  Also note that the changes in analyst numbers were pretty small over the last 4 months while the S&P 500 rose 4.5%.  The market has been (and is) expecting more than the analysts.

This earnings season will either preserve the earnings-are-great-and-growing narrative or crack it.  Until then, it’s small-ball.

Have a great weekend, see you Monday.

-Mike