Weekly Recap & Outlook – 01.07.11

Tower Private Advisors

Prior Posts

Below

  • Precious metals correction
  • Secular bear market review
  • Ugly payrolls figures

Capital Markets Recap

  • Precious metals correction underway
  • U.S. markets enjoying relative strength versus foreign

If you want a chance to buy gold, you’re likely to get it.  It looks like a test of the long-term trend is ahead of the yellow metal.  That would take gold to about $1300, while a correction similar to those seen in 2009 and in early 2010 would take us to 1247, the latter a violation of the trendline. 

For some time now we’ve been thinking that we’re in a secular bear market in U.S. stocks, based on a review of secular, or long-term, cycles in our past.  Briefly, they have averaged about 16 years in duration.  With the S & P 500 arguably peaking in early 2000, that plus 16 gets us to 2016.  By a bear market we mean one that doesn’t make new highs.  It doesn’t have to go down; it can go sideways.  We look at Fibonacci Retracement levels to determine likely targets.  Here, then, is a fresh look at the chart.

With the [circled] break out through the 61.8% Fibonacci retracement level–the biggies are 38.2%, 50%, and 61.8%–we expect a target of 1333 on the S & P 500, a short 4.89% sprint from here.  The market likely takes a breather there before a run at old 2000 highs.  (The market did go marginally higher in 2007, but that push was a weak one.)  It would not be a surprise to see 1533 (+20.6% higher than today) in 2011, but we think the markets have some unfinished work to do lower–although not as low as in 2009.  What would make sense is a run at 1533, followed by a retest to the 61.8% or 50% retracement levels.  We expect, at the end of the process, to see stocks sporting high single-digit P/Es, rather high dividend yields, and the populace expressing a distinct distaste for stocks.  A beautiful symmetry would be seen were the market to drop all the way back to about 900.  From 1533 that will feel like another crash, a drop of 42.1%.  Perhaps a more reasonable downside target would be 1010.  Because of the beauty of Fibonacci numbers that would mark a 61.8% retracement of the move from the market bottom in March 2009 to 1533 and would take us back to the 38.2% retracement of the entire decline from the 2000 highs. 

Yawn

Here’s what you need to know:

  1. Stocks are going higher, maybe another 20% higher . . . in the next 12 months?
  2. But they’re going to take another leg down . . . maybe quite a ways down . . . 1010?
  3. Then the stage will be set for the next secular bull market.

Top Stories

The banks got kicked in the teeth this week when U.S. Bancorp and Wells Fargo were dealt setbacks in their attempts to foreclose on properties in Massachusetts.  The Massachesetts Supreme Court upheld a lower court’s decision to invalidate two foreclosures because the banks “didn’t prove they owned the mortgages.”  An analyst mentioned in a Bloomberg story on the subject said that, “a mortgage must name the assignee to be valid,” and that, “this is likely to open the floodgates to more suits in Massachusetts and strengthens the cases in other states.”  Both those stocks promptly headed down but had managed to regain about half their losses by late afternoon today.

Apple became the second largest company in the world by market cap after passing up PetroChina this week.  The Company is still about 20% smaller than the largest company in the world, ExxonMobil.  Apple is undoubtedly hot, and the Company’s products are slobber-inducing, must-have things of beauty.  Today marks the middle of the Consumer Electronics Show in Las Vegas, and it’s estimated that their are at least 100 tablet-related products there.  It may be that Apple has such an early lead with a market-share dominating lead, such that every other product will prove to be an also-ran.  We still own shares of Apple, but with this news and more than 90% of the anaysts covering the stock urging investors to buy, it has to make one leery.  A good company doth not always a good investment make.

This Week

There was really just one release that mattered this week and that was the Nonfarm Payrolls report.  Technically, it’s called the Employment Situation Summary, and it comes from the Establishment and Household surveys of employment.  The Establishment survey polls about 600 brick-and-mortar companies, and about 40% of the responding firms represent companies with 20 or fewer employees.  The Household survey, according to the Bureau of Labor Statistics,

has a more expansive scope than the establishment survey because it includes the self-employed, unpaid family workers, agricultural workers, and private household workers, who are excluded by the establishment survey.

The Household survey also records the data along demographic lines, reporting, for example, the unemployment rate for those with “some college or associate degree.”  Economists tend to generally disregard the employment change in the Household survey.  Importantly, though, the Household survey is where the unemployment rate is determined.  Also, according to the BLS, to be statistically significantly, the Establishment survey’s payroll change needs to be greater than 100,000, while the same figure for the Household survey is 400,000.  Essentially, those are the margins of errror.

All of technicalities aside, the report was disappointing, especially on the heels of a 297,000 increase in private employment in Wednesday’s ADP Employment Change report.  Nonfarm Payrolls grew by just 103,000, which was less than the estimate of 150,000, albeit higher than November’s +39,000 increase.  The trouble with 103,000, other than that it’s just barely above the margin of error, is that the population over 16-years old is estimated to have grown by 174,000 in December.  Just to keep up with the population growth, we need to add 163,000 jobs per month.  That doesn’t consider the drop from peak employment to now of 8,000,000.  If we want to get those people back to work in five years, payrolls need to grow by an average of 133,000 per month.  Put the two together, and we need 296,000 per month.  As you can see in this 30-year chart, there haven’t been a lot of months over 296,000, just 61/360.

The ABC News Alert that popped up this morning trumpeted the fact that the Unemployment Rate had dropped to 9.4%, well below the expected 9.7% and last month’s 9.8%.  As someone interviewed on Bloomberg put it, it was the wrong kind of improvement, as the table below indicates.

What made it the wrong kind was that the labor force contracted by -260,000.  That probably means that more job seekers became discouraged and removed themselves from the labor force. 

Next Week

Key indicators to watch

  • NFIB Small Business Optimism (Tuesday) – December – ‘been rising stubbornly of late
  • Federal Reserve Beige Book (Wednesday) – April 23
  • Initial Jobless Claims (Thursday) – weekly
  • Producer Price Index (Thursday) – December
  • Consumer Price Index (Friday) – December
  • Industrial Production (Friday) – December
  • Capacity Utilization (Friday) – December
  • University of Michigan Consumer Confidence (Friday) – preliminary January
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One Response to “Weekly Recap & Outlook – 01.07.11”

  1. Larry Dent says:

    The folks I feel sorry for today are the young people trying to enter the work force doing something more urgent that flipping burgers (although there is a certain urgency in flipping before the burn). A young person in IUPU said to me the other day, “the worst thing I have done in my life is stay in school. By the time I graduate I will be so far in debt it will take half my life to recover”. Of course he was not considering the down side of flipping burgers, but the point I am making is that we are still in a whole lot of economic trouble, and I see very little “light at the end of the tunnel”. Good column as usual. Thanks. Larry Dent
    PS When gold corrects back to $36.00 an ounce I will buy a bunch.

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