Tower Private Advisors
London: ( 44) 207 847 4042 – Paris: ( 33) 1 5528 8040 – New York: (1) 212 847 2387 – Fort Wayne (1) 260 427 7141
- Low volume stock action
- Earnings season gearing up
- Economy needs a boost
Capital Markets Recap
July 10, 2009
While the concern for equity markets that had been expressed here for some time was well merited, stocks, as measured by the S & P 500, are holding on to support levels by only bitten-to-the-quick fingernails. What’s more, the volume has not been encouraging. Volume today on the NYSE was only lower on one day in the last 12 months, on Christmas Eve Day 2008. Support levels aside, volume is the most troubling technical aspect of stock markets at present.
This week stocks declined in near-perfect correlation with their perceived riskiness/Beta, with only the NASDAQ stepping out of line. That observation, however, attests to the relative strength of tech stocks, given the predominance of those stocks in that index. Relative Strength is a measure of how a security/sector/index is performing relative to another. Exchange rates are ever and always relative strength measures, when someone says the dollar is declining, they’re talking about its relative strength against another currency or basket of currencies. Early in July we began to notice the relative strength of leading sectors, like Materials and Energy, begin to decline, while the defensive sectors (e.g Health Care, Consumer Staples) began to show improving relative strength. One group that has maintained strong relative strength has been Technology. It does appear to have marginally broken a trendline, however, and bears watching.
The Trade Weighted Dollar’s performance of late has been interesting. It has been constantly buffeted by headlines that this or that nation is looking to move away from it as a central currency, and yet the dollar has not declined. As Dennis Gartman says–and I paraphrase–a security that does not decline on bearish news is a security that should not be sold. Even more importantly, since the dollar stopped declining stocks have been in trouble, so it stands to reason that stocks won’t rally until the dollar weakens, and there are already too many dollar bears. Where will the marginal sellers come from?
It is said that Alcoa is the company that kicks off every calendar quarters earnings reporting season, and while AA did report results this week (smaller loss than expected), it wasn’t the first of the S & P 500 companies to do so. Pepsi Bottling Group was out earlier, as was Family Dollar. (Undoubtedly an indication of the economy, FDO reported great results). If only the entire earnings season turns out as well as it did this week when 3 out of 4 companies surpassed estimates. Company earnings–and, more importantly, company outlooks–will take center stage from the economy for the next several weeks. The first quarter was to have been dismal but companies, especially the money center banks, managed to pull a rabbit from a hat. Naturally, the second quarter will have to be a disaster, as few expect the banks to repeat those results, and yet it’s likely that the money center banks, on the strength of trading–their own proprietary desks and the trading of customers–will report big results. According to Bloomberg, Goldman Sachs is about to release its best earnings since its 2007 peak. We’ll find out next Tuesday morning. A total of 35 companies report next week, including:
- JPMorgan Chase
- Bank of America
- General Electric
- Morgan Stanley
Could set the tone and the bar for the entire earnings reporting season. As always, what they say about the third quarter will trump actual second quarter results. If the outlooks are dismal watch for some Wall Street red.
There are probably a couple of dynamics at work in the following pair of headlines seen on the Bloomberg terminal today:
U.S. Stocks Drop as Confidence Report Adds to Concern Recovery Faltering U.S. Economy on “Cusp of Stabilization” as Growth Forecasts are Increased
After all, why didn’t the people selling all those stocks just read further down the screen. The first dynamic is that headlines are sometimes too big for their own britches. 502 million shares have been traded on the NYSE today, and eleven words (in the first headline) can’t capture the motivations behind all those shares. I’ve spoken to the editors at Bloomberg and was told that they call up one of their contacts ask him or her why the market was down and, voila!, a headline. (Tuesday’s reason du jour was “Concerns Over Tech Spending.” On Monday, they rose “On Speculation Global Credit Conditions are Improving.”)The second dynamic is that listening to economists can be harmful to one’s financial health. Or maybe the sellers should have listened to St. Louis Federal Reserve President, Jim Bullard, who made it into the following Bloomberg headline: Fed’s Bullard Says Recovery Not Faltering, Central Bank Policy “On Track.”
I can’t do justice to this subject as well as a brash New Yorker can, so here’s a quote from Barry Ritholz’s blog today.
Look, let’s not beat around the bush: Wall Street economists, as a group, well, they suck.
Most of them did not see the crisis coming; many were deep in denial about the recession long after it started. They missed the housing boom and bust, the credit crisis. They continued to see phantom bottoms and false recoveries again and again.
