Tower Private Advisors
- Silver going nuts . . . about to end
- Earnings take center stage
- Ugly economics
- An original thought on economics and the stock market . . . trouble brewing?
Capital Markets Recap
Ran out of time
The biggest non-story of the week was that Standard & Poor’s had downgraded the outlook for U.S. government debt, something that everyone else had done months–if not years–ago. So why the big market swoon? Who knows–probably kneejerk, algorithm following computers. Here’s the text of an e-mail I sent out that morning.
Until about 8:30 this morning, futures on the Dow Jones Industrial Average were doing what they’ve done for seemingly the last two weeks, meandering around, drifting lower, setting up for a low-volume rally back to unchanged by the close of the day. Then, Standard & Poor’s came out with a bombshell, leaving one so surprised as to be unable to enter the keystrokes S E L L. In short order futures fell to -208. As I type this in a nervous sweat the cash Dow 30 has recovered some of its post-open losses to be down by (-)220 (down now by 226.52 at 11:13 ).
Specifically, the same folks who had given Lehman Brothers a credit rating of AA until the day it defaulted reaffirmed the credit rating of the U.S. of A at AAA, that firm’s highest rating. They said, however, that, “there is a material risk that U.S. policy makers might not reach an agreement on how to address medium- and long-term budgetary challenges by 2013,” and, “if an agreement is not reached and meaningful implementation does not begin by then, this would in our view render the U.S. fiscal profile meaningfully weaker than that of peer ‘AAA’ sovereigns.”
Translation: We have determined that Congress cannot function and they might not be able to come up with significant budget cuts that manage to reduce the U.S. debt problem. We have also finally come to the conclusion that the U.S. is in worse shape with other nations—like Canada—who also have AAA ratings. Accordingly, we will have to consider cutting the U.S.’ rating some time in the future, regardless of how clueless we have been in the past.
With that, we should dispense with referring to the stock market as a “discounting mechanism,” an organism that is able to very quickly factor into current prices any information. That’s another way of saying that markets are efficient, and that it’s impossible for anyone to know more than the market. Look, S & P, I’ve had clients who have little understanding of sovereign debt ratings who have expressed these concerns for many months. Ridiculous!
As or right now (11:10), the volume on the NYSE is extraordinarily low—that’s to be expected in a holiday week. Tuesdays have come to be known as “Turnaround Tuesday,” and it wouldn’t be surprising to see this decline reversed tomorrow or later in the week. (Markets are closed on Friday in recognition of Good Friday.) That’s not to suggest that S & P was off-base. In fact, we agree with their assessment entirely, but this morning’s sell-off appears to be a knee-jerk reaction only. It won’t cause us to make any fundamental portfolio changes other than to, perhaps, pick up some things that have gone on sale.
The biggest stories of the week are generally earnings related, being, as we are, in week two of the first quarter earnings reporting season. So far, 121 of 499 companies in the S & P 500 have reported earnings. Of the 110 that have announced since Monday, 83% have beaten analyst estimates, which is better than the usual predictable pace of about 70%. At the sector level, Materials has done the best, with 7/7 beating estimates, followed by Healthcare, where 17/18 have beaten estimates. Consumer Discretionary stocks have done the worst, with a 50% batting average. That strikes me as not so healthy. Next week will be the biggie, with 35% of companies reporting. That combined with a bunch of economic releases should make for some interesting market action.
Silver reached the highest level ever since the strangely-named man Bunker Hunt got tomahawked. The chart immediately below shows silver two ways. The top panel shows the price of silver in the traditional fashion, namely with the y-axis shown in non-logarithmic form. The trouble with a non-log scale when something is rising exponentially is that the change looks extreme, so the log scale (bottom panel) is an attempt to address that. Basically speaking, the log scale allows for same percentage movement for the same distance on the chart. But it results in making a ridiculous graph look just a bit less ridiculous.
Silver has been generating more interest amongst clients, as some have heard claims that the white metal is going to $250, and the air is thin above the current price–save for the Hunt peak. That means there isn’t anything to stop it once past that all-time peak. What is likely to rein it in is its relationship to gold, which is quite stretched.
The current gold:silver ratio of 31.89:1 is in the 9th percentile, so only 9% of observations of the ratio have been lower. On the other hand, the ratio has momentum on its side–and the lunatic conspiracy theorist–the government’s out to get you goofballs. Here it is, graphically, and unless things are different this time–well, they are, but people don’t change–gold should outperform silver over the next several months, and there are several ETF combinations that would benefit from that. That’s not to say silver won’t go higher, it has enough momentum that it’s likely to, indeed, go higher, but it’s time for gold to take the performance baton for a while.
