- More sideways action . . . something brewin’
- Less bad news no longer enough
Capital Markets Recap
June 12, 2009
The non-drama that is the sideways action in the S & P 500 continued this week, and I include a refreshed version of the graph that has graced this space for the last two Fridays. Notice that we moved from one trading range to another.
This one, however, has another technical feature that suggests it’s leading up to something big. This chart is shown with prices plotted as candlesticks, which the Japanese began using hundreds of years ago to track rice prices. In a candlestick, there are two color possibilities. A solid candle (the body, rather) indicates a day when prices closed lower, in which case, the upper vertical bar is the open, the bottom is the close. An empty candle (black outline, here) represents a day when prices closed higher than they opened. The wick, or vertical, lines represent the day’s entire trading range.
Here’s a closer look at some of the recent price action in the S & P 500. Notice how the character of the candlesticks changed in June as compared to May. These new, narrow ranges between open and close suggest that the market is close to equilibrium, a state that tends to be short lived. Michael Kahn, who writes a column for Barron’s, said that, “price action is coiling tighter like a spring and eventually that spring is going to uncoil.” The question, of course, is which way it springs. As it stands right now, with very slim volume on the way up, suggesting fewer and fewer are buying into the rally, and with the market notmoving higher on less-bad news as it did in March, it looks like the direction could be downward. We suspect that any downward action could be relatively shallow as underinvested folks buy the corrections. On the other hand, an old Wall Street saw is, “don’t short a dull market.” We shall see.
The Bloomberg featured a couple of contradictory. The first, featured Monday, seemed remarkable. Paul Krugman is an economist who keeps a blog (Conscience of a Liberal) for the New York Times. He’s one of those guys, when he says something happy, you want to reach out and scream “What have you done with Paul Krugman?!“ The headline said that the U.S. would “emerge from recession by September.” This from a man who, in December 2008, produced a book titled “The Return of Depression Economics.” It turns out that if one read just a bit further, he went on to say that:
There is a lot reason to think that this is going to go, that the world economy is going to stay depressed for an extended period. In fact, as I said at the beginning, the Japanese lost decad is actually starting to look good in terms of dept right now, it was not nearly as deep as what we are going through and I am actually worried that it will start to look good in terms of duration as well.”
That seemed more in keeping with this character. As is not uncommon, Bloomberg managed to run another story the next day with slightly less optimism: Nobel Winner Krugman Says Weakness May Persist for ‘Long Time’. As it is with mere mortals, so it is with reporters: we tend to see what we want to see.
Apple held its Worldwide Developers Conference this week in San Francisco and, as usual, the company showed why its products are the must-haves and why Microsoft is only a crass imitator not an innovator. This was, however, the first WWDC where Steve Jobs wasn’t present, and at first, it looked like it would be the first where the stock wouldn’t sell off on the news. As the week rolled on, however, the stock pulled out the old script, selling off through the week. Exciting news from Apple has progressed from the iPod to the iPhone. Meanwhile, the biggest unknown story is the market share that Apple is stealing from the PC with its iMac desktops.
Ten banks decided they had had enough of the TARP funds and sought and received approval to pay back the funds. They were:
JP Morgan Chase: $25 billion
American Express: $3.4 billion
Capital One: $3.6 billion
Morgan Stanley: $10 billion
BB&T: $3.1 billion
US Bancorp: $6.6 billion
Northern Trust: $1.6 billion
State Street: $2 billion
Bank of New York Mellon: $3 billion
Goldman Sachs: $10 billion
Citigroup‘s CEO, Vikram Pandit, gained back a very small shred of credibility this weekwhen he fulfilled his promise to make good use of the funds the Federal government had given him at the end of October. Since then, the stock has tripled and the preferred shares the government received totalled about $1.6 billion. According to a Bloomberg story, that amounts to a return of 7.5% for Uncle Sam versus a 2.4% return for the S & P 500 since that time. Somehow that’s supposed to translate into good for taxpayers, but–and not that there’s any cynicism here–I don’t think we’ll see it.
In more banking fun, the American Grandstand, otherwise known as Congress, subpoenaed(and we wonder why American schoolchildren have a hard time speling) the Fed for records relating to the acquisition of Merrill Lynch by Bank of America. We posted Andrew Cuomo’s letter on the subject here, and you can read some more salacious excerpts on The Big Picture by clicking here and here. Here is one sample: “Merrill is really scary and ugly,” from a Senior VP at the Federal Reserve Bank of Richmond.
Indiana’s own Eli Lilly is in hot waterover some marketing efforts that went a bit too far. Among other things, folks at Lilly wrote studies for medical journals on its antipsychotic drug Zyprexa and then persuaded doctors to put their names on the articles. That, apparently, isn’t an unheard of practice, though it usually results in a lawsuit and settlement. In what seems a bit more egregious, according to another Bloomberg story, Lilly encouraged doctors to prescribe Zyprexa for treating dementia, “even though the drugmaker had evidence the medicine didn’t work for such patients.” Oh, and if you’re taking Merck‘s Singulair, don’t stand close to ledges on tall buildings or idly construct nooses in front of the TV. It seems that the FDA cited Merck because of the heightened risk of suicide when taking the asthma medication.
