Tower Private Advisors
- It’s all better now/Sugar Ray Leonard
- Earnings season in full swing
- Recession over [INSERT BOILERPLATE HERE]
- Warning: no spell checking today
Capital Markets Recap
Last week’s missive cautioned against being too bearish for the next month and a half, while this one will caution against the opposite. You’ll see the caution below to avoid investing by headlines. The next worse thing to do is to follow the advice of sell-side (so named because they’re in the business of selling stuff) brokerage firms. Recently, we’ve seen such stalwarts as Goldman Sachs, HSBC, and others raise their estimates of where stocks might go. Thanks a lot fellas. Where were you three months ago? Hunkered down in cash, that’s where.
So far, gauges of sentiment are not showing rampant enthusiasm, and so long as that’s the case, one should stay invested, but when sentiment starts to get overly optimistic it’s time to dance closer to the door. Stay tuned. For now, enjoy the headlines, but don’t invest by them. If you do, you could be getting set up like Sugar Ray Leonard did Muhammed Ali.
It’s all about earnings again, although it can be amusing to have congress people display their ignorance on American Grandstand as they question Chairman Bernanke–or Bernonckey, as one managed to address him. Let’s not forget, as The Virginian blog pointed out, what they’re capable of:
It was [Ohio Representative] Ms. Kaptur who only a year or so ago began her round of questions to Dr. Bernanke with the statement, “Mr. Treasury Secretary.” Dr. Bernanke said, very calmly, “I am not the Treasury Secretary.” Ms. Kaptur responded in a stament that should be entered into the Hall of Fame of Congressional faux pas, “Who are you then, Sir?”
This week 144 companies in the S & P 500 announced earnings. 107 (74.3%) reported better than expected results, also known as a positive surprise, while 35 (24%) announced negative surprises. On a year-over-year basis, in aggregate, companies this week saw earnings fall by 26.15%, with the worst sector being–no surprise–Finance, with a drop of (-)66%, and the best being Health Care, with an increase of 1.40%. Care to guess the second-best performing sector on a year-over-year basis? With only eight other sectors remaining, one can’t say you’ll never guess, but it surprised me to see it was Consumer Discretionary. Quick, what’s the hottest group this year? Technology. What’s the only group to have produced more negative than positive surprises? Yep.
To date, this earnings season is progressing better than the sheep stock analysts expected, with 75.1% of companies reporting positive surprises. The typical ratio is more like 2/3. Next week is the heaviest week, with 149 (29.8%) of companies reporting. The following week will feature 93 confessions. Next week’s heavies include ExxonMobil, Chevron, Walt Disney, Metlife, and a handful of others. The majority will be Financials and Industrials.
Recently, we’ve seen increasing calls that the recession is over. Last week, in this space, I pointed out that Dennis Gartman had made such a call, based on the spike lower in jobless claims. This Monday, Ned Davis Research gave several reasons for why the recession ended in June and why July would be the first month of recovery. Dennis Gartman, in his eponymous letter of today, however, highlighted fears of ours:
But we are also certain that the economic rebound shall be tepid, weak, hobbly, poor, ineffectual, terrible, meandering, less-than-hope-for, fraught with poor comparisons to past economic advances et al. We trust we are clear. This will not… repeat loudly and often, NOT!…be like typical rebounds of years and decades past.
Economic indicators were mostly positive this week. Leading Economic Indicators grew by 0.7%. That was better than what economists expected (+0.50%), but below May’s reading of 1.2%, which was subsequently revised to 1.3%. That put the 12-month change in the LEI closer to the zero line, but below. The Co/Lag index, discussed last week, further solidified its upturn, which, as also noted last week, has been a very reliable indicator, in the past, of recession’s end. Ned Davis Research reports on the percentage of LEI components that are higher than they were six months ago. That index hit 50% with this release. That’s the highest reading since we entered the recession, but a far cry away from the zone (75%) that suggests “strong upside momentum.”