In general, they were institutionally biased, preternaturally accepting of questionable data, and wed to outmoded belief systems of efficient markets. Oh, and if you listened to their advice, you lost XXXXloads of money.
. . .
Which brings me back to the original question: Why should anyone listen to these folks as a group? Do we want to get it wrong yet again, or do you still have some remaining cash to lose . . . ? Seems like the news that GM emerged from bankruptcy should have helped out markets today, but it appears not to have done so. Then, again, maybe it would have been worse without the news. Further, the New York Times reported that “GM sold 9,300 Camaros during the month of June–more than either its entire Buick or Cadillac divisions.” And you can see why by clicking here. According to the Wall Street Journal, the pace of auto sales in China puts the red juggernaut on a pace to easily overtake the U.S. in auto sales. Now, admittedly, those folks aren’t shelling out $30,000+ for a new Camaro SS or longing to drop $35,000+ for a cool, green Volt. It’s unit volume, not dollar volume. Alas, all is not good for GM, as another headline said that Ford could take over the slot of top U.S. automaker.
For some companies the credit crunch is in full swing, and one of those is CIT Group. The FDIC is said to be unwilling to guarantee any of its debt because of the company’s shaky fundamentals. The FDIC says its reluctant to put taxpayer money at risk. Never mind that its list of failed banks, available by clicking here, extends to six web pages of ten banks per page. Seven banks were added to the list last week, and more will assuredly be announced this weekend.
Boone Pickens apparently has a few hundred wind turbines for sale. You might recall that he intended to put them up in swath of land running from his native Texas north to somewhere. It turns out the electric grid isn’t up to the task of transporting his wind-generated electricity to anywhere important. (Now that sounds like a worthy bailout/stimulus package project.) You’d think that one of the world’s smartest energy men would have looked into this first. Anyway, earlier this week he said that oil would “Match Record $147 a Barrel Price in Three Years” (Bloomberg headline.) I wouldn’t bet against him.
There wasn’t much on tap this week. Monday started off the week with the ISM Non-Manufacturing survey. This diffusion index, where 50 divides expansion from contraction, came in at 47, whereas economists were expecting a reading of 46. The previous reading was 44. Included in the report is the Net Percentage of Managers Reporting Growth, and that rose to 6%, the first reading over zero since mid-2008. According to Ned Davis Research, such a reading is coincident with 2.0% per annum GDP growth. That seems like a stretch, and survey participants have seen their 401(k) balances heal along with yours and mine, which may color their views similarly. As always, we’ll look for confirmation in next month’s reading.
Mortgage Applications rebounded this week, increasing by 10.9%. The perversity of percentage math, however, makes it just a bounce. Considering just last week’s drop of 18.9%, we need a 23.3% improvement just to recover that ground.
In what would likely make the Consumer Credit Counseling Service a bit annoyed, markets rallied on Wednesday afternoon as it was reported that Consumer Creditcontracted less (-$3.2 billion) than expected (-$8.8 billion). In April, consumer credit fell by a lowerly revised (-)$16.5 billion. The consumer’s new-found frugality has him repairing credit, hunkering down, increasing savings, and picking up pennies. That will put pressure on retail sales for some time. To the extent that consumer credit shrank less than expected it offers some hope that perhaps consumers didn’t feel as great a need to pay down credit, leaving more to be spent. Initial Jobless Claims fell sharply, by 52,000, from an upward-revised 617,000 to 565,000. Commentators were quick to point out that there are no auto plants to shut down in the summer, as is customarily done; i.e. they’re already shut down. If this was such a ready explanation, it begs the question of why the dismal scientists hadn’t considered that in coming up with their way-off-the-mark call for a decline of just 11,000. University of Michigan Consumer Confidence fell from 70.8 to 64.0.
Over the last year ended in June, Import Prices have fallen by (-)17.4% while economists had expected a decline of (-)18.6%. If you haven’t noticed your bills being nearly 20% lower, consider that about 21% of U.S. imports are of petroleum-related products. The average price of gasoline–much of which is imported from Europe–in June 2008 was $4.05. It’s now $2.56. Crude oil averaged $133.97 per barrel; today’s $59.60.
In contrast to this week, next week is packed full of economic excitement.
