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UBS Weekly Guide: Help Wanted
UBS Weekly Guide: Help Wanted
11 July 2011
Contents
Page
Feature article Our Best Ideas at a Glance Review/Preview of the Financial Markets Earnings Calendar Key Economic Indicators Strategy and Performance Reports of Note Published in the Last Week
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After having rallied sharply over the past two weeks, markets were hit with a vicious backhand following Fridays payroll report. Not only did non-farm payrolls increase by a distressingly low 18,000 workers during the month, but the unemployment rate rose to the highest level in six months as well - despite the labor participation rate having dropped to just 64.1% as 272k workers exited the workforce (see Figure 1). Those hopeful for a silver lining from an upward revision to prior employment statistics were left equally disappointed. Nonfarm payrolls were revised lower during May (to 25K from 44k), leaving the average monthly payroll growth during the second quarter at an anemic 87k rate (see Figure 2). Not only has the pace of hiring dropped off from the sluggish pace of the first quarter, but the current level is simply inadequate absorb new entrants into the work force and keep the unemployment rate from trending still higher in the months ahead. Whats more, it doesnt appear that seasonal factors had much to do with Junes poor results. If anything, the spring soft patch appears to have been even deeper than most economists had projected.
This report has been prepared by UBS Financial Services Inc. (UBS FS). Please see important disclaimer and disclosures at the end of the document.
Fig. 2: The pace of hiring during 2Q dropped off from sluggish pace of 1Q
Nonfarm payrolls quarterly average, in thousands
2008
2009
2010
2011
Fig. 3: We expect earnings in aggregate to beat for 2Q Average % S&P 500 company beat consensus earnings estimates by
16% 14% 12% 10% 8% 6% 4% 2% 0% 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q112Q11*
Fig. 4: Earnings growth expected to drive market higher S&P 500 earnings per share and year-over-year change in earnings
$120 $100 $80 -23% $60 $40 $20 $0 2006 2007 2008 2009 2010 2011 2012 -5% +16% +16% -3% +39% +8%
The June labor market report was dismal, missing consensus expectations by a wide margin. All key indicators in the report weakened. Non-farm payrolls rose a meager 18k and the past two months numbers were revised lower by 44k. The unemployment rate rose from 9.1% to 9.2% and hours worked fell. Finally, average hourly earnings were flat over the month and stalled at 1.9% y/y. Despite this very weak June report, quarterly average private sector hours worked a critical input to the economy's output rose at a 3.3% annual pace versus 2.0% in the first quarter. We still think that real GDP will likely rise by 2.5% q/q annualized in 2Q11, but the risk is clearly to the downside. The weak labor data hurt the stock market, which ended little changed for the week, while bonds rallied.
The ISM non-manufacturing index slipped slightly from 54.6 in May to 53.3 in June, a bit worse than expected. Key growth sub-indicators new orders and business activity slipped, while employment held steady. The index still points to moderate growth. European debt markets were rattled by two developments. First, Portugals sovereign debt rating was downgraded to junk by Moodys. Second, the rating agencies said they would view the French proposal to roll over Greek debt as a default. This news caused the yield spread on the sovereign debt of the weaker Eurozone countries (relative to German Bunds) to widen to record levels. For 10-year bonds, Portuguese and Irish debt now yield around 10 percentage points more than Germanys. Italys debt also sold off sharply with the yield spread
widening roughly 50 bps to hit a record 240 bps. Despite these problems, the European Central Bank (ECB) went ahead and hiked interest rates by 25 basis points to 1.50%, in line with market expectations. The euro lost ground against the dollar, closing near EURUSD 1.43, down from 1.45 at the start of the week. China also raised interest rates by 25 basis points last week, part of the ongoing effort to restrain inflationary pressure. Japans Economy Watchers Survey jumped to 49.6 in June (50 is a neutral reading) from 36.0 in May, indicating that economic conditions are getting back to normal after the disruptions caused by the earthquake in March. Brian Rose, Strategist
This week the market is likely to focus on economic data releases in the US and China, second-quarter earnings results, the debate over the US debt ceiling, and discussions on Greek sovereign debt. The most important US statistic this week will be June retail sales. The headline number will be depressed by the weak auto sales recorded in June. We forecast a drop of 0.5% m/m. However, the key component ex-auto ex-gas retail sales will likely rise; we expect +0.3%. Such a reading would be consistent with real consumption growth of about 0.7% q/q annualized in the second quarter, lower than our current forecast of 2%. Stronger net exports and inventories reported thus far should offset some of the consumption growth weakness. We a forecasting real GDP growth of
2.5% q/q annualized in the second quarter (the data will be released on 29 July), but the risk is to the downside. China will release several key economic indicators this week. We expect the CPI to rise more than 6% year-over-year in June, up from 5.5% in May. However, food prices should contribute less to inflation in the months ahead, helping the overall inflation rate to slow to around 4% by the end of 2011. GDP for the second quarter is likely to slow from the 9.7% year-over-year growth rate recorded in the first quarter, but growth should still be above 9%. With China driving so much of global economic growth in recent years, there could be a strong market reaction if there is a surprise in the GDP data.