Housing data was good this week. Mortgage Applications ticked up by (+)2.8%. With home sales still anemic, most of the growth applications comes from refi activity, not purchases. The broad-based Home Price Index was up by (-)0.9%, naturally that left the economists nonplussed, one of the more bizarre words in our language, although one of the frequent states of economists. So if they weren’t confused, would they be plussed? No, in this case “non” does not mean “not.” Instead it’s from Latin, and you can learn more by clicking here. Existing Home Sales rose to an annual pace of 4.89 million homes, from 4.77 million. That last bit caused the Fort Wayne Journal Gazette to put up the following top-half headline of “Housing Market Mounts Comeback.” The basis is that existing home sales have risen for three straight months for the first time in five years. Beside the twisted data mining–couldn’t they have eked out an “in more than five years”?–this series is so far off its highs that it’s more akin to the bounce a dead cat makes. The last paragraph, if you made it that far before buying some homebuilder stocks, did point out that “about one out of three homes sold in June was foreclosure-related.” Oh, do you think that might have had something to do with it? Here’s some free but invaluable investment advice: if you value your personal net worth do not invest by the headlines. That’s not a sucker punch. Instead, it’s like when one kid goes behind you and stoops down while his crony gives you a gentle push backward.
Initial Jobless Claims popped back up, to 554,000, well above last week’s upwardly revised (from 522,000) figure of 524,000. Keep an eye on the revisions. They’re still going the wrong way.
University of Michigan Consumer Confidence came in at 66.0, up from the mid-month reading of 64.6 and a point higher than economists expected. That marked, however, a five point decline from the end of June. I’m just guessing here, but with the stated economy looking better (e.g. mindless headlines like the JG’s), earnings okay, which has pushed stocks higher, that the disillusionment is coming from the Administration and its actions. Before you come unglued, I’ve got no GOP axe to grind here. I actually find myself with Librarian leanings.
Monday – we get the same number of housing data points next week as this week, with next week’s swinging a bit more weight. On this day we get New Home Sales for the month of June. This index could jump by a cool 20% and it would only look like a superball cat. This index is at all-time (post-1963) low and should be little affected by the foreclosure dynamic that caused the JG to wax optimistic. According to the book, Using Economic Indicators to Improve Investment Analysis, the survey covers sales at any point in the construction process and that about 25% of homes are sold upon completion. One other aspect of the report might be especially important this time round: cancelled sales are not considered. Once the paper’s signed, the house’s sold. The Dallas Federal Reserve releases its Manufacturing Activity survey, marking the first of three regional activity reports.
Tuesday – the much respected Case/Shiller Home Price Index for the month of May is released. Note the three-month lag, which may come to bear shortly if the JG (sorry) is to be believed. Analysts expect the rate of year-over-year decline to have slowed, although not dramatically, from (-)18.12% to (-)17.90%.
Wednesday – housing data point number three comes in the form of Mortgage Applications. Economists don’t fire up the linear regression/extrapolation machine for this series. But they do pull it out for Durable Goods Orders, calling for a decline of (-)0.5%; excluding transportation orders, they’re expected to be down by just (-)0.2%. Later in the afternoon the Fed will release its Beige Book report on economic activity in all 12 Federal Reserve districts.
Thursday – it appears that the economists will reach into our playbook and call for increased Initial Jobless Claims of 580,000, while our highly-sophisticated Collinear Regressed-Analytical Prognosticator© shoots for 588,000.
Friday – we get our first glimpse of Second-Quarter GDP, and with a guess of -1.5%, economists will surely play their role of making meteorologists look good. We’ve been saying for a while that inventory restocking could provide a quick pop for GDP. Businesses have been very slow to rebuild stocks, doing everything possible to avoid ordering more. They don’t, however, want to miss out on an upswing in orders, so they’ll eventually reorder goods. To be fair, that could produce a crack-cocaine boost to the economy, but unless it’s ultimately supported by increased demand it will be a Thomas Dolby in this cycle of the economy. To get a look at what’s called Final Sales, we simply will take GDP and reduce it by the change in Inventories, so a drawdown will increase final sales, and a build will reduce them. This is also known as Aggregate Demand. We will also want to look closely at Personal Consumption. Economists expect it to have contracted by (-)0.50%. Later in the morning we get the second two regional surveys with the NAPM Milwaukee survey of purchasing managers in that area, which is expected to have peaked above the expansion/contraction line, and Chicago Purchasing Managers’ survey, which is expected to have made improvement under the line.
Have yourself a great weekend.
Graig Stettner, CFA, CMT
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