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Capital Markets Recap
Some curious divergences are starting to arise. A divergence occurs when multiple indexes/securities/observances don’t mutually reinforce each other. The most common involves Dow Theory, where the Industrials and Transportation indexes are considered. When one is making a new high, it is confirmed if the other does the same thing. Notice, in the table, above, the performance of small-cap stocks this week. While every other equity index shown there was positive on the week, small caps were marginally negative. That’s a worrisome sign and one that needs to be watched.
Here’s another. Notwithstanding small-cap stocks, the indexes are at 2009 highs, but the leadership, or the stocks that are helping push the indexes, is narrowing. Witness the chart below from Investors Intelligence. The level of new 52-week highs is not in sync with the indexes making new highs. This, on it’s own, isn’t cause for panic. In the internet bubble heydey this situation continued for some time, with the biggest technology stocks, like Cisco Systems and Microsoft leading the way, while the bulk of technology was not performing as well.
The relationship between the dollar and stocks, however, is intact; that is, dollar down, stocks up.
On a long-term basis, you won’t have any argument from us that the dollar is likely to depreciate against a basket of foreign currencies. In the short term, however, it could be subject to a mighty bounce, and when that happens stocks will be in for a nasty teeth kicking, as will commodities. There are few dollar bulls out there, the bearish dollar trade is getting crowded (think Lemmings.) In the commodity futures pits, however, there are only two commodities where the smart money, the so-called Commercials, are not bearishly positioned, and that’s in the U.S. Dollar Index and Treasury Futures.
With ultra-low policy rates and a depreciating currency, the U.S. dollar has likely become a funding currency for the carry trade. The IMF said the same thing recently (“There are indications that the U.S. dollar is now serving as the funding currency for carry trades.”) In a carry trade, one currency is sold to fund the purchase of some other asset. That asset could be the Swiss Franc, gold, or emerging market stocks. The carrying costs (i.e. the interest and margin rates) are low, and a depreciating currency (the dollar), and those combine to make a double tail wind: the asset appreciates, and the loan is paid back with depreciated dollars. If the dollar appreciates, however, there will be a rush to repay the dollar loans, which will, in turn, push up the value of the dollar. Noriel Roubini said the carry trade faces an “inevitable bust.” He said that two weeks ago, so I’m not suggesting it’s new news, just that some smart guy said it. Clicking here will take you to the complete article (may require registration).
What could possibly cause the dollar to appreciate? Well, as the world’s reserve currency, a flight to safety would do it. What could provoke a flight to safety? Try these on for size.
In a fit of boredom with traditional news, I’ve decided to only include stories found on blogs this week. In no particular order, here they are. Like the folks mentioned below who respond to the Empire State Manufacturing survey, the posts I’ve selected reflect baggage I’m carrying, axes I’m grinding, and other stuff. Click on the underlined title for the full story. I can make a point without resorting to colorful language. Some of these folks can’t. There. You’ve been warned.
- From Barry Ritholz’s The Big Picture: NYU: Market Timing Bests Buy & Hold. He goes on to point out that it’s likely the managers who bested buy and hold were using other strategies, such as “aggressive risk management tools and capital preservation strategies.” These probably appeared to be market timing techniques.
- From Paul Kedrosky’s Infectious Greed: Who Files for Bankruptcy. Like a lot of stuff on blogs, there is a fair amount of cross pollination, and as you’ll find from clicking through the link above, this comes from a website called Fancy Stats. Like a lot of Paul Kedrosky posts, he relishes one’s ability to display to effectively display information graphically.
- From the Wall Street Journal’s Economics Blog: California, Michigan Faces [sic] Doomsday Budget Scenarios. This makes for some pretty dreary reading as these states problems are expected to continue on into the next decade. To the astute, that’s not saying much, if for no other reason that the next decade starts in about a month and a half (remember, 2000 was the first year of the decade; this is the 10th.) Here’s a scary quote: “I looked as hard as I could at how states could declare bankruptcy,” said Michael C. Genest, the director of the California Department of Finance who is stepping down at the end of the year. “I literally looked at the federal constitution to see if there was a way for states to return to territory status.”
- And from Mish’s Global Economic Trend Analysis, a related report: 10 States in Deep Fiscal Trouble. This report shows the Change in Revenue and Size of the Budget Gap for ten states, and while each is a double-digit margin away from being balanced, the difference from the #1 worst (California) to–perversely in light of the previous one–the #10 worst (Michigan.) It goes on to say that “other states . . . were not far behind.”
- From zero hedge: Goldman on Why a Second Stimulus Is Merely Months Away. Here’s an excerpt on the lead in to a report from Goldie. “Earlier today, Goldman came out with a harbinger piece on why a second stimulus announcement is essentially a formality. The administration has already promptly forgotten the lessons from the recent elections which were a failure for the Democrats, and a resounding vote against incremental deficit spending. The people spoke, and they will have no more of it.”
- From Clusterstock: America’s Infrastructure Really is Crumbling. This post includes a report from teh American Society of Civil Engineers that “reveals 15 weak points that need a mind-boggling $2.2 trillion over the next five years to be fixed.”
- From Dealbreaker: Jim Cramer’s Bear Call Was Second Worst Prediction of the Decade, Says Fellow CNBC Colleague. In March 2008, Jim Cramer told viewers that Bear Stearns would be fine. Apparently, one of his colleagues reminded everyone of that.
