Unemployment Claims Fall, But Recovery Faces More Speed Bumps (IHF, DIA, SPY, QQQ, USO, GLD, LNKD, AAPL, CAT, CMG, BAC)

Jon D. Markman:  Of all the economic news last week, the fall in unemployment claims had the most positive impact. It’s great to see them come down, and my work suggests that May is on track for a 275,000 gain in payrolls, which is well above current consensus.

Claims fell by 29,000 to 409,000 last week, the second improvement in a row after a couple of sad-sack weeks that were muddied by special events like a new emergency benefits program in Oregon and the layoffs resulting from the parts shortage in Japan.

All told, over the past two weeks claims have fallen by 69,000 — which nearly erases the 74,000 spike in claims in the prior two weeks. In short, we’re back to where we were a month ago.

Still, we have two big problems looming like Godzilla on stilts.

First is manufacturing. The Philadelphia Fed Index showed once again the manufacturing recovery is losing speed. Global demand is still strong, especially in emerging markets, but check this out: the index has fallen to a seven-month low of 3.9 from 18.5 in April. And the sub-indexes were equally terrible, showing that new orders are down, shipments are down, prices paid are down and prices received are down.

That’s a lot of downs. It means that manufacturing is still expanding but at a slooooower and sloooooower pace. This kind of data says the recovery may be in gear but its durability is in question.

Second, we have the U.S. existing home sales data, which clanked a lot more than expected in April — down 0.8%. That was the first decline since February and flew in the face of two straight advances in pending home sales.

Bottom line:The big news events of the week fit together. Until the housing market improves, the lightly-skilled workers who make up most of the current hard-core unemployed will not find the kinds of jobs that push wages higher and juice consumer demand. That’s keeeping a lid on U.S. economic growth, making manufacturers stumble around.

Still, there is a big difference between a slowdown and a contraction. Slowdowns, which is what we are facing now, can serve to stretch out an expansion, albeit at a painfully sluggish pace.

So why hasn’t the market spiraled down into a darkened abyss with flames spewing out from its engines?

It’s the same reason we have seen for two years. Weak economic news keeps the Federal Reserve focused on providing liquidity, which is all the markets really care about.

The best stocks to own in these circumstances are those that don’t depend on tons of growth to keep their engines running. Food makers, groceries, drug makers and health insurance providers may not be capable of producing an initial public offering (IPO) that doubles its first day — but they should provide steady profits in soft times.

And how about that LinkedIn Corp. (NYSE:LNKD) IPO? The business social networking Website connected with the public markets in a big way after months of anticipation.

Shares were priced at $45, but debuted for trading on the open market at $83. LNKD zoomed as high as $122.70 before backing off in the final hour to around $96. But the bubblicious enthusiasm only lasted for a day, because shares closed lower on a third of the volume the following day.

Markets Zig Zag

Overall, the markets started the week on a sour note, advanced with a touch of optimism in the middle, then spiraled lower into the close of trading on an option-expiration Friday.

The Dow Jones Industrial Average (NYSE:DIA) sank 0.7% for the week, while the the Standard & Poor’s 500 Index (NYSE:SPY) fell 0.3%, the Nasdaq Composite (NASDAQ:QQQ)  fell 0.9% and the Russell 2000 (NYSE:IWM) fell 0.8%. Crude oil (NYSE:USO) sank 0.2% last week and gold (NYSE:GLD) rebounded a bit, up 1.4%.

The number of new highs fell to 174 on Friday, among the lowest levels of the year, while the number of new lows rose to 87. These levels show a lack of leadership in either direction.

The key issue for bulls is that old-line and new-wave momentum stocks like Caterpillar Inc. (NYSE:CAT), Apple Inc. (Nasdaq:AAPL), Chipotle Mexican Grill Inc. (NYSE:CMG) and Lululemon Athletica Inc. (Nasdaq:LULU) have not made new highs since the beginning of April.

And the key issue for bears is that nothing is really breaking down, either.

The bulls are still clearly in charge since the major indexes are within 3% of their one-year highs, but they are having trouble persuading sideline-sitters to join them.

Most of the catalytic events of last week were negative. We had a slew of weaker-than-expected economic data points as well as softer-than-expected earnings reports.

