- Broken record
- Economy still not showing real improvement
Capital Markets Recap
June 19, 2009
They say that to a man with only a hammer everything looks like a nail. Or maybe the proper saw is, “if you torture the data [chart] long enough, it’ll tell you what you want to hear.” Still, this is the same chart we’ve seen for the past two weeks, and it still tells a story, in contrast to the supposed fundamentals of the economy and companies.
The first chart is same chart, with March lopped off. It shows two distinct trading ranges. We broke up from the first and down from the second. The breakout occured right at the 200-day moving average, something we’ve covered here before.
We didn’t stay in the trading range long, breaking down through it after just two weeks. In the process 950 was further defined as a level of strong resistance for the S & P 500.
Let’s zoom in just a bit further and take a look at the action this week. Virtually every charting application has installed as a default, the 200-day moving average. So, everyone from the wannabe technical analyst to the day trader with an Ameritrade account to George Soros knows about the 200-day moving average. If you don’t believe me, go to http://stockcharts.com/ and enter a ticker in the “Enter a ticker” box. On the chart that pops up the redline will be the 200-day moving average.
This past Monday, the market closed below the trading range; it opened above it but closed further below it and the 55-day moving average. At that point, the 200-day moving average comes into play. On Wednesday, the market went below the 200-day moving average but closed almost perfectly unchanged. It appears that the 200-day moving average was successfully tested. The test was accompanied by a particular Japanese candle chart pattern, the doji, which is seen when the open and close is identical. It suggests a change in trend. Bloomberg even featured a top story on the doji, lest you think it’s esoteric and unnoticed (click here to read it). Yippee! It’s all better.
Not so fast. Here is a look at the NYSE and its volume. Volume should always confirm direction. When the market or a security is going up, the normal, constructive action is for volume to expand. When going down, volume should contract. If not, it’s a warning sign. Notice what happened to volume when the market started to decline on June 12: it increased.
I remain nervous that we could be on the verge of something significant, but folks a lot smarter than I have said that it’s just trading-range action, that we’ll be between 880/900 – 950 for a little while yet. At the risk of losing all credibility, let me suggest that there is an entire subset of folks who think that celestial bodies and their movement has something to do with it all. (It certainly does at home. Crazy kids? Full moon). Summer Solstice is on Sunday. Quadruple witching is today. Sell in May and go away. I’m just sayin’, that’s all.
Here’s a look at the indexes for the week.
It’s not uncommon–indeed, efficient market folks would say it’s perfectly expected–to have market action be a reflection of an index’s ostensible Beta, or relative volatility. In such a case, the Dow Jones Industrials might be down the least while the NASDAQ or Russell 2000 up the most. This week’s equity index action was a hodgepodge. True to form, the Russell 2000, S & P Mid-cap, and foreign stocks fell the most, but did only slightly worse than the Dow. Meanwhile the cliched tech-heavy NASDAQ performed the best. Let’s just say the efficient markets hypothesis died with Long Term Capital Management.
Like stocks, these commodities struggled to find direction this week, with the exception of natural gas, which continues to think it’s a bear-turned-bull (chart to the right). The dollar is probably the key to stocks for the next few weeks. Check out the second chart for a look at the close (eyeballed) correlation.
Apple‘s latest iPhone went on sale this week. You can see the line of folks waiting to shell out the bucks to get it by clicking here.
Ten of the biggest banks in the country paid back their TARP loans this week.
Not so fast, says the White House, with a rollout of coming finance sector regulation that Bloomberg captured with this headline: Obama Seeks to Correct “Cascade of Mistakes” with Financial Rules Overhaul.
Chrysler is expected to fire up production at seven factories the week of June 29.
Retailer Eddie Bauer enters bankruptcy, for what, the second time?
