Weekly Recap & Outlook – 12.04.09

Tower Private Advisors

What about Bob [Nicholas]?  Time is running out to make contributions to 529 plans.  If you didn’t already, click here to see some year-end thoughts from Bob.


  • Dollar bounce
  • Apple
  • Bernanke re-appointment hearings
  • Surprisingly strong labor report
  • What about Bob [Nicholas]?  Time’s running out.  Click here.

Capital Markets Recap

7:29 AM

All is quiet as I type this–in the U.S. markets (they haven’t opened yet), and in the office because it’s early, and no one’s here yet.  Today is Nonfarm Payrolls day.  Economists expect that (-)130,000 jobs were lost in November and that the Unemployment Rate stayed unchanged, albeit at a 26-year high.  Foreign exchanges are presently in the red, although just modestly so, and markets have not–as some blogger clown noted this morning–”tanked.”  U.S. futures have the S & P 500 up by 2.70 and the DJIA up by 21.00.  In about an hour the futures activity should go bonkers . . . one direction or another, as the data is released.  This is a big day, if for no other reason than NFP Friday often marks a trend-change date.  On the other hand, December has historically been one of the year’s strongest months. wro

I’ve attempted to make the point here in past dispatches–belabored the point is more like it–that the biggest risk to the markets is a possible rally in the dollar.  Such a rally doesn’t have to be an admission that all is well with the U.S.  Instead, the dollar has become oversold and is due for a mean-reversion bounce.  But that bounce could be especially devastating because of all the speculation funded with the ultra-low U.S. currency, a funding otherwise known as a carry trade.

The unexpectedly-strong labor markets reading (see below) caused a rally in the buck, and ended up kicking stocks in the business, although the Dow managed to finish up by 6 points.

The dollar is threatening to make a breakout, which could lead to it heading higher, as shown in the chart below.


That’s the 55-day moving average in green, a level that has rejected the buck in the past.  There are just a few good ways for individual investors to speculate on the fortunes of the buck.  PowerShares offers both bullish (UUP) and bearish versions, and the chart on display next shows the former.  You can see volume added in the lower panel, and it was relatively big today, suggesting there was strength behind the move.  Note that while is investible by individual investors, it’s also a cheap way for institutional investors to participate in the trade.


Dennis Gartman, whose eponymous newsletter we read, has been highlighting Goldman Sachs and Apple as tells for the market.  If you like metaphors, they’re the generals of the army.  Watch them.  If they run into trouble the market runs into trouble.  Okay.  They’re running into relative trouble. 

I wonder what Apple’s trouble might be.  Great products, packed stores, etc.

Here’s a thought, the curse of the cover story.  I missed this one, as the cover story was out in early November, but this insight is a rare own of my own concocting.  To review the cover story phenomenon, it represents the point at which a company or an individual’s merits are fully recognized and discounted.  What’s more, a new decade starts in 27 days.  Steve Jobs is the CEO of this decade, and what a decade it has been for Apple’s stock (click here for a 10-year view.)



Top Stories

 Bloomberg again displays its ability to produce inane headlines, as evidenced by these to gems, numbers 1 and 2 on Thursday’s Top Stories:

  • Stocks End Three-Day Gain on Concern Recovery Faltering; Treasuries Slump
  • VIX Options Trading Surges to Record in Bet Derivatives Index May Decline

First, if the “recovery [is] falaatering,” then why are Treasuries slumping?  Treasuries do well when recoveries falter.  Second, if the recovery is faltering and stocks are falling, then why would the VIX index, a measure of anticipated volatility 30 days hence, decline?  And you’re supposed to believe these people.  Maybe it’s the holiday interns’ turn to write headlines.

Ben Bernanke was grilled by the Masters of the Universe this week, and some of the excerpts were dandies.  You can click here to see the entire prepared remarks of one Jim Bunning, Republican from Kentucky, but here are some choice selections.

 Four years ago when you came before the Senate for confirmation to be Chairman of the Federal Reserve, I was the only Senator to vote against you.

As recently as a letter you sent me two weeks ago, you still refuse to admit Fed actions played any role in inflating the housing bubble despite overwhelming evidence and the consensus of economists to the contrary. And in your efforts to keep filling the punch bowl, you cranked up the printing press to buy mortgage securities, Treasury securities, commercial paper, and other assets from Wall Street.

Alan Greenspan refused to look for bubbles or try to do anything other than create them. Likewise, it is clear from your statements over the last four years that you failed to spot the housing bubble despite many warnings.

Even if all that were not true, the A.I.G. bailout alone is reason enough to send you back to Princeton. First you told us A.I.G. and its creditors had to be bailed out because they posed a systemic risk, largely because of the credit default swaps portfolio. Those credit default swaps, by the way, are over the counter derivatives that the Fed did not want regulated.