There were a host of technology earnings released this week, and the numbers were pretty impressive. Several are bulleted below.
- Apple profit almost doubles after iPhone debuts for Verizon
- Qualcomm profit tops analyst estimates on smartphone demand
- IBM boosts profit forecast
- Intel forecasts second-quarter sales that may top estimates
- VMware profit tops analysts’ estimates on new product sales
- Texas Instruments profit forecast falls short on Japan, mobile
The chart below depicts the price change for the week in relation to the earnings surprise. By definition, a surprise is unexpected–as if anything turns out as analysts expect–and so the efficient markets hypothesis says that only what isn’t known moves the market. Any of the little diamond symbols that don’t lie on the vertical axis are surprises. The ones north of the 0% horizontal axis are positive earnings surprises–the majority of them. As usual, there is little correlation between surprise % and price change %–a stock is as likely to go down on a positive surprise as it is to go up. That should stick a spokes in the it’s-all-about-earnings crowd . . . but it apparently doesn’t.
Hooray! Housing Starts leapt by 7.2% in March, while the leading Building Permits jumped by 11.2%! Both were much better than economists expected. ‘Trouble is, housing is going nowhere, as can be seen in the charts below. Until we break out of the dotted rectange shown on each chart, housing can be considered dead.
Other housing indicators–and there were a raft of them–reflected the same. The widest measure of nationwide house prices, the House Price Index, fell by (-)1.6% to the lowest level since January 2004. Existing Home Sales rose by 3.7%. According to Bloomberg, they rose because, “a mounting supply of properties in or near foreclosure lured investors.” In fact, 35% of the sales were all-cash transactions, the most ever, and the sign of investor demand . . . the wrong kind.
Initial Jobless Claims rose more than expected (403,000 v. 390,000) and the prior release was revised higher (to 416,000 from 412,000). While the longer-term direction of jobless claims is down, we are in a shorter-term trend begun on February 25. Were jobless claims a stock the pattern it’s tracing out would be called a bear flag, and it would signify lower “prices” ahead. Let’s go with that; this is just a blip in an improving job market.
The Leading Economic Indicators rose by 0.4%, a tick better than economists expected, but half of February’s level. The week was wrapped up with a Philly Fed that fell by 57% (from 43.4 to 18.5) to half of what economists expected (36.9). In spite of that, the indicator remains in a strong uptrend–albeit approaching it from above–and firmly in positive territory.
Hey! Whoa! Shine a light in this darkness. I’d be hardpressed to find more than one glimmer in this week’s releases, but they’re just that: one week’s releases, but of monthly data in most cases. Stocks shrugged off the gloom; that’s the light shining in darkness.
Citigroup publishes a marvelous series of Surprise indexes. They measure surprises in economic indicators; in other words they track the economic releases relative to what economists expect. If the surprises are to the upside–i.e. the indicators are better than economists expect–it could mean that economists are overly pessimistic; if the surprises are negative, it could indicate that economists are overly optimistic. These indexes can give some leading indications of where various economies might be heading, and if the index for the U.S. is any indication, we’re heading for a bit of a slowdown, as the chart below indicates. You should also notice that the index and U.S. stocks are typically in gear or moving together. That had been the case from mid-2009 to March 2011. Presently, the two are badly out of gear, and the only way this resolves itself well–i.e. stocks don’t drop considerably–is if the stock market is smarter than economists and is anticipating an economic rebound that the dismal scientists aren’t. The stock market has forecast something like 10 of the last 7 recessions, but that’s a whole lot better than economists who, as a group, have forecast NONE of them.
A whole bunch of indicators. That plus earnings could make for an . . . uh . . . interesting week.
Key indicators to watch
- Durable Goods Orders (Wednesday) – March
- Q1 2011 GDP (Thursday) – Q1 first look
- Initial Jobless Claims (Thursday) – weekly
- Personal Income, Spending, and Savings (Thursday) – March
- CaseShiller Home Price Index (Tuesday) – February
- Pending Home Sales (Thursday) – March
- Dallas Fed Manufacturing Activity (Monday) – April
- Richmond Fed Manufacturing index (Tuesday) – April
- Chicago Purchasing Manager (Friday) – April
- NAPM – Milwaukee (Friday) – April
Here’s wishing you a happy Easter weekend.
Graig P. Stettner, CFA, CMT
Vice President & Chief Thorn-in-the-Side
Tower Private Advisors
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