Uber-cool Fed Governor Richard Fisher says there is no way the Fed can absorb all of the supply of Treasury bonds being issued to fund everything from bailing out your neighborhood to getting health coverage for illegal immigrant panhandlers. What that means is that the buyer of first resort, the buyer who won’t demand a higher yield in return for the risk, can’t be counted on. And what that means is that we will need to rely on the beneficence of strangers, foreign central banks, where the chatter has been about the need for a new global reserve currency.
Speaking of foreign stuff, Morgan Stanley Capital International, keeper of the eponymous global indexes, declared that Israel is no longer a developing nation; rather, it’s now one of the developed nations.
Verbatim Bloomberg headline: “Active Mutual-Fund Managers Beating S & P 500 by Widest Margin in 26 Years.”
China‘s stock market has been giving the U.S. market a good ol’ fashioned, totalitarian whuppin’ as can be seen from the accompanying chart (the lousy resolution can be fixed with a click on the chart.) While someday in the future China may overtake the U.S. as the world’s foremost economic superpower, for now it can’t do so without being the U.S.’s Walmart, and as I’ve noted in the past and below, we’re becoming more frugal here. What all that means is that China’s stock market streak may be in jeopardy. Greg Weldon, whom I’ve cited here before, refers to China as Popeye and the U.S. as Wimpy. Popeye, of course, always need spinach for his guns to mete out the uppercuts, and the U.S.–here the analogy breaks down badly–has always provide the spinach via our insatiable consumer demand. In a report this week he points out some fascinating data, like that passenger car sales rate in April was the same in China (about 9 million units annually) as in the U.S., and that steel production there recently hit an all-time high. In spite of that, the Chinese stock market, as shown above/right/close by, is not confirming the economics. Therefore, it runs the risk of breaking down further.
Economic indicators were mixed this week. There were two regional Fed surveys, the Empire State Manufacturing survey and the Philly Fed. The Empire State report fell to -9.41. The previous reading was -4.55; economists expected -4.60. Zero is the demarcation between expansion and contraction. Ned Davis Research tracks the year-over-year point change, and the index is stubbornly staying just under zero. The YoY rate of change reached bottom in September 2008 and has been on the mend since.
The Philly Fed report, in contrast, was a blowout in the right direction. Like a number of surveys, including University of Michigan Consumer Confidence, this survey consists of current and future conditions surveys, and most of the improvement came in the future survey. First, the headline reading was -2.2. Economists expected -17, and the last reading was -22.6. In the last 20 years, that represents one of the largest monthly improvements, and the year-to-year change was positive for the first time since the beginning of the recession. 60.1% of respondents expected the economy to strengthen. Again, in the last 20 years the readings haven’t been much higher than that. That’s the headline future reading, which is the result of a single question. There are also a number of component indexes. Relative to the last several years, a number of them showed considerable improvement, such as New Orders, Shipments, Unfilled Orders, and Average Employee Workweek. Inventories, Capital Expenditures, and Delivery Time all improved, but much more modestly. In terms of current conditions, respondents were far less sanguine. Almost all eight indicators just recouped some of the damage since the recession’s start. Only Shipments managed to poke back into positive territory.
Leading Economic Indicators improved (1.02%) more than economists expected (+1.0%) and more than last month’s reading (+1.0%), which was revised upward to +1.1%. Like the Philly Fed report, future indicators looked better than current condition indicators–called Coincident Indicators in the LEI–which worsened. They’re approaching all-time lows. Industrial Production fell again. For those with a half-full bent, the deterioration in the component indexes (i.e. manufacturing, utilities, mining) lessened. Based on year-over-year changes, the index and its utilities and mining components are all at levels last seen in the ’40s (headline, manufacturing) and ’50s (mining output). There doesn’t seem to be any stopping the decline in Capacity Utilization (CU), which fell further, due, in no small part, to the auto sector. Still, capacity utilization has never been lower since it began being tracked in 1961. In terms of trends, CU has been making higher highs since 1966. It has put in a relative peak before every recession, but never recovers the previous high. Since the economy has not been in perpetual decline since the ’60s, it suggests something else must be going on, and it’s likely that the something else is darkened capacity (capacity that won’t be utilized again), higher productivity, and perhaps other factors. Still, this series looks dismal.