From monetary policy to regulation, consumer protection, transparency, and independence, your time as Fed Chairman has been a failure. You stated time and again during the housing bubble that there was no bubble. After the bubble burst, you repeatedly claimed the fallout would be small. And you clearly did not spot the systemic risks that you claim the Fed was supposed to be looking out for. Where I come from we punish failure, not reward it. That is certainly the way it was when I played baseball, and the way it is all across America. Judging by the current Treasury Secretary, some may think Washington does reward failure, but that should not be the case. I will do everything I can to stop your nomination and drag out the process as long as possible. We must put an end to your and the Fed’s failures, and there is no better time than now.

  • Bank of America is expected to repay $45 billion of TARP funds, although it can’t hire a CEO, which might have something to do with Pay-czar-imposed salary caps and a troubled franchise.  It intends to repay TARP, in part, with a $19.3 billion securities issue.
  • Venezuelan bonds fell this week as Victor Hugo Chavez threatened to nationalize that nation’s banks. 
  • Perhaps the supreme commander felt left out after the Dubai debacle.  Apparently, some investors mistook Dubai World as an obligation of Dubai, which it definitely isn’t.  It seems that investors’ only (fading quickly) hope is that Abu Dhabi might step in and help out.  The United Arab Emirates minister of the economy, however, said that “it is a matter of time” before the debts get repaid.  Ah, that’s helpful.  There are two ways to view this mess:  1) it’s just a remnant of the credit crisis; or 2) it’s a reminder that the credit crisis isn’t done claiming victims.  Dubai World, you might recall, is the creator of the palm-shaped island and the islands that together comprise a mini-globe.  What you might not know is that the entire fiasco was financed with debt, as Dubai has, practically speaking, no oil riches.  For an utterly amazing look at Dubai now, click on the picture below.  It will open up a separate internet browser window and take you to a NY Times slideshow.


This Week

Reports were broadly positive this week, with the best Nonfarm Payrolls report in many moons.

This was an action-packed week–well, as much as economics can be action packed–and most of it was good news.  Getting the bad news out of the way first, the ISM Nonmanufacturing (i.e. service sector) survey unexpectedly–as if economists really ever expect anything–fell back below the 50-demarcation line of expansion/contraction.  Indeed, it was a pretty ugly report, and here are a few excerpts:

  • Of 11 categories, seven were categorized as “contracting.”
  • In the category of haven’t-I-said-that, inventories fell for the 15th month in a row.  The report included a couple of respondent comments:  “continuing to consume existing levels,” and “inventory reduction due to slower previous month’s sales.”

On the other hand, an unnamed colleague was chatting with an unnamed business owner in an unnamed industry who said that if industry sales are the same in 2010 as they are in 2009, inventories (i.e. sales of his products) would have to increase by 65%.  But there is also this, with my underlining, which is excerpted from Dow Jones MarketTalk blog (click here for the original):

ISM said manufacturers’ inventories “contracted at a faster rate in November,” with the index at 41.3, its lowest level since August.

Apparel, leather & allied products “is the only one of 18 manufacturing industries reporting higher inventories in November,” ISM said.

On top of that, the institute said it was the eighth consecutive month that the customers’ inventories index has been below 50 percent. In fact, the index registered 37, lowest since May 2004 and actually hasn’t been lower since at least 2002. Only two of 14 industries reported higher customer inventories.

Early on, we thought the inventory restocking thesis was over-hyped for a few reasons. One, we didn’t expect weak demand to warrant much of an increase in inventories. People without jobs usually don’t buy a lot of new stuff. Call it Econ 101, if you will.

The fact that the restocking idea was being parroted unquestioningly by so many “economists” — despite clear hurdles for demand –  was another reason we were leery.    

The final clue was commentary from transportation companies – railroads and truckers. They kept saying they weren’t shipping much stuff, and didn’t expect to be shipping more stuff in the near future. How robust could inventory rebuilding be if there isn’t much product being shipped? That might also be Econ 101.

On the other hand, you could just read the Weekly Recap on a timely basis and read the news before it gets reported, as evidenced here, back in . . . uh . . . September!

The rest of the reports for this week were smashing successes.  There were two regional manufacturing surveys, Chicago Purchasing Manager and NAPM-Milwaukee, that showed managers were confident, the surveys both in expansion territory.  The national ISM Manufacturing survey, while still in expansion territory, contracted a bit from October levels. 

