Tower Private Advisors
Capital Markets Recap . . . abbreviated
April 30, 2009
- Bulletproof stock markets
- More stabilization in the economy
A Honey-Do list beckons, so this week’s recap will be early and abbreviated. I’ll provide some color on the markets early next week. Suffice it to say that the it seems impervious to data that, only a few short weeks ago, would have sent the Dow down by 1,000 points. Consider the slew of bad news that has confronted the market:
Swine flu — wait, make that H1N1 flu — gotta protect pork producers
Chrysler files for bankruptcy
Earnings are less than spectacular
Banks are reported to need more capital
And yet it marches on. We’re running out of catalysts, and the last Weekly Recap dispatch used the concept of running on fumes. With nowhere to go from there, let’s now say that the Emperor is looking scantily clad.
Economic news this week was split between not-as-bad-as-expected and bad-but-we-don’t-care. In the first category were the S & P/Case-Shiller Home Price data, Consumer Confidence, Initial Jobless Claims, and ISM Chicago. In the second category were GDP and Mortgage Applications.
The Case-Shiller Home Price index[es] appears to be bottoming out, but don’t take my word for it, check out the chart below. The Case-Shiller series includes two important components, a 20-metropolitan area series and a National Home Price Index. The national series is released quarterly; the 20-metro are series is released on a monthly basis; both series are two months in arrears. As a consequence, this week’s release was the 20-metro area series, and it is just now reporting on February data. Next month we’ll get March data for both series. In the chart below you’ll see the 20-metro area series, as well as the narrower, 10-metro area series. Both are still declining, but at a slower rate. Mortgage Applications declined sharply this week, falling by 18.1%; last week, applications rose by 5.3%.
This week, we got our first look at Q1 2009 Gross Domestic Product data, and it was dismal. Few expected a repeat of the Q4 -6.3% result, and we didn’t get it, but it was awfully close, as GDP fell by 6.1%. That was much worse than economists expected (-5.0%), but, in a sign of the bulletproof-ness of the stock markets, the data was shrugged off. It’s possible that the massive inventory liquidation–and refusal to restock–will either provide room for revisions to the Q1 data or prove a springboard for a strong Q2. We will get two more, published revisions to the Q1 data: the Preliminary estimate will come at the end of May; the Final estimate will come at the end of Q2.
Initial Jobless Claims fell again this week, although if Jobless Claims were a stock, you’d still feel like it was at the top. At 631,000, we’re a mere 6.38% off the March 27 high. Still, that could prove to have been the peak of the recession. Since then, we’ve put in a lower low (613,000 on 4/10) and a lower high (645,000 last week). Too, the 4-week moving average has rolled over. It’s at its lowest since late February. Economists use the four-week smoothing to even out the data. While some hope can be found in first-time claims, Continuing Claims, the rolls of those who continue to collect unemployment benefits, continue to rise. Taken together, we can tell that jobs are being shed less quickly (falling jobless claims), the pace of new job creation is dreadful (rising continuing claims).
The ISM Chicago survey was considerably stronger than expected and about 33% better than the March reading. While economists expected a reading of 34.0, the actual survey came in at 40.1. While that’s a strong bounce, and far better than economists expected, we’ve got another ten points to go before it can be said that the Chicago area manufacturing economy is expanding. Still, the component indexes that supported the headline increase weren’t fluffy. Order Backlogs increased, New Orders increased, Production increased–albeit more modestly, as did Employment. The indices that fell weren’t that troubling: Prices Paid declined, Inventories fell, and Supplier Deliveries declined. Remember, too, that any time inventories fall in this environment of already lean stocks, it’s a positive for the future as inventories have to be rebuilt.
Consumer Confidence sharply rebounded in the month of April, much to the consternation of the elusive consensus economist, who expected only a modest improvement (26.9 to 29.0). Instead, bouyed by stock market headlines–what else is one to make of the attached chart, courtesy of Bloomberg–the average consumer put on a happy face in April. Funny how Consumer Confidence very closely tracks the results of stock markets.
Now, lest you become too enthusiastic, yourself, I’ve plugged in another chart (to the right) to give you a longer-term perspective on consumer confidence. Suffice it to say, it’s going to take a lot more than a few months of positive stock market results to boost consumer confidence beyond dead-cat bounce territory, something like several more such months.
Monday - we get the week’s first look at home activity in the Pending Home Sales report. Economists expect that pending sales in March were flat from February. If you like the idea of buying stocks at their bottoms, you’ll love the potential for this data series, illustrated in the graph below.
Tuesday – the ISM Non-Manufacturing series is released. It is expected to show an improvement from 40.8 to 42.0. Recall that this data is reported a diffusion index, meaning that at 50 reading roughly approximates half the respondents indicating business expansion, half indicating contraction. Of all the data series, the diffusion indexes (ISM Chicago, ISM Manufacturing, etc.) seem to have the most potential for showing outright improvement versus just slower worsening.
Wednesday- with Nonfarm Payrolls on tap for Friday, we expect the ADP Employment Situation index on this Wednesday. While this report attempts to presage Friday’s report, it has a fairly dismal record of doing so, as the chart below indicates. The top half shows the amount by which the two reports are different; the bottom half tracks the two independently. One can see that the ADP has long periods of persistent over/undershooting. Expectations are for losses of 643,000, which would mark a substantial drop from last month’s 742,000 loss.
Thursday – as usual, Initial Jobless Claims are to be released on this day. No consensus estimates are available at this time. Lower numbers are preferred, and a drop of 20,000 would be nice. We will want to keep an eye on the revisions to this data
Friday - it was true from the beginning of the week, that the Nonfarm Payrolls data would be the big report of the week, but everything else now gets pushed aside in anticipation of what’s likely to be another big number of jobs lost. As the chart below shows, this is indeed a lagging measure of the economy. The blue-shaded areas represent recessions. Notice that jobs continue to get cut sometimes well after the recession is officially declared over, but the cuts are nowhere near as severe. So, while employment is a lagging indicator, it does give clues as it begins to get progressively less worst.
Economists expect that layoffs improved from 663,000 jobs lost in March to 620,000 lost in April. Somewhat surprisingly, they expect manufacturing employment to have fallen at the same pace: 161,000 lost in March; 160,000 lost in April. The Unemployment Rate is expected to have ticked up from 8.5% to 8.9%. I suspect, that with this series, especially, the revisions to March data will be crucial, especially if we can hope this equity rally continues. It is a release fraught with peril, as markets have a tendency to reverse direction on Payrolls Friday.
Graig Stettner, CFA, CMT
Investment Management Services
Tower Private Advisors
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