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- Abbreviated Capital Markets Recap
- Lots of economics
- Markets closed next Friday
Capital Markets Recap
June 26, 2009
Once again, we’re going to take a look at the action that unfolded in the S & P 500 this week.
It’s pretty much the same chart as we’ve seen for the last few weeks with a couple of minor changes. Something that was on the lips of a few folks was a phenomenon called a “Golden Cross,” which is it’s called when the 50-day moving average crosses above the 200-day moving average. It’s supposed to be a good thing, as the crossing of the longer-term by the shorter-term moving average suggests the longer-term moving average should soon turn up. The market, as it’s wont to do, tends to frustrate the maximum amount of people as possible, and not a few were shook out when the S & P 500 closed below 900 for the first time since May. Then, the next day, the day of the golden cross, the market couldn’t close above 900, but with an important difference: the open and close were nearly identical, while the high and low of the day were wide. That pattern often signifies a trend change, as it did–albeit short term–four price bars to the left of the golden cross.
As to the anticipated action next week, it should be interesting, what with the month’s most important economic report, Nonfarm Payrolls. There is overhead resistance at 920, the market’s high for the last two days; after that, 930, the lower end of the trading range in the first half of June. As is widely known, historic seasonality is generally not good in the summer, but it does allow for a rally through the middle of July.
There will be a longer term factor coming to bear after that time. Any moving average picks up and drops data for every period of the moving average, in our case, for every day. The 200-day moving average, today, doesn’t include June 25, 2008. Recall the action 12 months ago. July was rough (down, then up for a modest loss); August was okay–mostly sideways; and then September hit. We certainly don’t need to rehash that. The point is that the high values of July and August will begin to drop off, and the 200-day moving average is going to head sharply down. That matters, critically, as the 200-day has been important support for the market. Note, in the chart above, where the lows from yesterday and Wednesday were . . . at the 200-day moving average. Corrections to support are going to go lower and lower.
Markets were mixed this week. Treasury yields have started to move down, and that will be good for markets. Here’s an excerpt from BCA Research, one of our key strategy providers, on the week’s stock market action.
The recent pullback of the equity indexes represents a correction in a bull market, rather than a change in trend. There are plenty of near term risks, but the extremely low return on equity raises the odds of a decent return in the stock market over the medium term.The next upleg in Treasury yields is probably not imminent, but expected returns over the medium term (1½% per year) will significantly trail those of the equity market (8½% per year).Tax cuts, extremely easy monetary policy and some pent up demand suggest that a modest consumer spending recovery will soon get underway now that the saving rate has shifted higher, even as households continue deleveraging.
I’m pushing up against a meeting deadline and will need to cut things short. The economics stuff, below, gets done first. I’m sure there were plenty of headline hijinks to report on, but it’ll have to wait.
We received four housing data points this week. The House Price Index, which was pointed out here last week, is the home price index with the widest national coverage. It fell by (-)1.1% in March, which was revised downward to (-)1.4%. (Quick note: so long as revisions are negative, there’s little chance of the underlying trend reversing. That’s true for all the economic series.) In April, however, the decline approached zero, as home prices fell by just (-)0.1%, while economists looked for a decline of (-)0.4%. The index covers all conforming mortgages sold to or guaranteed by Fannie Mae or Freddie Mac. The Mountain region (Montana, Idaho, Arizona, New Mexico, etc.) saw prices increase by 1.3% (East South Central and New England also grew.) Worst performance was seen in West South Central (Oklahoma, Arkansas, Texas, Louisiana), where prices fell by 0.7%. Mortgage Applications grew by 6.6%. In a rare–though not unsurprising given mortgage rates–turn of events, it was the Purchase index that carried the release, while the Refinance index fell sharply. Existing Home Sales (4.77MM) rose less than expected (4.82MM annual units) but more than in April (4.68MM revised down to 4.62MM.) New Home Sales fell to a level below last April’s downwardly revised 344M pace to 342M, which was also below economist expectations of 360M.
In the final incarnation, first quarter Gross Domestic Product was revised from bad (-5.7%) to less bad (-5.5%). As to why there are revisions, the Bureau of Economic Analysis puts it this way.
