Lower markets on weak economic data from China

Dow dropped 87, decliners over advancers almost 4-1 & NAZ was off 17.  The MLP index fell 6 to the 462s & the REIT index lost 5 to the 302s.  Junk bond funds were mixed to higher & Treasuries were flattish.  Oil fell, but gold found buyers with increased nervousness about the global economy.

AMJ (Alerian MLP Index tracking fund)

Treasury yields:

U.S. 3-month	0.04%
U.S. 2-year	0.24%
U.S. 10-year	2.02%

CLN13.NYM

...Crude Oil Jul 13

....92.83

.....1.45

(1.5%)

GCK13.CMX

...Gold May 13

...1,394.80

...27.20

(2.0%)

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China's manufacturing contracted in May for the first time in 7 months, adding to signs that economic growth is losing steam for a 2nd qtr. The preliminary reading of 49.6 for a Purchasing Managers Index from HSBC Holdings & Markit Economics compares with a final 50.4 for Apr & the 50.4 estimate.  A reading above 50 indicates expansion.  But a separate Markit index for euro-area services & factory output increased more than forecast.  China’s growth rate unexpectedly slowed to 7.7% in Q1 while remaining above the gov full-year target of 7.5%.  Data earlier this month on fixed-asset investment & factory production missed forecasts, & gauges of manufacturing & service industries declined.  The economy expanded 7.8% in 2012, the slowest pace in 13 years.

China May Factory Output Contracts in Test for Premier




Photo:   Yahoo

The number applying for unemployment benefits fell by 23K last week.  Applications for unemployment declined 340K according to the Labor Dept, down from 363K the previous week & is a level consistent with job gains.  The less volatile 4-week average ticked down just to 339½K, close to the 5-year low of 338K reached during 3 week ago.  The 4-week average is 9% lower than in Nov.  But much of the improvement has come from fewer layoffs, not robust hiring.  Employers laid off just 1.7M in Mar, only slightly above the 12-year low reached in Jan.  Overall hiring remains far below pre-recession levels.  More than 4.7M were receiving unemployment benefits, down 23% from nearly 6.2M a year earlier.  The US still has 2.6M fewer jobs than it did when the recession began in Dec 2007.

US unemployment aid applications fall to 340K AP


The bulls went into hiding today, so markets sold off.  Sorry to sound like a broker record, but the markets are vastly overbought, with the Dow still up a staggering 3.3K in less than a year.  The US economy is probably more important to most investors & that is just bumbling along, not being helped by federal budgets cuts which are biting.  Between yesterday & today, this hardly qualifies as a meaning ful correction.

Dow Jones Industrials

Markets pull back on comments the Federal Reserve might reduce bond purchases

Dow dropped 80, decliners over advancers almost 4-1 & NAZ plunged 38.  The MLP index gained 1+ to a new record in the 468s but the REIT index dropped a very big 8 to the 307s.  Junk bond funds sank & Treasuries declined, taking the yield on the 10 year Treasury over 2%.  Oil & gold also sold off.

AMJ (Alerian MLP Index tracking fund)

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Treasury Yields:

U.S. 3-month	0.04%
U.S. 2-year	0.24%
U.S. 10-year	2.02%

CLN13.NYM

...Crude Oil Jul 13

....94.35

...1.83

(1.9%)

Photo:   Bloomberg

Many on the Federal Reserve (FED) board said more progress in the labor market is needed before deciding to slow the pace of asset purchases, according to minutes of their last meeting.  “Most observed that the outlook for the labor market had shown progress” since the-bond buying program began in Sep.  “But many of these participants indicated that continued progress, more confidence in the outlook, or diminished downside risks would be required before slowing the pace of purchases would become appropriate.”  They may accelerate or slow monthly purchases of Treasuries in response to changes in the labor market and inflation & also pledged to hold the target interest rate near zero as long as unemployment remains above 6.5% & the outlook for inflation doesn’t exceed 2.5%.  A number said they were willing to taper bond buying as early as the next meeting on June 17-18 if economic reports show “evidence of sufficiently strong and sustained growth.”  The record gives more detail on a debate within the FED over how & when to curtail asset purchases that have enlarged its balance sheet to a record $3.35T.  The committee is pressing on with purchases until the outlook f.or the labor market has “improved substantially.”  The minutes also showed that FED officials began a review of their exit strategy, which was adopted in Jun 2011 as they sought to assure investors the central bank had the means to avoid igniting inflation once job growth, wages & demand started moving up.

