Weighing The Week Ahead: Can Employment News Change The Fed's Course?

Summary

• Last week's economic news was mixed.
• Weak GDP was the big story, raising questions about the timing of Fed rate hikes.
• It is a big week for job news, both public and private data.
• The Fed has a special focus on employment, and plenty of speeches scheduled this week.
• There are plenty of ideas about how to trade and invest around this news - as well as more on Sell in May.

This week's economic news is mostly jobs-related. The Fed has cited employment as the most important factor in future rate decisions. There is plenty of FedSpeak on tap. Pundits love to talk about the Fed. Voila! The theme for the week will combine all of these elements:

Can the employment news change the Fed's course?

Prior Theme Recap

In my last WTWA, I predicted that attention focus on markets rather than the economic reports. In particular, I suggested several different viewpoints about expected market action. While each of these got a riff or two during the week, I was expecting the main theme to be the challenge to the top of the trading range. With the soft start to the week, the upside breakout potential got little attention.

Feel free to join in my exercise in thinking about the upcoming theme. We would all like to know the direction of the market in advance. Good luck with that! Second-best is planning what to look for and how to react. That is the purpose of considering possible themes for the week ahead.

This Week's Theme

This week's economic news is mostly about employment. At the end of the week, we will get the monthly employment situation report, with plenty of angles and spin potential. In addition, we will see the ADP private employment report, news about layoffs, initial jobless claims, and a report on service sector employment. The Fed is giving special attention to employment, watching for signs that the labor market is getting tight and wage pressures mounting. This week, I expect discussion to center on employment and the aftermath of last week's FOMC rate meeting. Fed speakers will be out all week, discussing the data and answering questions. Analysts will be asking:

Can the employment data change the Fed's course?

The Viewpoints

Fed policy is a favorite market topic, eliciting a range of viewpoints encompassing both economic prospects and prospective rate tightening. Here are the leading candidates:

• The economy remains very weak, so the Fed is on hold. (Numerous super-bears).
• The economy remains sluggish, but the Fed will begin a modest rate increase program nonetheless. (Tim Duy).
• There are already signs of inflation and the Fed will begin rate increases by September. (Scott Grannis)

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• The labor markets are tighter, even though the overall economy is weak. (Eddy Elfenbein - initial claims 2nd-lowest since 1973).

• The Fed is already hopelessly "behind the curve" and must start tightening soon. (Martin Feldstein).

As always, I have my own ideas in today's conclusion. But first, let us do our regular update of the last week's news and data. Readers, especially those new to this series, will benefit from reading the background information.

Last Week's Data

Each week, I break down events into good and bad. Often there is "ugly", and on rare occasion, something really good. My working definition of "good" has two components:

1. The news is market-friendly. Our personal policy preferences are not relevant for this test. And especially - no politics.
2. It is better than the expectations.

The Good

There was some good news in a mixed week.

• Consumer spending rose 1.9%, confirming the early read from New Deal Democrat that we noted last week. See his post for these results and much more.
• Home prices showed a nice gain of 5% y-o-y, according to the Case-Shiller method. (Calculated Risk).

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• Initial jobless claims hit the lowest point since 2000 - 262K.

The Bad

The news also included some negatives.

• Consumer confidence missed expectations on the Conference Board survey. Doug Short has a full account, including some negative quotations from the source. The article also covers and charts the Michigan Sentiment survey, which was a little more positive.

Despite Washington This Medical Device Company Keeps Growing

Free market capitalism is, in theory, about a kind of economic Darwinism. The fittest will survive and thrive while the weakest face a certain, if unpleasant fate. Of course, it doesn't always work that way. As the adoption of TARP and the bailout of the U.S. auto companies during the financial crisis showed, the concept of “too big to fail” crosses ideological and party lines and is a fact of life in the modern world

This leaves the dire consequences of failure as anything but certain. The survival and success of the fittest, however, particularly during difficult times, can still give investors valuable indications as to what may constitute a good long term investment. When medical device company Hologic (HOLX )

 released earnings after yesterday’s market close it was an example of just such a positive indicator.

Conventional wisdom maintains that these are indeed difficult times for the medical device industry, and that they will soon become a little less difficult. It is frequently said that the medical device tax that was a part of Obamacare has put a squeeze on the industry and that the Republican gains in the mid-term elections will result in its repeal. A case can easily be made that neither of these statements is actually relevant to the performance of individual companies, nor even true.

The tax applies across the industry so no individual company is at a particular disadvantage, and medical devices, like many healthcare products, have fairly inelastic demand. If your doctor believes you need one, then a 2.3 percent tax on the device is unlikely to sway that opinion. A Congressional Research Service report published at Modernhealthcare.com came to just that conclusion, that the tax would have a negligible effect on both the producers of medical devices and on overall healthcare costs.

The reality for medical device producers, then, is not as bad as some would suggest. What the advent of the tax has done, though, is to prompt companies to look for improvement efficiencies, which is never a bad exercise for a company in a business with inelastic demand.

That doesn’t mean that the new Republican majority in Congress won’t attempt to repeal the tax, however. It is one part of a law that they oppose that has some bi-partisan opposition. The tax is cast as a tax on jobs and as such an attempt to repeal has too much political appeal to be ignored.

Whether it will pass the President’s veto pen or not depends on whether there is some other way of funding the resultant shortfall in Obamacare funding. If not, the President would see it as a backdoor way to put pressure on his signature achievement and reject any repeal bill.

To Hologic, however, it seems that none of these political shenanigans really matter. They are doing what good companies do when faced with a less than ideal market; going about their business of growing and making money. Yesterday’s results showed a beat on both the top and bottom lines. The 5year chart for HOLX confirms the impression of a company that has continued to grow, even as its industry becoming a political football has caused some volatility in the stock.

There has been a positive reaction to yesterday’s earnings, with the stock indicating gains of around 2-2.5 percent at the opening this morning. That, and the past volatility of the stock, may make a delayed purchase strategy more profitable than an outright buy at these levels. If, as discussed above, any attempt to repeal the medical device tax is vetoed by a President with nothing to lose it is likely that HOLX, along with all medical device companies, would fall quite precipitously.

That said, it would be a shame to miss out on a company that has demonstrated the ability to grow through consistently as you wait for a correction that may not come. It could even be that Obama, concerned about a perception of intransigence would care more about his legacy than any budget implications and not veto a repeal of the tax. In that case all medical device stocks would get a boost. It makes far more sense to adopt a strategy of controlled averaging in a situation like this.

Buy half of your intended total position at market and then set two more orders, even if just in your head. One would be to buy at last month’s low around $23 and the other to buy at around $29 should the stock continue on upward. (Incidentally if you physically place these orders, don’t forget to include the instruction that one cancels the other).

This would leave you with a full position at either $25 or $27.50. Either way you would own stock in a company that has shown the ability to work through whatever Washington throws at it and still make money and continue to grow. That has to be a good thing.

By Martin Tillier,

Source: http://www.nasdaq.com/article/despite-washington-this-medical-device-company-keeps-growing-cm410931#ixzz3IKaa311w