China will also release its trade for June. The commodities markets are usually especially interested in Chinas import data, since its voracious appetite for raw materials has a big influence on commodity prices. Debate over US fiscal policy and the debt ceiling will of course continue this week, but it is probably still too early to expect a major breakthrough. In Europe, the authorities will continue to search for a way to roll over Greek sovereign debt without triggering a default. Brian Rose, Strategist
Earnings Calendar
The Earnings Calendar provides publicly announced reporting dates and times of companies covered by Wealth Management Research Americas. Reporting dates and times are subject to change by the reporting companies.
Analyst Contact Information
Date
Ticker
Company
Reporting Period
Time (EST)
Alcoa, Inc. Chevron Corp. Bank of the Ozarks, Inc. Yum! Brands, Inc. Marriott International, Inc. Google, Inc. Progressive Corp. JPMorgan Chase & Co., Inc. First Horizon National Corp.
Q2 2011 Earnings Release Q2 2011 Sales and Revenue Release Q2 2011 Earnings Release Q2 2011 Earnings Release Q2 2011 Earnings Release Q2 2011 Earnings Release Q2 2011 Earnings Release - June Sales Q2 2011 Earnings Release Q2 2011 Earnings Release
After Market 5:00pm After Market After Market 5:00pm Unspecified Unspecified 7:00am Before Market
Andrew Sutphin Nicole Decker Dean Ungar Alexandra Mahoney Jonathan Woloshin Bob Faulkner Michael Dion Dean Ungar Dean Ungar
12-Jul-11 13-Jul-11 14-Jul-11 14-Jul-11 14-Jul-11 14-Jul-11 14-Jul-11 14-Jul-11 15-Jul-11 15-Jul-11 15-Jul-11 15-Jul-11 15-Jul-11
Trade Balance (May) Import Prices (Jun) Jobless Claims (Jul 2) Producer Price Index (Jun) Core PPI (Jun) Retail Sales (Jun) Retail Sales Ex Autos (Jun) Business Inventories (May) Consumer Price Index (Jun) Core CPI (Jun)
-$44.0 bil -0.7% 410 k -0.1% 0.2% 0.0% 0.1% 0.8% -0.1% 0.2% 4.2 0.3% 77.0%
-$44.0 bil -0.6% 395 k -0.4% 0.2% -0.5% -0.3% 1.0% -0.2% 0.1% 3.0 0.5% 77.1%
-$43.7 bil 0.2% 418 k 0.2% 0.2% -0.2% 0.3% 0.8% 0.2% 0.3% -7.8 0.1% 76.7%
Empire State Manufacturing Survey (Jul) 8:30:00 AM Industrial Production (Jun) Capacity Utilization (Jun) 9:15:00 AM 9:15:00 AM
Source: Bloomberg & UBS estimates, as of 08 July 2011. In developing the WMR quarterly forecasts, WMR economists worked in collaboration with economists employed by UBS Investment Research (INV). All remaining forecasts were developed by economists employed by INV. INV is published by UBS Investment Bank. Forecasts and estimates are current only as of the date of this publication and may change without notice. m/m = month-over-month, q/q = quarter-over-quarter, k = thousand, bn = billion, y/y = year-over-year, mn = million
