In almost any endeavor, it is critically important to believe what someone is telling you is true. In the business world, and especially with investing, being able to rely on management to do what it says, or at least try its darnedest to get their goals accomplished, might be more significant than anything else one considers. Conversely, if a person gets the reputation for ‘embellishing the truth’, it can be the kiss of death as far as reputation is concerned. Yesterday’s weak May jobs report, one where only 38 thousand jobs were created (as opposed to the 160K estimate), may very well be a critical moment for the current Federal Reserve Board. Why? Over the last few months, multiple board members have gone on record at noting the strength of the U.S. economy in an effort to convince the investment community interest rate hikes were a distinct possibility, if not in June than in July. Given the dramatic miss in job creation, and that the Fed has often stated it will be data dependent in making policy decisions, a reasonable person might question the data the Fed is looking at. It is also on the table to ask how these board members are interpreting the information they are seeing.
Even further, and more critical, is taking the next step and questioning whether the current policy is appropriate given the dramatic under performance of the job creating ability of the economy. Macroeconomic analysis is complex and not easy, which is why many investors, like myself, spend a far greater amount of time concentrating on the microeconomics of specific businesses and their valuation. It might be a bit of a stretch to imply the Federal Reserve Board’s reputation for integrity is now lost, but as the above quote simply states, some things are difficult or almost impossible to retrieve.
In Europe, Mario Draghi determined the ECB will leave interest rates alone, while raising no doubt it will do everything in its power, including more quantitative easing, to fight deflation. The implications of the poor jobs report means the dollar will probably stay weak versus emerging market currencies and commodities, like oil. Markets responded to the punk number by bidding up the commodity based country indexes of Canada, the euro, and the South American countries, sans the joy of Venezuela. Looking ahead, the futures market priced the expectation of a June interest rate hike at literally zero, with July minimal as well. In this regard, you have to say markets definitely are efficient.
With respect to individual companies and earnings reports, Ambarella Inc (NASDAQ:AMBA) and Broadcom (NASDAQ:AVGO) enjoyed better than expected numbers and gave some lift to the semiconductor area, as well as maybe helping expectations for the back half of the year. Michael Kors Holdings Limited (NYSE:KORS) showed fashion is still in swing with a solid beat but warned of softness in the next six months in order to reduce the prevalence of discounting. Vera Bradley Inc (NASDAQ:VRA) also exceeded their estimates, so the luxury sector is still worth keeping your eye on. In the oil patch, the joy which is OPEC continues to show their dysfunction as the independence of Iran to pump at full throttle undermines the ability of the organization to affect prices. What a shame, the fellows from OPEC cannot get it together. Here in the U.S., rig counts actually went up a bit, but from the rock bottom level of around 350. Oil still trades at around the $50 a barrel level, and it bears watching to see if demand improves.
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