Archive for May, 2009

Weekly Recap & Outlook – 5/29/09

Friday, May 29th, 2009

Tower Private Advisors

Capital Markets Recap

May 29, 2009

I’m forced to dispense with flowery prose on account of an early departure today.

   Current   Last Week  $ Chg % Chg
S&P 500        908.55        888.33 20.22 2.28%
DJ Industrial Average      8,401.17      8,292.13 109.04 1.31%
S&P Mid Cap 400        569.33        554.09 15.24 2.75%
Russell 2000      1,223.26      1,195.95 27.31 2.28%
NASDAQ Composite Index      1,750.44      1,695.25 55.19 3.26%
Dow Jones World & Region – World x U.S.        164.86        159.57 5.29 3.32%

Equity market action can best be described as “yawn.”  Stock markets are stuck in a range.  The S & P 500 is depicted in the chart close by.  sp50  I suspect we’re going to have a June resolution to this small band of sideways trading as the market is forced to confront the 200-day moving average (the declining green line in the thumbnail).  Expect a number of sellers to emerge there in what could be a pitched battle–an apt metaphor. 


What’s more, the volume has not been compelling at all.  In fact, as you can see from this chart of the NYSE Composite and its volume, it’s terrible.  nyse1




   Current   Last Week  $ Chg % Chg
10-year Treasury            3.67            3.35 0.32 9.51%
30-year Treasury Bond            4.54            4.31 0.24 5.45%

For reasons described below, the rise in Treasury yields is troubling.  The chart below shows the steepness of its move.  It also shows a trendline that served to reverse the move.  When looking at trendlines, it’s best to view the first two touches (numbered) of it as entirely coincidental.  The third touch (numbered), however, confirms the trendline. 10yr




   Current   Last Week  $ Chg % Chg
Light Crude Oil – Continuous Contract          65.08          61.05 4.03 6.60%
Natural Gas – Continuous Contract            3.96            3.60 0.35 9.83%
Gold – Continuous Contract        961.50        951.20 10.30 1.08%
United States Dollar Index          79.39          80.56 -1.17 -1.45%

Courtesy of the declining dollar, commodities rose this week.  The dollar, while sharply oversold, now hovers below $80 support.  No bounce, yet, but it’s due.  In the meantime, commodities and the related equities, continue to move higher. 

Top Stories

Direct from Bloomberg:

  • GM Will File for Bankruptcy June 1
  • Ackman Nominees to Target Board Rejected by Retailer’s Investors - Bill Ackman is a well-known activist hedge-fund manager–perhaps most well known for his agitation at Target.  He wants the company to package up its real estate and spin it off as a REIT. 
  • Dell’s Sales Miss Estimates as Consumers Delay PC Purchases
  • Geithner Will Urge China to Boost Domestic Demand – This one is really comical.  The U.S. Treasury Secretary is going to go to a sovereign nation and tell its leaders that they need to encourage more spending.  And who will that benefit?  Exactly.
  • AOL is Worth Half of Facebook, 5% of Google as $124 Billion Merger Undone – Time Warner is finally unwinding its ill-timed acquisition of AOL, made just about at the peak of the internet bubble.  The Facebook comparison is timely, as that company is expected to get a $200 million investment from a Russian party.
  • Facebook is Worth More Than Starbucks, Alcoa, Campbell Soup – where have I read this plot line before?

Will someone please tell the stock market that interest rates are rising.  This is not a good development.  The 10-year Treasuryhas begun to rise sharply, and it might tie in nicely with the following Bloomberg headline:  Bond Vigilantes Confront Obama Credibility as Bernanke Housing Aid Falters.   In the late ’70s and into the early ’90s bond investors were known as vigilantes as they pursued inflation on their own, demanding higher yields for inflation, regardless of the company line.  The rise in benchmark interest rates is troubling for the following reasons:

  • They underpin mortgage rates, and low mortgage rates are key to housing affordability and a healing of housing, in general.
  • Benchmark interest rates are used to discount future cash flows (i.e. earnings), and higher discount rates lower present values.
  • Bonds compete with stocks for investment dollars.  At the margin, higher bond yields make bonds relatively more attractive than stocks.

The increase also suggests that the Federal Reserve’s Quantitative Easing program (i.e. printing money and buying Treasury bonds) isn’t working.  It also suggests that some might be worrying about the inflationary implications of drunken-sailor spending by the government.

This Week

  • See comments on Conference Board Consumer Confidence by clicking here.
  • See Mortgage Delinquency thoughts here.

We seem to be running out of Bernanke’s green shoots for two reasons.  (Speaking of green shoots, if you’re tired of the phrase, head on over to CNBC’s website (here) and vote for your favorite replacement.  Choices range from “meadow muffins” to “bamboo roots.”)  First, it’s one thing to have moderation in the decline, but it’s still a decline.  In the words of John Mauldin, the bucket is still leaking.  At the risk of taking the metaphor too far, the shoots are going to start wilting soon.  So, we have to start seeing some actual improvement improvement.  In other words, what have you done for me lately?  Second, some of the indicators are either continuing to get worse or are backing off from earlier improvements–not the improvement improvement type.