The GDP estimates released today are based on more complete source data than were available for the preliminary estimates issued last month.
That’s another way of saying that much less had to be estimated this time round. As to the bases for the revision, the BEA said the following in the press release.
The smaller decrease in real GDP in the first quarter than in the fourth primarily reflected an upturn in PCE and a larger decrease in imports that were partly offset by larger decreases in private inventory investment and in nonresidential structures.
PCE stands for Personal Consumption Expenditures, and the statement indicates that consumer spending was higher than originally estimated and subsequently revised. One of the factors in GDP is (X – M), or exports minus imports, or net exports. In this case, the “M” was smaller than expected, which pushed net exports higher.
Not quite sure what the score is, but our Initial Jobless Claims estimate soundly whomped that of the Dismal Scientists. Last week’s figure of 608,000 was revised upward to 612,000; economists expected 600,000; our scientific estimate was 619,000; this week’s actual figure was 627,000.
Personal Income and Spending data was released this morning, along with the Savings Rate. As a result, “in part, the pattern of increased government social benefit payments associated with the American Recovery and Reinvestment Act of 2009,” personal income grew by 1.4%. Apparently, the economists’ econometric models hadn’t considered that. They looked for an increase of 0.3%. April’s release was an increase of 0.5%. That 1.4% translates to increased incomes of $167.1 billion. Hellloooo . . . I’ll take some of that. Unfortunately for the economy, Personal Savings increased by, uh, $160.3 billion, another definition of pushing on a string and unintended consequences. Well, they got the Reinvestment part right. U.S. consumers are taking their personal bailout packages–I notice, I think, about $15/week–and reinvesting them, alright, in their savings accounts. Call me stupid, but why not distribute gift cards to a handful of stores. What’s with this savings nonsense, anyway?
The chart below (as always, click to enlarge) gives you a quick look at the savings rate and its 25%+ increase in May.
Notice the near-perfect intersection of the latest reading (6.90%) and the long-term average (6.84%). That dashed-blue line represents 605 monthly readings. Each additional reading affects the average by 0.16529% and falls each month; next month the figure will be 0.16502%. So while the average line is perfectly horizontal, it moves by an infinitesimally small amount each month. As a consequence, when we say that the savings rate is now back to average, it pays to consider that the last 186 readings (from December 31, 1993, when the savings rate stayed went below the current average line), or 30.7% of the readings, have served to drag down the average considerably. On December 31, 1993, the savings rate had averaged 8.71%. Given the steepness of the ascent, it doesn’t take your humble servant much to guess that the savings rate is going much higher. Consider that the savings rate–both its direction and its momentum–reflects the average consumer’s mindset. That elusive average consumer is in maximum lockdown mode (see below) and it’s going to take more the $15 per paycheck–and far less than 10% (and rising unemployment)–to open up the pursestrings.
Here’s another way of looking at the Savings Rate, by looking at its rate of change. In the chart below you’ll see three rates-of-change plotted and their current readings plotted in the same color back to the series’ inception.
I chose the 14-month ROC since that’s the time it took us to go from a Great-Gatsby zero savings rate to the current reading. To add additional perspective, I’ve included 6-month and 3-month ROCs. It looks like the “maximum lockdown” title is merited. There’s never been a 14-month ROC even close; the 6-month ROC has only been bettered twice; the 3-month ROC, just seven times. Recall the ol’ second derivative (Ben Bernanke preferred the metaphorical “green shoots”), the rate of change of the rate of change? It is conceivable that the second derivative could fall to zero (i.e. the rate of change doesn’t go up or down) and we could move to a 12% savings rate by December, just in time for Christmas shopping season. That would take us to just below the previous peak of 12.5% from the early ’80s, the all-time high being 14.6% in 1975.