The one big bright spot of the week was Dell Inc. (Nasdaq:DELL), which reported on Wednesday a splendid quarter and advance in its recovery effort. But even then bulls were not able to sustain their advantage; Dell shares gave back 4.4% on heavy volume on Thursday and Friday.

Retailers’ earnings reports were mostly on the weak side, as women’s fashion chain Limited Brands Inc.(NYSE:LTD) — you know it better as Victoria’s Secret — revealed a disappointing outlook, and Sears Holding Corporation (Nasdaq:SHLD) posted a larger than expected loss.  iShares S&P MidCap 400 Growth Index (NYSE:IJK)

http://www.markmancapital.net/charts/ijk051911

In corporate actions, the discount chain Big Lots Inc. (NYSE:BIG) yanked itself off the auction block, taking its already sinking shares down another 11%.

Thermo Fisher Scientific Inc. (NYSE:TMO) announced a potentially transformative deal to acquire allergy diagnostics services provider Phadia for $3.5 billion, and BlackRock Inc.(NYSE:BLK) said it would buy back a stake of itself from Bank of America Corporation (NYSE:BAC) for $2.5 billion. The TMO and BLK deals were treated very positively by the markets.

Drug Stocks Deliver Highs

The ranks of the new highs have been rather slim lately. But among them are a lot of companies we care about – companies I think are going to keep leading the market higher in ways the majority of investors don’t seem to appreciate.

New one-year highs came from the much-hated big drug maker Merck & Co, Inc.(NYSE: MRK).

Also topping the new-high list were health-care leaders Baxter International Inc. (NYSE: BAX), Coventry Health Care Inc. (NYSE: CVH), Amgen Inc. (Nasdaq: AMGN), Cardinal Health Inc. (NYSE: CAH), Medtronic Inc. (NYSE: MDT), DENTSPLY International Inc. (Nasdaq: XRAY), Cigna Corporation (NYSE: CI), Humana Inc. (NYSE: HUM), Express Scripts Inc. (Nasdaq: ESRX), and Becton Dickinson and Co. (NYSE: BDX).

Get the picture? Big Pharma is back, baby, and with a vengeance. Yet where is the love? Where are the ticker-tape parades on financial television? Who’s shouting about how Big Pharma has returned from the wilderness to lead the market higher?

I don’t see any big embracing of this fantastic, sector-wide move at all, so it most likely has legs and stamina.

http://www.markmancapital.net/charts/ihf051811

I think part of the problem is that most people rank their medical insurance company right up there with their cable television provider. But let’s face it. The reason we cringe as consumers at Cigna and Humana is that they know how to make and keep a buck — and that actually is a pretty good trait for a company.

One of the funds focusing on this group is iShares Dow Jones US Health Care ETF (NYSE:IHF). Owning it lets you overweight HMOs in your portfolio.

The Week Ahead

May 23: No releases scheduled

May 24: New home sales (4/11). Last report was lowest since 1973.

May 25: Durable goods orders (4/11)

May 26: GDP growth for Q1, estimate for Q2; Jobless claims

May 27: Personal income(4/11); personal consumption expenditure; Core prices; Reuters Consumer Sentiment Index for mid-May.

Written By Jon D. Markman From Money Morning

Jon D. Markman brings a unique perspective and unparalleled insights to his role as a Money Morning contributor. And with good reason: During the past two decades, Markman has worked as both a journalist/commentator and as an actual portfolio manager. In addition to his contributions to Money Morning, Markman manages The Markman Portfolios, and is the editor of two premium investment research services: Strategic Advantage and Trader’s Advantage.

 From 1982 to 1997, Markman was an editor, reporter and investments columnist at the Los Angeles Times. In 1992 and 1994 he was a news editor on staffs that won Pulitzer Prizes, the top award a journalist can receive. From 1997 to 2002, Markman was managing editor of CNBC on MSN Money. Markman is the author of four books, including the bestsellers Online Investing (1999) and Swing Trading (2003). His fourth book – an annotated version of the widely read investment classic, Reminiscences of a Stock Operator – debuted in late 2009. Markman is also the co-inventor on two investment-software patents. A graduate of both Duke University and Columbia University, Markman is a regular guest on radio and television, and at investment conferences – sought out for his insights on stocks, credit and the global economy. Markman lives with his family in Seattle.

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