In the second category, the Case-Shiller Home Price Index–the national version–recorded its worst yet annualized decline as you can see in the chart below.  Whereas economists looked for an 18.7% decline, the index fell by 19.1%–not exactly a disaster, but no green shoots there, although the rate of decline has moderated.cs1  Oh, and the week’s 14.2% decline in mortgage applications isn’t helpful.



Also in the second category is the Chicago Purchasing Managers Index, which had posted a nice bounce, but which fell sharply in May.  Economists had expected a further improvement, from 40.1 to 42.0.  Instead, the reading was 34.9.  pmiThis is an economic series that can provoke market responses–ostensible ones, anyway, as I’m loathe to attribute much to a single data point–since it often foreshadows the nation version (ISM Manufacturing), which is due out next week.  Suggesting that we’re in a bull market of some duration, the news was shrugged off by Mr. Market.

First quarter 2009 GDP was revised slightly upward in today’s Preliminary release.  Economists thought the revision might be from -6.1% to -5.5%.  Instead, it improved to -5.7%.

Finally, Initial Jobless Claims came out at 623,000, which was below our key 641,000 level, and it was better than economists guess of 627,000.  Unfortunately, last week’s figure was revised upward, from 631,000 to 636,000. 

Speaking of a guess, I’m going to start to provide one here for Jobless Claims in an effort to show you how ridiculous it is that economists get paid to make meaningless forecasts.  And getting paid means getting paid well into the six figures.  I’m also paid well into the six figures, when you include the decimals.  In perfect transparency, I’ll tell you how we’re going to get it.  We’ll take the difference between the current week’s result and the prior week’s preliminary result and adjust it by the revision.  Finally, we’ll add the resulting figure to the current week’s result.  For example:

  • Last week’s figure was 631,000
  • This week’s figure was 623,000, for a difference of -8,000
  • Last week’s figure was revised upward to 636,000, or by 5,000
  • So, we’ll add -3,000 (-8,000 + 5,000) to this week’s release of 623,000
  • Our estimate for next week is 620,000

Let’s see how we do.  I’m guessing that the Weekly Recap’s estimate won’t perform any worse than the Dismal Scientists.

Next Week

MondayPersonal Income and Personal Spending will be released and will give us an idea of the consumer’s profligacy or frugality in May.  Many commentators are saying that the savings rate will be heading much higher, and thus muting spending.  It’s in these releases that will be determined.  While a higher savings rate is better for individual households–witness China where its stimulus plan will be paid for out of savings–it’s not so good for the economy, where we are usually pulled out of recession by consumer spending.  ISM Manufacturing, the national version of Friday’s Chicago Purchasing Managers Index, is due out.  Economists, innovative lot they are, are using the same estimates as they did for the Chicago index.  To review:  previous release was 40.1; current estimate, 42.0.  As with all the diffusion indexes, 50 separates expansion from contraction.

WednesdayADP Employment Changeindex is released.  Recall that this index front runs Friday’s Nonfarm Payrolls report, but, so far,  it hasn’t done so well.  That’s not stopping the economists.  They expect the figure to be -530,000 for both it and Friday’s biggie.  Later in the morning we get ISM Non-manufacturing (i.e. service sector).  With a last reading of 43.7, it’s the closest of the diffusion indexes in getting to expansion territory, and economists hope it nudges closer, as they estimate a release of 45.

ThursdayInitial Jobless Claims are released.  No consensus estimate is available, but we have our own: 620,000.  Keep in mind 641,000.

Friday – the biggie for the week is the monthly Nonfarm Payrolls report.  All other reports will pale in comparison.  The figure for April was (-)539,000.  Economists look for (-)530,000.  They expect the manufacturing sector shed 150,000 jobs.  The Unemployment Rate is expected to have inched closer to the Stress Test’s “more adverse” level of 10%, as economists look for 9.2%. 



Spin this!

Thursday, May 28th, 2009

Every once in a while, when you say something negative, you get accused of being pessimistic.  Some prefer a gentle, always-positive spin on things.  A perfect example, is the Unemployment Rate–”well, at least 90% of people are still working.”

But there are some times when bad news can’t be spun, and this seems to be one of those cases.  Mortgage delinquencies. (more…)


Surprisingly strong Consumer Confidence

Tuesday, May 26th, 2009

Stock markets today are roaring ahead (Dow 30 up 208.36, 2.5%; S & P 500 up 23.31, 2.6%; etc.) in the wake of several news stories.  At 10:44 this morning, the Bloomberg terminal featured the following two headlines, in this order:

  1. Consumer Confidence in U.S. Increases to the Highest Level since September.
  2. Stocks in U.S. Extend Advance as Consumer Confidence Index Tops Estimates.