Asset Class Strategy & Performance Market Returns Extended Asset Allocation Strategy* MTD YTD 2010 + 2.7% 9.2% 16.9% US Equity Non-US + 0.7% 5.9% 9.4% Developed Equity Emerging Market + 2.0% 3.0% 19.2% Equity 0.1% 2.8% 6.5% US Fixed Income Non-US Fixed -0.6% 4.8% 4.9% Income n 0.0% 0.1% 0.1% Cash (USD) n 1.9% -0.8% 16.8% Commodities
Total return indices in USD: Russell 3500, MSCI EAFE & Canada, MSCI Emerging Markets, BarCap US Aggregate, BarCap Global Aggregate ex-USD, Citigroup 3-month T-bill, DJ UBS
Equity Region Strategy & Performance Strategy* MTD US Equity S&P 500 DJIA Nasdaq EMU** UK Japan Other Developed Emerging Markets n n.a. n.a. n.a. + ++ 2.7% 2.5% 2.5% 3.6% -0.6% 1.4% 1.9% n.a. 2.0% Market Returns YTD 9.2% 8.7% 11.3% 8.8% 12.6% 7.0% -2.8% n.a. 3.0% 2010 16.9% 15.1% 14.1% 18.0% -3.4% 8.8% 15.6% n.a. 19.2%
US Equity Sector Strategy & Performance Sector Strategy* Weekly Cons. Discr. Cons. Staples Energy Financials Healthcare Industrials IT Materials Telecom Utilities ++ n + + n +++ n 3.5% 1.9% 2.6% 2.0% 1.2% 2.7% 3.8% 2.9% 1.4% 1.2% Market Returns MTD 3.5% 1.9% 2.6% 2.0% 1.2% 2.7% 3.8% 2.9% 1.4% 1.2% YTD 12.1% 10.0% 14.3% -1.1% 15.3% 11.0% 6.0% 6.7% 8.5% 10.4% 2010 27.7% 14.1% 20.5% 12.1% 2.9% 26.7% 10.2% 22.2% 19.0% 5.5%
Total return indices in USD: S&P 500, DJIA, Russell 3500, MSCI for non-US. Price return indices in USD: Nasdaq
Equity Size, Style Strategy & Performance Style Strategy* Large-Cap Value Large-Cap Growth Mid-Cap Small-Cap REITs + + ++ Market Returns MTD 2.0% 3.2% 2.8% 3.7% 4.6% YTD 8.1% 10.3% 11.1% 10.2% 15.7% 2010 15.5% 16.7% 25.5% 26.9% 27.9%
Regional Indicators 2011 Consensus S&P 500 EPS 2011 UBS WMR S&P 500 EPS 2012 Consensus S&P 500 EPS 2012 UBS WMR S&P 500 EPS UBS WMR 2011 year-end S&P 500 target Price to earnings+ Price to book value+
+Consensus 12-month forward estimates, as of 08 July 2011. Total return performance as of close of business on 07 July 2011.
US Dollar Fixed Income Strategy & Performance Strategy* Treasuries TIPS Agencies Inv. Grade Corporates High Yield Corporates Preferred Securities Mortgages Emerging Markets Municipals + + + + n n.a. Market Returns MTD 0.1% 0.5% 0.0% 0.3% 0.7% 0.4% -0.2% 0.1% 0.0% YTD 2.4% 6.3% 1.8% 3.6% 5.7% 5.9% 2.7% 5.0% 4.8% 2010 5.9% 6.3% 4.7% 9.5% 15.1% 13.7% 5.7% 12.5% 2.3%
USD 99
USD 100 USD 113 USD 108 1410 13.2x 2.3x
Bond Regions Strategy & Performance Strategy* US EMU** UK Japan Other + n + + Market Returns MTD 0.1% -1.1% 0.1% -0.9% n.a. YTD 2.8% 7.5% 4.8% -0.1% n.a. 2010 6.5% -4.5% 4.6% 17.5% n.a.
*Please see the scale in the Appendix and the most recent Investment Strategy Guide for an interpretation of the tactical deviations and an explanation of the corresponding benchmark allocation. **EMU = European Monetary Union and is comprised of European countries that have adopted the Euro as their currency.