Pending Home Sales were released this week, and they showed a big jump.  Not only that, but it looks like more than a dead cat’s bounce as sales notch another high, as evidenced to the right (click to enlarge for a fpdgsalesull-glory version.)  MBA Mortgage Applications rose by just 2.1%, but look for next week’s to rise nicely as the Freddie Mac’s National 30-year Mortgage Rate  hit a new, all-time (since 1972, that is) low, as you can see below. fre

Gotta have a job to qualify for a mortgage, and that picture cleared up slightly this week.  It’s about as close a thing we’ve had to green shoots in employment for a long time.  It–housing data–didn’t start out looking that way.  Wednesday’s ADP Employment Change report came in weaker than economists expected.  Whereas the dismal scientists expected a reading of -150,000, it came in worse, at -169,000.  So far, the ADP report has done a poor job of foreshadowing nonfarm payrolls.  But then, on Thursday, Initial Jobless Claims were considerably better than expected.  Instead of 480,000 new unemployment insurance filings, just 457,000 filings were made.  That marked another lower low, the simplest indication of a trend in motion, as evidenced in the chart below and to the right.  What’s more, this marked the second week of downward revisions to the data, as mjoblessy the shameful graphic below and to the left shows.  Notice how we rev1shifted from a time of up- and downward revisions to just upward revisions.  Now we’ve had two downward revisions.  That’s very positive for the pace of layoffs, although it says nothing about hiring.   One has to respect this development.  I’ve got a serious axe to grind:  I think the economy is in deep doo-doo, and a double-dipper is all but inevitable, but this is positive stuff.

As you can tell from the quasi-realtime comment at the very top of this week’s dispatch, you can see that markets were pretty timid about action today*, judging by futures action this morning.  They needn’t have been**, however, as the Nonfarm Payrolls report was about as positive as could have been imagined.  In fact, if the revision to today’s data is, next month, as dramatic as the revisions of the past two months’ data, it’s likely that jobs were added in November due, assuredly and in no small part, to the dramatic and sagacious actions of the civil servants in Congress and Washington, in general. 

We subscribe to the excellent service, The Liscio Report.  These are sharp folks.  They don’t sugar-coat anything, but one had to read to the very end before finding anything remotely negative about the report.  Here are a few choice excerpts.

There’s no way to describe this morning’s employment report other than as a pleasant surprise. It was the best initial print on payrolls since December 2007, with only few blemishes (like sectoral narrowness) hidden under the surface.

Revisions were strongly positive

Diffusion indexes rose across the board, with the one-month measure up 8.1 points to 40.6, its highest level since May 2008. Longer-term indexes were up less dramatically, but that’s to be expected at inflection points, if this turns out to be the beginning of a new trend.

Here’s about the only source of gloom I could find.

The decline in the number of unemployed was driven by shrinkage in the number of job losers, especially permanent job losers (as opposed to those on temporary layoff, whose ranks also shrank, though not as much). Unemployment is increasingly concentrated among the long-term.

The median duration of unemployment rose to 20.1 weeks, and the mean to 28.5 weeks – both records. And 38.3% of the unemployed have been without work for 27 weeks or more, also a record, and three times the average for the 61 years the series has been published. At the same time, flows into unemployment are slowing, with the number unemployed five weeks or less at the lowest level since mid-2008.

But the report ends up on a nice note.

Reinforcing the favorable first impressions from this report, the forward looking indicators, like temp employment and hours, were up nicely. Of course, the jobless recoveries of the early 1990s and early 2000s were both characterized by about a year of payroll changes hugging the zero line, punctuated by a few big down months, so the November figures contain nothing that would lead us to expect a strong V-shaped recovery. Still, you take encouragement where you can find it, and there’s some to find here.

 *  It’s typical, though, on a Payrolls Friday, that no one really wants to make a big trade, and that’s especially true in this enviroment.

** Futures and cash markets blasted off after the numbers were printed, however, but tanked just prior to New York lunch time.spx  Some of this stuff can’t be explained, contrary to what the folks at CNBC and Bloomberg TV.  Just deal with it.





Here’s another bit of happy employment news.  Temporary employment is turning up, while payrolls decline.  That’s a divergence, and a positive one.


Next Week

Just a few releases of importance next week.

Wednesday – we should see some reaction to those record low mortgage rates in the release of MBA Mortgage Applications.  No consensus estimates are submitted by economists; they’re too busy trying to figure out what jobless claims will be, something at which they’re very skilled.

ThursdayInitial Jobless Claims are released.  The consensus guess of economists is that they rose by 8,000.  Our sophisticated forecast calls for 444,000, which seems way too clever.  Oh, well; it took a lot less time to arrive at that number.

Friday -  we wrap up the week with two reports of significance.  University of Michigan Consumer Confidence is released at 10:00.  It is expected to have stayed around recent levels.  Hopefully, Christmas will bring some cheer to these folks, because nothing else seems to.  At the same time, Business Inventories  are released.  Economists expect inventories to have contracted again, and who can blame them?  Comments from the folks surveyed by the ISM don’t provide much cause for hope.

Isn’t this exciting stuff?

Have a nice weekend.  Swap out the mower deck for the blower/plow attachment.  Get out the dorky stocking cap and go split some lumber.  Well, at least that’s what we do in Indiana about this time.dork

Graig Stettner, CFA, CMT

Tower Private Advisors

Fort Wayne  ~  Paris  ~  Stockholm

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