- Daniel Gross of Slate Magazine does a good job of reporting stuff on his own; that is, he doesn’t swallow the company line. From the Slate Magazine – Moneybox blog: The Mystery of the Rising Stock Market. The subtitle is, “if the economy’s stagnant, why are stocks up? The answer is disturbing.” I didn’t find it terribly disturbing. In short, the best performing stocks have been global in scope, and their increases reflect the health of the world excluding the U.S.
Cut to the chase: one step forward, one step backward
You might recall that this was to have been a light week. Our Initial Jobless Claims quote-unquote Model beat the consensus view of the average meteorologist economist in forecasting (apologies to the word) 496,000 claims. The dismal scientists had expected 510,000. Instead, first-time claims for unemployment benefits fell to 502,000, almost a new low for the year. Meanwhile, the closely-watched four-week moving average did fall to a new low for the year. Clearly, the rate of job loss is slowing–and that’s confirmed by the not-as-bad-as-before nonfarm payrolls figures.Calling the recession over is, at this point, probably a foregone conclusion, although the NBER–the arbiter of when things start and end–is holding out. We’ve stopped receding; recession over. Many smart folks have argued that’s it’s going to feel like a recession for a while, and one reason for that is because the transition to growth is going to take a while. Growth should include growth in jobs, and that part of the equation is murky (I believe that was three mixed metaphors in one independent clause.)
This week the National Federation of Independent Business released its Small Business Optimism indicator, a part of which is Hiring Plans, both of which are on display here. Even after the stock-market lead rebound in optimism, it still remains below all but the lowest two readings, and that 1980 low was a one-quarter wonder (readings were quarterly then). Hiring plans weren’t tallied until 1997, but that portion of the chart needs no explanation. Small business, the much ballyhooed engine of America’s growth, is still in job-cutting mode, as evidenced by the negative reading for hiring plans.
Speaking of arbiters, the Bloomberg news desk is apparently the arbiter of why things happen. The reason for the decline in University of Michigan Consumer Confidence, they aver (memo to self: add “aver” to list of best short words) is the “rising unemployment.” For once, I might agree with them if for no other reason than that they agree with what I said on October 30.
In September the unemployment rate was 9.8%. It’s estimated to be 9.9% in October. Ask yourself, which does more for you a 10,000 Dow Jones Industrial Average or a 10.000% unemployment rate. While folks likely yawned-as they should have-over an arbitrary index of faulty construction that covers 30 companies-I suspect a double-digit handle on the unemployment rate could rip the chest hairs off of consumer confidence.
I don’t think a five-point drop qualifies as ripping chest hairs, but it’s a big drop, as evidenced below. Naturally, another dynamic on display below is entirely coincidental, but notice how the low of Consumer Confidence in the last expansion marked the peak of the current recession. Yes, I think there is a collective consciousness at work here, and it’s not a coincidence that the current peak of consumer confidence only reached as high as the depths of our then-despair reached during those heady times, and I suggest that only when those former lows are decisively overtaken will we begin to believe the recession is over.
In contrast to this week, next week is heavy with data.
Monday - we get a look at the state of New York’s manufacturing sector with the release of the Empire Manufacturing survey. Its last reading was firmly at 2004 levels, but the consensus is for a sizeable drop of about 18%. This is another survey of opinions formed by well-informed folks in the business of manufacturing, who have also seen their 401(k)s improve over the last six months. In short, they can be as fickle as anyone else. Am I being excessively pessimistic? Ask yourself, can anything about the economy be as good as it was five years ago?
Tuesday – the Producer Price Index data is released. Still no signs of inflation. Industrial Production is expected to have again grown in October, by 0.4%, which is below the pace set in September. At this point, any growth is welcome. Recall that IP is reported for three sectors: manufacturing, utility, and mining, with the first being the most important to the average Jane, the second being the most dependent on weather, and the third being the best underlying gauge of coming activity. Capacity Utilization, the level of which is a big source of “slack” for those who say that inflation is a long way off, is released at the same time. It’s expected to have shown a slight improvement, from 70.5% to 70.8%. Lastly for Tuesday, the NAHB Housing Market Index, the survey of homebuilder sentiment, is due out. After a downtick in October, economists expect it to have regained its former heights–well, September’s, at least. Roughly translated, about 18% of homebuilders are optimistic.
Wednesday – on this day, Consumer Price Index data is released. Like the wholesale version it, too, should show little indication of inflation. The month-to-month data should be unchanged, while the year-over-year data will be unchanged at the headline level, less deflationary at the core level. Next to the Case-Shiller Home Price indexes, the most closely-watched housing indicator has to be Housing Starts and Building Permits, the latter of which is the backlog for the former. Not only does it display builder-perceived demand, but it also reflects enthusiasm from the builders. Unfortunately, what it has lately done is shown how much the stock of unsold homes is going to go up. Economists are hopeful that both will post 2009 highs, but as the accompanying chart shows, even that will hardly represent a bounce.
Thursday – as usual Initial Jobless Claims are reported. Economists expect them to be largely unchanged (504,000 vs. 502,000). Our fearless guess is 494,000. Leading Economic Indicators should cement the idea that the economy continues to move in the right direction, albeit at a glacier’s pace. Lastly, the Philly Fed is expected to be unchanged in November. For some reason the Philadelphia Federal Reserve District’s survey participants are striking a much more downbeat view of the economy than are those of the New York district.
Here’s hoping you have a great Thanksgiving. The Weekly Recap & Outlook will be taking two Fridays off.
Graig Stettner, CFA, CMT – VP & Portfolio Manager – Tower Private Advisors