Many on FOMC Said More Progress Needed Before Slowing QE Pace




Photo:   Yahoo

Target, a Dividend Aristocrat, reported a 29% drop in Q1 profit as unusually cool spring weather & financial pressures chilled customers' appetite for spending.  The company also cut its annual profit outlook.  TGT is the latest in a string of companies that say bad weather & financial pressures like the higher payroll tax have squeezed business in the first couple months of the year.  While chilly weather was a big factor in depressing sales of spring clothing & other seasonal goods, it also said that a yo-yo economic recovery has continued to make shoppers stick to shopping lists & plan their spending.  "We remain cautiously optimistic about both the macroeconomic environment and consumer behavior," CEO Gregg Steinhafel said.  "Both of these business drivers continue to reflect slow, uneven growth and ongoing cross-current of positive and negative indicators, just as they have for the past few years."  In fact, while the housing market is showing signs of recovery & claims for unemployment insurance have been declining, shoppers, particularly younger customers, are still facing a weak job market, Steinhafel said.  A big hurdle for many low-price retailers has been tax changes.  An increase in the payroll tax of two percentage points means that take-home pay for a household earning $50K a year has been sliced by $1K.  TGT said that 3/4 of its customers surveyed were aware of this year's payroll tax increase.  Among those, a majority have noticed the impact of the tax increase on their paychecks & indicate it's affecting their spending.  Still, TGT, whose sales growth has been uneven since the recession, remains confident in its strategies to attract shoppers.  Quarterly EPS was 77¢, versus $1.04 a year earlier.  Excluding items related to its Canadian expansion & retirement of certain debt, EPS was $1.05 & sales rose 1% to $16.7B.  Analysts had expected earnings of 95¢ on revenue of $16.8.  Revenue at stores open at least a year slipped 0.6% as the number of transactions fell 1.9%.  That measure should improve to a 2-3% gain in this qtr & expects adjusted EPS of $1.09-$1.19.  For the full year, the company expects EPS of $4.70-$4.90, down from its original guidance of $4.85-$5.05.  Analysts had forecast $1.11 per share for the Q2 & $4.63 for the year.  The stock slumped 2.86 (4%).

Target First-Quarter Profit Trails Estimates

Target (TGT)

Pfizer, a Dow stock, plans to try to sell its controlling stake in its former animal health business, Zoetis thru a voluntary stock exchange with Pfizer shareholders.  Its shareholders will be able to trade their Pfizer holdings for Zoetis shares at a discount expected to be about 7%.  The discount level will depend on the average price of both stocks in the 3 days leading up to the offer's expiration on Jun 19.  For the past 2 years,  CEO Ian Read has been trying to streamline the company to reduce costs & to focus research on disorders with limited treatments.  Both strategies are needed because revenue has dropped as prescription drug sales have been hurt by worsening generic competition, particularly inexpensive copycat versions of its cholesterol blockbuster Lipitor.  In addition, PFE has been increasing its div & aggressively buying back stock.  Zoetis has annual sales of about $4.2B & invests $400M a year in R&D.  PFE stock gained 52¢.

Pfizer To Shed Its Remaining Shares in Zoetis Animal-Health Unit Spinoff

Pfizer (PFE)

Stocks were not made to go up forever.  But many lost track of that fundamental idea.  With the markets being so VASTLY overbought, today's decline had to be expected.  However Dow is still up 470 in May, hardly chump change by any standard!  Tomorrow the bulls will return & try to regain control of the markets.  Even if they do, today is a reminder that markets can be fickle & that uncertainty should be priced into stocks.  Additionally, the negative comments from the biggest retailers are sobering.

Dow Jones Industrials