Thursday, 07 July
Thursday, 07 July
Tuesday, 05 July
Thursday, 30 June
Thursday, 30 June
US fixed income: July update: Higher or Lower? Worries over a Greek sovereign debt default and slower economic growth caused investors to shun risk assets in June. However, UBS economists believe the economic soft patch will prove to be temporary, and that growth will accelerate in the second half of the year. A bailout package for Greece should helped allay sovereign credit risk concerns, and put the US credit markets on firmer footing. We increased the tactical allocation on agency mortgage backed securities to overweight, and increased the underweight on Treasuries.
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Appendix
Scale for tactical deviation charts Performance and Strategy tables Symbol Description/Definition moderate overweight vs. moderate underweight vs. + benchmark benchmark ++ overweight vs. benchmark underweight vs. benchmark strong underweight vs. +++ strong overweight vs. benchmark benchmark
n n/a
The overweight and underweight recommendations represent tactical deviations that can be applied to any appropriate benchmark portfolio allocation. They reflect WMRs short- to medium-term assessment of market opportunities and risks in the respective asset classes and market segments. The benchmark allocation is not specified here. Please see the most recent Investment Strategy Guide for definitions/explanations of benchmark allocation. They should be chosen in line with the risk profile of the investor. Note that the Regional Equity and Bond Strategy is provided on an unhedged basis (i.e., it is assumed that investors carry the underlying currency risk of such investments). Thus, the deviations from the benchmark reflect our views of the underlying equity and bond markets in combination with our assessment of the associated currencies. Source: UBS WMR, All market performance data is from Bloomberg data as of date listed on top of this document, using representative indices and is provided for information only.
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Disclaimer
Wealth Management Research is published by Wealth Management & Swiss Bank and Wealth Management Americas, Business Divisions of UBS AG (UBS) or an affiliate thereof. In certain countries UBS AG is referred to as UBS SA. This publication is for your information only and is not intended as an offer, or a solicitation of an offer, to buy or sell any investment or other specific product. The analysis contained herein is based on numerous assumptions. Different assumptions could result in materially different results. Certain services and products are subject to legal restrictions and cannot be offered worldwide on an unrestricted basis and/or may not be eligible for sale to all investors. All information and opinions expressed in this document were obtained from sources believed to be reliable and in good faith, but no representation or warranty, express or implied, is made as to its accuracy or completeness (other than disclosures relating to UBS and its affiliates). All information and opinions as well as any prices indicated are currently only as of the date of this report, and are subject to change without notice. Opinions expressed herein may differ or be contrary to those expressed by other business areas or divisions of UBS as a result of using different assumptions and/or criteria. At any time UBS AG and other companies in the UBS group (or employees thereof) may have a long or short position, or deal as principal or agent, in relevant securities or provide advisory or other services to the issuer of relevant securities or to a company connected with an issuer. Some investments may not be readily realizable since the market in the securities is illiquid and therefore valuing the investment and identifying the risk to which you are exposed may be difficult to quantify. UBS relies on information barriers to control the flow of information contained in one or more areas within UBS, into other areas, units, divisions or affiliates of UBS. Futures and options trading is considered risky. Past performance of an investment is no guarantee for its future performance. Some investments may be subject to sudden and large falls in value and on realization you may receive back less than you invested or may be required to pay more. Changes in FX rates may have an adverse effect on the price, value or income of an investment. We are of necessity unable to take into account the particular investment objectives, financial situation and needs of our individual clients and we would recommend that you take financial and/or tax advice as to the implications (including tax) of investing in any of the products mentioned herein. This document may not be reproduced or copies circulated without prior authority of UBS or a subsidiary of UBS. UBS expressly prohibits the distribution and transfer of this document to third parties for any reason. UBS will not be liable for any claims or lawsuits from any third parties arising from the use or distribution of this document. This report is for distribution only under such circumstances as may be permitted by applicable law. Distributed to US persons by UBS Financial Services Inc., a subsidiary of UBS AG. UBS Securities LLC is a subsidiary of UBS AG and an affiliate of UBS Financial Services Inc. UBS Financial Services Inc. accepts responsibility for the content of a report prepared by a non-US affiliate when it distributes reports to US persons. All transactions by a US person in the securities mentioned in this report should be effected through a US-registered broker dealer affiliated with UBS, and not through a non-US affiliate. The contents of this report have not been and will not be approved by any securities or investment authority in the United States or elsewhere. Version as per June 2011. UBS 2011. The key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved.
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