Initial Jobless Claims picked up this week, but modestly. Economists went into the survey expecting 604,000,while the actual reading was 608,000. The previous week’s reading was 601,000, which was subsequently revised higher to 605,000. Economists have the luxury of revising their estimates (last Friday’s estimate was 610,000.) We, here at the Weekly Recap & Outlook, have such high confidence in our Jobless Claims Forecasting Model (JCFM) that we stick to our guns. Thus, the estimate from last week’s dispatch of 594,000 fell short of the mark. We will look for 619,000 in the coming week, knowing our guess is as good as any economist’s; ours is just unemcumbered by advanced decrees and a concern for any other data besides three numbers: change = 608,000 – 601,000 + 4,000.
Inflation does not appear to be a problem we’ll need to deal with anytime soon, gasoline prices notwithstanding. All of the inflation readings–Consumer and Producer level–came in lower than what economists expected. On a year over year basis, the Producer Price Index is down by (-)5%. When factoring out food and energy prices, +3%. Both measures are lower than in April. The Consumer Price Index fell by (-)1.3% through May (falling from -0.7%); net of food and energy prices, the rate was 1.8%.
Housing news was mixedthis week. The NAHB Housing Market Index, essentially a survey of builder sentiment, at 15, was below both economists’ estimates (17) and May’s reading (16). Traffic of Prospective Home Buyers leveled off, while Expected Sales and Current Single Family Home Sales both turned down slightly. There must be some optimism, however, as Housing Starts and Building Permitsboth moved up. The former jumped up by 16.2%, but in the context of the decline from the January 2006 peak of 2.3 million (!), an increase of 74,000 seems paltry–not to rain on your ballon, or anything. Building permits rose by 4%. Reflecting the increase in mortgage rates, the Mortgage Bankers Association Mortgage Applications Index fell sharply again.
Tuesday – Existing Home Sales for the month of May are announced. We’ll get an annual rate that should be somewhere around 4.8 million units, and we’ll see the monthly change, which economists expect to tally 2.6%. We also get the Home Price Indexfrom the Federal Housing Finance Agency, which is said to provide the broadest coverage of national home prices. It’s presently back to its February 28, 2005, reading, while the Shiller index is at its May 31, 2003, level. The HPI has provided a number of positive surprises based on some strength in the upper midwest. Economists look for a (-)0.3% drop, which follows on March’s (-)1.1% drop.
Wednesday – we get New Home Sales and MBA Mortgage Applications. Economists expect new home sales to increase in line with existing home sales, which is to say at about a 2.3% pace. Economists don’t provide forecasts of mortgage applications, which would only provide one more indication of the value of an economist, whose job it is to make meteorologists look good.
Thursday – we get one last look at Q1 GDP, and economists expect this incarnation to be unchanged (-5.7%). None of the associated indicators (Personal Consumption Expenditures, Price Index) are expected to change either. As usual, Thursday presents us with Initial Jobless Claims, while economists have yet to post their estimates, we are ready to provide a fearless forecast of 619,000. The WR&O forecast has only been close once since its about four week inception, but that’s okay; it’s about as good as economists do.
Friday – Personal Income and Spending are announced. Both are expected to have increased by 0.3% in May. That report also releases the Savings Rate, which is likely to head yet higher, some savvy commentators have said it’s going back the 12% neighborhood from the present 5.7%. Watch out consumer spending. We wrap up the week with University of Michigan Consumer Confidence. Economists expect it to be unchanged from the mid-month reading of 69. I suspect that, as with the market, consumers are running on the fuel vapors that are the so-called green shoots and higher 401(k) values and want now to see something positive, like their neighbors going back to work, or fewer foreclosure sale signs.
Happy Summer Solstice wishes to you,
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.