A related story on the terminal had the following title, “Consumer Confidence Soars in May.”

Before we get positively giddy, let’s step back and take a look at what’s really going on.  I don’t know what we’re going to find at this point, just that my skepticism of headlines persists–especially when they seem to pinpoint reasons for very broad actions, such the motivations behind the 689,000,000 shares that have traded hands on the New York Stock Exchange today.

Economists were looking for a survey reading of 42.6%, while the actual result was 54.9%.  In addition, the prior reading of 39.2% was revised upward to 40.8%.  The survey asks respondents the following questions:

  1. Assesment of current business conditions
  2. Expected business conditions in six months
  3. Current employment conditions
  4. Expected employment conditions in six months
  5. Expected family income in six months.

For each question, a respondent can answer Positive, Negative, or Neutral.  The positives are divided by the sum of negative and neutral responses to arrive at the released figures.

In the chart below, the blue line represents the Expectations Index, while the orange line represents the Current Situation index.


As is typical, the Expectations index rose quite sharply (from 51.0 to 72.3), while the Current Situation index rose more modestly (from 25.5 to 28.9).  This may be an example of the impact of the media upon consumers, namely that we usually fear more for our neighbors’ losing their jobs; not ours. 

While the expectations index is prone to fits and starts–whether in recessions or not–but especially in the case of recessions, the current situation index had just one false start, in the 1973-1975 (April 1974; keep that date in mind) recession.  That’s a good thing.

What has driven the rebound in consumer confidence?  Even if the average consumer had some idea of what Durable Goods Orders are, he or she still wouldn’t understand what has many Wall Street folks worked up, the idea of a slower deterioration in the economy.  Ben Bernanke refers to it as  “green shoots.”  Others call it an improvement in the second derivative. Something tells me the guy down the street from you can’t figure out where those folks are comign from.  There’s a good chance that all he knows is that his 401(k) should look better than it did a month ago.  Indeed, it turns out that all Joe/Joyce Consumer needs to see are rising stock prices to spur a boost in confidence.  Note, in the chart below, that an upturn in stocks (dashed vertical line) preceds an upturn in confidence (yellow circles).

ccstks Here, then, is a closer look at how consumer confidence got its boost. 

  • On March 9, 2009, stocks were being traded like the world was going out of business. 
  • That was followed by some better than expected news, which pushed stocks up a bit. 
  • Then the banks reported good albeit ephemeral earnings, and stocks were off for the races. 

To be fair, there is a real loop effect to all of this that affects the real economy.  It goes like this:

  1. A confident consumer (2/3 of the economy, remember?) can feel more confident about spending money.
  2. That can force retailers and others to have to restock their shelves (recall from previous notes that they’ve skinnied inventories way down).
  3. Along the way some folks get called back to work, and that comes with attendant benefits: their incomes rise, they feel more confident, unemployment peaks, and so forth.

You can see this process graphically, below. This won’t be enough to push the economy into a sustainable growth mode, but it can provide a shot of adrenaline necessary to get it closer to that mode.  ccc


Weekly Recap & Outlook – 5/22/09

Friday, May 22nd, 2009

Tower Private Advisors

Capital Markets Recap

May 22, 2009


  • Embedded video!
  • U.S. credit rating at risk . . . again
  • Freaked out formatting

Here’s a look at how equity markets fared this week.

Current Last Week $ Chg % Chg
S&P 500 887.00 882.88 4.12 0.47%
DJ Industrial Average 8,277.32 8,268.64 8.68 0.10%
S&P Mid Cap 400 551.27 545.72 5.55 1.02%
Russell 2000 1,195.95 1,182.58 13.37 1.13%
NASDAQ Composite Index 1,692.01 1,680.14 11.87 0.71%
Dow Jones World & Region – World x U.S. 160.99 154.84 6.15 3.97%

As is often the case, the point-to-point changes obscure the intraweek volatility.  For example, between intraday high and low for the week, the Dow swung by 459.75 points, while the S & P 500 swung by 47.69 points.  Also masked was the S & P 500′s failed attempt at piercing its 200-day moving average, a level many consider the difference between bear and bull market.  On the other hand, the 870 support level held.  If it hadn’t, we would have been looking for a drop to 840, which might have shaken the confidence of the underinvested, Johnny Come Latelys.  Click here for a look at the chart of the action.  Other than the continuing worry about volume not confirming the rally, this week’s high was lower than last week’s, as that previous chart showed.  (more…)


** FDIC Insurance Update **

Thursday, May 21st, 2009

I wanted to get out a quick note on FDIC insurance.

Effective May 20, 2009, deposits at FDIC-insured institutions will continue to be insured up to $250,000 through December 31, 2013.  Previously, the insurance was to expire on December 31, 2009, and revert back to $100,000 after that.

You can check out the details at the FDIC’s website by clicking here.