Monday – the Federal Monthly Budget Statement is released. I trust yours bears no resemblance, irrespective of the amount. In May, for example, the Government had on-budget receipts of $64,098 MILLION and off-budget receipts of $53,143 MILLION. On-budget and off-budget outlays totalled $250,801 MILLION and $56,090 MILLION. You can do the higher level mathematics to determine how far beyond our means we’re living. Here are the year-to-date figures: total receipts, $1,373,307 MILLIONS; total outlays, $2,365,252 MILLIONS–through May! of the current fiscal year! without considering past years of profligacy! Prepare to assume the fetal position.
Tuesday – we get Producer Price Index data for June. On a year-over-year basis, economists look for a drop of (-)5.2%, accelerating the (-)5.0% decline from May–not surprising given the aforementioned drop in petroleum-related products mentioned above. Factoring out food and energy, looking at the so-called Core rate of inflation, economists expect a year-over-year increase of 2.9%. Retail Sales for the month of June are also reported on this day. Expect this data to be watched very closely over the coming months as the consumer continues to retrench. The Cash for Clunkers–maybe better called Dollars for Dodge–should be released shortly and can be expected to provide a crack-cocaine sort of boost for auto sales without the addictive effects. Economists expect sales to have risen by 0.4%, which is precisely the average increase since the series’ 1993 inception–not that economists would be that lazy. May Business Inventories are reported, and many will point to the declines in inventories for why third quarter GDP could be positive, but the decline seems largely in response to falling sales; that is, businesses attempt to keep a certain level of inventory relative to sales, and that ratio has recently spiked up, something that has happened in past recessions. In fact, most recessions tend to be exacerbated by/a result of inventory problems, where businesses react sharply to a sudden mismatch of inventories and sales. In the case of the current malaise, the recession was the result of a financial crisis, and the inventory problem occurred only after the onset. I suspect that inventory building in the third quarter may be overblown as a positive.
Wednesday – the Consumer Price Index, in contrast to PPI, will show year-over-year deflation at the headline level (-1.6%) but continued inflation at the core level, where, when food and energy are excluded, prices are expected to have by about the same absolute value (+1.7%). The Empire State Manufacturing index released by the New York Federal Reserve. It’s the first of two regional Fed surveys. Economists expect a reading of -4.75, which will mark the best bad reading since early 2008. The twin releases of Industrial Production and Capacity Utilization are also released, and in the spirit of happiness they will not be reported here next Friday, as they will inevitably be dismal. Lastly for this Wednesday, we’ll get to pull back the curtains and read the Minutes of the FOMC’s June 24 meeting. It might be the most important meeting of the week.
Thursday – it’s the ever-popular release of Initial Jobless Claims, and this time all the economists who forgot about the non-event of auto-plant shutdowns now rush to the other side of the boat, dropping their collective forecast to 530,000, from the 603,000 they used this week. We, here at Obvious Insights, are much more cool headed, if considerably lower paid, yet as much as we’d like to call that a one-timer, our model dictates that we follow it, so we forecast a sizzling 519,000, for a staggering drop of 46,000. Probably explains some of the lower-paid stuff.
Speaking of lower-paid, some hardworking sod–salt of the earth type–in a tie-dyed tee-shirt was standing outside the 5/3 building–soon to be renamed 3/5–handing out brochures that said he wasn’t working–and one shouldn’t patronize 5/3 for the same reason–because he didn’t get paid as much as the hard-working sod in Indianapolis. ‘Any one else wonder why in the name of capitalism a union would strike in the middle of the worst economy since the Great Depression? I must be missing something. At best, one of ten is out of work. At worst, it’s closer to two of ten, and we’re supposed to feel sorry for these guys?
The second regional Fed report, the Philly Fed, is released at 10:00. According to Ned Davis Research, the survey has an 88% correlation with the Empire State survey. It’s probably no wonder, then, that the entrepid folks that make weather forecasters look good expect this survey to read -5.00. Gee, I wish it was easier to tie that in to Wheel of Fortune than Family Feud (“Survey says . . . “) then we could tie in a video of Ed Grimley. Oh, why not, anyway.
Count on Wednesday’s release of Mortgage Applications to have been dismal–anything housing is. So, today’s release of the National Association of Home Builders sentiment index, the Housing Market Index is expected to show builder sentiment flopping around at the level of recent months, well off the bottom–double even, but even more below the top.
Friday – the fun fest wraps up with Housing Starts–please stop building more houses–and Building Permits. Starts, whether they’re 530,000, as expected, or + or – 50,000 from that are still about 1/4 of what they were at their 2006 peak. The fewer homes are built, the sooner the inventory of unsold homes can get down to normal levels. Housing is going to be a millstone around the economy’s neck until that happens.