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Capital Markets Recap
Wanna know why stocks fell today? Some goofball that the Bloomberg folks interviewed said it’s because “wage growth won’t keep up with rising oil prices.” That’s right, all 1.038 billion shares traded on the New York Stock Exchange fell because of that. Ridiculous!
Mark Mobius, who is frequently quoted on foreign capital markets matters, said the “trend is up” for global oil amidst the continuing kerfuffle in the Mideast. Indeed, according to some, there has been little risk premium in the price of oil, instead the move from <$50 to $85 largely reflected demand from strengthening economies; thus the last ~$20 has come from heightened geopolitical concerns. The sense seems to be that the risk premium could go considerably higher. With this week’s, action we’ve now retraced the all-important Fibonacci level of 61.8%. Further, there’s nothing between the current $104.85 and the $118.98 that marks the next important Fibonacci retracement level. Here’s the trouble, folks. There’s little spare production capacity and it doesn’t take too many nutjobs to blow up a pipeline or two.
The developing world is breaking things. Despots are not sleeping easily. Oil is at $104.85. The S & P 500 has corrected . . . all of 1.8%. This market indeed seems unstoppable. Call it a teflon market. The big boys, the hedgies, might even be throwing in the towel, judging by short interest on the New York Stock Exchange. As of two weeks ago, short interest had fallen to its lowest level since late 2007, as shown in the chart below.
On the surface the economy appears to be stronger this week. That fits with our Strategas service, which believes we’re entering the expansion phase of the economic cycle. We’ve marginally taken out the pre-recession high in real GDP. You might not [want to] believe it, but our national output is at a new high, as the chart at right indicates. Sounds good, right? Well, it’s not. After hitting all the rosy highlights I’ll tell you why.
Personal Income came in better than expected (+1.0% v. 0.4%) while Spending was worse than expected (0.2% v. 0.4%). That means more of the increase was saved. Indeed, we’re now saving 5.8% of income, which puts us back to early ’90s levels. Good for the consumer; bad for the economy.
There were several regional activity reports this week. The Chicago Purchasing Managers Index reached its highest level since 1988, and it’s only been higher than the present level a few times since its 1967 inception. The NAPM Milwaukee–oh, who really cares about Milwaukee–wasn’t quite as strong, but it was considerably better than expected, and the Dallas Federal Reserve Manufacturing index was likewise strong. The big manufacturing survey, ISM Manufacturing, tied its highest level since 1984. Certain parts of the economy are undeniably strong.
Take Initial Claims for Unemployment Insurance, for example. They are at their lowest levels since May 2008, and the four-week moving average is below 400,000 for the first time since mid-2008. What’s more, it crossed below 400,000 instead of crossing above. (It used to be that 400,000 was the demarcation line between an expanding/contracting labor situation.) Of course, what has been missing is hiring. Sure, the pace of layoffs has slowed; to some degree, employers can’t cut any closer to the bone.
Enter Nonfarm Payrolls to the rescue. Today, that report showed that 192,000 jobs were added (although 196K were expected). In addition, we have had five consecutive upward revisions to the data, totalling 216,000, more than were added in any of those months. As our Liscio Report service put it, that, “often accompanies an accelerating employment trend. Private Payrolls rose by 222,000 versus the expectation for 200,000; 33,000 manufacturing jobs were added versus the expectation for just 25,000. Woo hoo! The Unemployment Rate fell to 8.9% Woo hoo! I must pause now to get my bucket of cold water. Pictured at right is a regression of the decline in the unemployment rate off the October 2009 unemployment rate peak. It shows that, if the economy continues at this pace that had the Bloomberg Radio folks positively gushing this morning, we’ll hit a 5% unemployment rate in mid-2019! Let me say, too, this is not the usual Obvious Insights level of work–which is to say someone else did it–that’s the real deal, all original.
Just so some rosy-glassed Pollyanna type doesn’t get his or her dander up–or is it feathers?–I can present the optimistic view here, too. If we can keep up the heady pace of the last three months we’ll blow through 5% by July 2012. I wouldn’t count on that were I you.
As promised at the outset, here is why this is not good news. Stocks don’t do well in a growing economy. Stocks would rather rise in anticipation of a growing economy.
Almost nothing going on next week.
Key indicators to watch
- NFIB Small Business Optimism (Monday) – February
- Initial Jobless Claims (Thursday) – weekly
- University of Michigan Consumer Confidence (Friday) – preliminary March
Graig Stettner, CFA, CMT
Vice President & Portfolio Manager
Tower Private Advisors