And here’s one that just came in: the state-run media in Iransays that President Ahmadinejad had won that nation’s election. Meanwhile, the BBC reported that his challenger said he had won by a wide margin in the midst of–get this–voting irregularities!
Last Friday’s WR&O mentioned four confidence surveys (IBD, ABC, Bloomberg Global Confidence, and University of Michigan). Each reported a higher figure than the previous reading, but turned in a mixed performance versus expectations. The IBD survey showed a reading of 50.8, just north of the 50 demarcation line. Otherwise, sentiment improved by becoming less gloomy. The tenor in both these surveys and the markets seems to be enough of the less-bad news; gimme some good stuff.
The Federal Reserve Board released its Beige Book report. After dispensing with the usual formalities (” . . . the right honorable Messrs Fancypants and Smartglasses signaled their acquiescence with a subtle to Chairman Ben . . . “), the report jumps into a summary of economic activity in the 12 Federal Reserve districts. The following excerpt is typical of the report:
Reports from the twelve Federal Reserve District Banks indicate that economic conditions remained weak or deteriorated further during the period from mid-April through May. However, five of the Districts noted that the downward trend is showing signs of moderating. Further, contacts from several Districts said that their expectations have improved, though they do not see a substantial increase in economic activity through the end of the year.
But it’s Friday, and to avoid straining the cranium, let’s resort to a paste of the text into some Wordle art. In short, the takeaways are much the same: not as bad as before; little improvement.
Initial Jobless Claims were released and managed to make a lower low, taking jobless claims back to January levels. While economists looked for 615,000 (our guess was 621,000), the actual figure was 601,000, but yet again, last week’s figure was revised upward, from 621,000 to 625,000.
A full plate awaits us.
Monday – the Empire State Manufacturing survey, conducted by the New York Fed, is released. Economists expect it to have stayed just below the expansion/contraction line; they actually expect a slight decline in the survey. We get the first housing datapoint of the week with the release of the NAHB Housing Market Index. This survey of home builder sentiment will inform on three categories: 1) Traffic of Prospective Buyers; 2) Expected Sales of Single Family Homes in the Next Six Months; and 3) Current Single Family Home Sales. All of those are rolled up into one headline Housing Market Index. On January 31, the index reached its nadir of all time, a reading of 8. Roughly, that means that 8% of home builders are enjoying life. The May reading was 16; economists expect 17 for June.
Tuesday – the Producer Price Index is released. Economists expect that, on a year-over-year basis, prices at the wholesale level fell by (-)4.4%, after a decline of (-)3.7% in April. Core prices are expected to have risen by 3.2% on the same basis. Housing Starts and Building Permits are announced. Economists expect a 5% increase in starts a 1% increase in permits. With still about 10 months of inventory of both new and existing homes, fewer starts and permit are better for now. Next, we get Industrial Production and Capacity Utilization, both of which look lousy and are likely to get lousier. As the declines have been getting steadily smaller, there might be the possibility of an improvement in IP, which would mark the first in seven months, but there appears to be no decline in sight for Cap U, no second derivative stuff–nothing but an empty chasm.
Wednesday – gives us Consumer Price Index data, and economists expect year-over-year inflation to have gone further into negative territory (-0.9% v. April’s -0.7% rate). At the Core level, economists look for a 1.8% increase. Think deflation’s great? Get to buy more stuff for fewer greenbacks? Think, again.
- Mortgage payments have to be paid back with deflated dollars, mitigating one of the great benefits of the American dream.
- Consumers wait until next month and the next month and the next month to buy all the increasingly cheaper stuff–fighting that is what many of the Great Depression’s programs were intended to do.
- Lastly, the [malevolent] Invisible [back] Hand of the economy whaps you a good one with a real wage increase that involves the same take-home pay.
Thursday – Initial Jobless Claimsare announced. Economists expect a transposition of this week’s data, as the expectation jumps to 610,000. That’s a lowering of their estimate for this week (615,000). Our guesstimate is for 594,000. So far the score for the Tower Private Advisors econometric model versus the economists is 1 loss, 1 draw, 0 wins. Leading Economic Indicators are released. They’re expected to be positive (0.9%) for the second month in a row, and while the LEI has a long road back, one has to go back to the Autumn of 2006 to find another time when there were two, back-to-back improvements. Lastly, the Philly Fed index is released, and it is expected to show the usual sign of less badness.
Graig Stettner, CFA, CMT
Investment Management Services
Tower Private Advisors
This e-mail, its cynical style, ignorance of punctuation convention, and a host of other aspects, assuredly do not represent the views of Tower Bank or Tower Private Advisors. In fact, there are folks here who likely cringe upon receipt of it. If anything you have read here has offended your sensibilities, well, tough. Also, if there are typographical, grammatical, or stylistic errors above, you can see why we don’t teach English Composition. The passive tense, where used, is regretted. If you have suggestions for improvement, keep them to yourself. Just kidding . . . really; send ‘em in.