If that becomes the case, it makes the possibility of a double-dip recession, outlined yesterday by the U.S. Chamber of Commerce’s Chief Economist, even more likely, though the savings rate wasn’t labeled a potential culprit in his press briefing. It’ll be sheer, dumb luck if we have a 12% savings rate by December, as I did the lamest, laziest economic analysis possible in extrapolating the current rates of change into the future–although I did use a weighted average of all three outcomes (I weighted each by 1/3, which is to say I used a simple average) to come up with 12%. If it comes to pass, however, it won’t, however, be sheer, dumb luck–perhaps just plain, ol’ dumb luck–that we have a double-dip recession; it’ll be a sheer, dumb certainty. In the words of the inimitable Earl Pitts, “wake up, America!”
University of Michigan Consumer Confidence came in a smidge stronger than expected (69.0), which was also the mid-month reading. Technical analysis, in my opinion, shouldn’t be applied to economic analysis, but the use of higher-highs/lows and lower-highs/lows seems to be a reasonable way to monitor trends. In that vein, a careful look at the chart reveals a modest higher-high in the survey, although it remains well below January’s high.
It’s an action-packed week of economics, seemingly, a contradiction in terms, next week, although with markets closed Friday, it makes for a shortened week.
Monday – we get two Federal Reserve district surveys from Chicago and Dallas. Unless they’re significant, you won’t read about them here next week. For that matter, you might not a Weekly Recap next week, at all.
Tuesday – if for no other reason than that he was a shrill voice against the bubble in housing, Robert Shiller’s eponymous CaseShiller Home Price index is respected and released on this day. So far, there’re no green shoots in housing, and it’s unlikely you’ll see any on Tuesday. Economists expect a year-over-year decline of (-)18.6%. The Chicago Purchasing Managers index is released. Economists look for a bounce to 39.0 (last release 34.9). A Milwaukee version is also released.
Wednesday – the MBA Mortgage Applications index for the week ended June 26 is released. In a precuror and possible foreshadowing of Friday’s biggy, Nonfarm Payrolls, the ADP Employment Change index is released. If economists are correct–a dubious proposition–the report is going to show a sharp improvement. The May job loss was 532,000, according to ADP; June’s is expected to be just 374,000. The ISM Manufacturing report for June, a national version of Tuesday’s Chicago report, is released. May release was 42.8; economists expect 44.0; 50 is the demaracation between expansion and contraction. Construction Spending for May is announced, as are Pending Home Sales.
Friday – as usual the big report of the week will be the Nonfarm Payrolls release. If economists get it right with their estimate of (-)365,000, that will mark a slight deterioration from May’s improvement (-)345,000, but won’t materially alter the distinct trend of an improvement in the labor picture, of a bottom being registered. Manufacturing payrolls are expected to have fallen by (-)150,000. Almost certainly, this will be the ninth month in a row with a loss greater than 100,000. What confuses the issue a bit is that manufacturing payrolls have been declining, formally, since at least 1995–and undoubtedly longer on an unofficial basis. No, it’s not because of China or Walmart; it’s because of productivity, but that’s another soapbox.
Here’s a look at manufacturing payrolls, graphically, with apologies for what looks a lot like Disneyland, and I apologize for not cleaning up the Bloomberg jazz. Click for a full-size verion and/or read on. The top plot shows total manufacturing workforce in the U.S., with regression of the trend since the 1995 overlaid. The bottom plot shows the monthly change in said workforce. Note that, for the last 14 years we’ve spent most of the months cutting jobs there. What the bottom regression reveals is that recent cuts are far outside the trend that has been in place, suggesting–no surprises here–that the economy is responsible for most of the recent losses. Still, this data should be more than seasonally adjusted; it should have a secular, trend adjustment.
Initial Jobless Claims will be released at the same time. They’re expected, by economists, to have come back down a bit (610,000) after this week’s bounce. That could be another way of saying that economists have adjusted their estimates back up to account for their shoddy forecasting this week. Our estimate, since it is so sensitive to the most recent trend, jumps to 650,000, and we desparately hope we’re wrong.
I hope you have a happy Independence Day. Just for fun, ask your child, grandchild, niece, nephew, or other version of young person, if there is a fourth of July in England. The answer, of course, is yes, there is.
Graig Stettner, CFA, CMT
Investment Management Services
Tower Private Advisors
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