Tower Private Advisors
- Earnings peak
- Mixed economics
Don’t miss a couple of posts to the blog. One’s comical; the other, frightening. Click the hyperlinks below.
Capital Markets Recap
The chart below is a two-year history of the S & P 500. I chose two years since it captures the all-time high in the index. I’ve overlaid it with a series of lines that cause my colleagues to roll their eyes. The most incorrigible among them seems to always reference broccoli in his side-bursting witticisms. The lines are based on a series of numbers determined by Leonardo of Pisa. He was the son (filius, Latin for son) of Bonaccio; thus, Fibonacci. He came up with the series by pondering a question about the reproduction rates of rabbits. [I'm not kidding.] In doing so he came up a series of numbers that are found throughout history (Egyptian pyramids), art (many of Leonardo da Vinci’s paintings) , nature (broccoli), and security prices. You may recall the word from Dan Brown’s The Davinci Code. If you are some sort of math fiend you can find more information by clicking here. If you’re more likely to get invited out to dinner by Joe the Plumber, click here.
In short, the Fibonacci sequence goes like this: 0, 1, 1, 2, 3, 5, 8, 13, 21, and so forth, where the preceding two numbers add up to the following (e.g. 0 + 1 = 1; 8 + 13 = 21; etc.) There’s a relationship between each number and the one that preceded it: 1.618 (e.g. 89/55). There’s also a relationship between each number and the one that follows it: 0.618 (e.g. 55/89). There are minor relationships as well, including 50% (e.g. 1/2).
We can apply those ratios to the distance between the bottom and top of a security’s price action to come up with likely support and resistance levels in corrections. This is called a Fibonacci Retracement. While I don’t do it here, we could also find where a security’s likely to go once it’s making new highs by making a Fibonacci Projection.
What we can take from this is that the index should run into trouble at about 1015, which marks the 38.2% retracement, then 1122, then 1230. 1015 should prove to be a considerable hurdle for the market, maybe even more than the 1000 level, which proved to be just a rest stop on the way down. A common criticism of technical analysis is that it works because so many people expect it to. That may be, and you may have your own weighty criticisms, but irregardless (yes, I know) the 1015 neighborhood will prove to be considerable resistance, mark my typage, and keep in mind that risk goes up as prices go up.
We may be rubes at Tower Private Advisors, but the 1000 level of the Standard & Poor’s 500 makes us nervous. We will likely raise some cash in accounts on a sprint through that level. The index needs some time to consolidate the gains from the mid-July move, which it hasn’t yet had.
Imagine playing Red Rover against a line of big kids. It’s not the lean and quick little runt runt who makes it through; rather, it’s the big lumbering bruiser who eventually gets through.
And the dreadful macroeconomic backdrop to the markets still gives us pause. So long as that continues ugly, we’re going to have itchy sell-trigger fingers.
This week marked the busiest of the second quarter earnings reporting weeks. 148 companies reported results, and 75% of them beat the expectations of the sheep analysts. That was the same rate at which they had bettered results in the weeks prior, which is better than the usual 68% rate. For once, the Finance sector companies didn’t turn in the worst results. Those were turned in by the Energy sector (-83.3% year-over-year earnings drop) and the Materials sector (-70.1%). Again, Health Care had the best results (+5.69%), along with Utilities (+2.11%). Want to do relatively well the next time the market goes in the loo? Own Health Care and Utility stocks. Want to get left out in the next rally? Own Health Care and Utility stocks. There’s a cost to consistency. Next week’s earnings action is dominated by Utilities, Energy, and Finance sector releases, as 94 companies arrive at the confessional.
As happens around turning points the economic data points were mixed this week. New Home Salesrose sharply compared to May results (384,000 v. 342,000) and encouraged the bulls who didn’t bother to look at the heights from which home sales had fallen. Judge for yourself from the graph below if perhaps folks are getting a little too excited.
According to a blog post at The Big Picture, sales were boosted by Federal first-time home buyer credits and California tax credits, as if the land of fruits and nuts can afford that. Indeed, sales in the West were up by 22.6% in the West, but that was only good enough for third place behind the Northeast (+29%) and the Midwest (+43.1%). Encouragingly, inventories fell to a level of 8.8 months worth, which was the lowest since late 2007. That was the week’s first bit of good news, but in the face of falling home prices it does bring into question the strength of housing just now, and you can see that in the chart below. As always, click to enlarge.
MBA Mortgage Applicationsfell this by 6.3%, after rising last week. Then there was the Case-Shiller Home Price Index data. It showed home prices continuing to decline on a year-over-year basis, but at a declining rate, which you can see in the chart below and to the right. Note that while the line has turned up, it remains well below the zero line. The turned up portion is Ben Bernanke’s “green shoots” and the White House’s “economic recovery.”
Durable Goods Orders were, on their face, disappointing, as they fell by more than four times as much as economists expected. When large orders for things like airliners are factored out, however, the report was quite strong. In fact, it was infinitely stronger than economists expected (+1.1% versus 0%).
Initial Jobless Claims rose by 30,000 (from an upward-revised 559M to 584M). Continuing Claims–the rolls of those continuing to collect insurance–fell, surprisingly, but was likely the result of benefits running out for some.
Second Quarter GDP was the report that was awaited all week, and it contained a mix of good and bad. First, we didn’t know how bad the first quarter really was. GDP for the first quarter was revised down from -5.5% to -6.4%. Second, the Q2 release was -1.0%, which was better than economists expected (-1.5%). Much of this Advance release was estimated and will be revised lower or higher in the ensuing two months. Last week’s dispatch mentioned looking at GDP net of Inventory adjustments to come up with Final Sales (aka Aggregate Demand). We do that by adjusting the headline figure (-1.0%) for the drop in inventories of (-)0.83%. That produces Final Sales of -0.17%, which marks a big improvement over the (-)4% drop in Q1. Not surprisingly, given the increase in consumer savings, Personal Consumption fell (-1.2%) versus the first quarter (0.6%, revised downward from 1.4%).
Monday - the week kicks off with a look at ISM Manufacturing, the nationwide survey of purchasing managers. Economists expect it to have edged closer to the demarcation line between expansion and contraction. Last month’s report showed strength in all but one of the component indexes (new orders, production, employment, supplier deliveries.) Naturally, that was the employment component. Chances are high it’ll be the weak link this time, too. Total Vehicle Sales are due to be released on Monday, too, and economists expect a slight uptick (+3%) in volume (from 9.7 million annual rate to 10.0 million). Judging by the success of the Government’s Cash-for-Clunkers program, there might be an upward bias to the release.
Tuesday – on this day we get Personal Income and Spending, which report will also give us the Savings Rate. Some savvy folks expect the savings rate to have dropped after last month’s spike. We shall see, but it remains a critical component to the economy’s recovery path and likely presages a lousy back-to-school shopping season, which always correlates strongly with the holiday shopping season. We also get the first of two housing data points in Pending Home Sales.
Wednesday – on the heels of it comes MBA Mortgage Applications, which have largely been re-finance related and, not surprisingly given that, entirely dependent on mortgage rates. The more important report of the day will be the ADP Employment Change index. It is expected to show a drop in employment of (-)335,000. Intended to front-run Friday’s employment situation report, it usually fails miserably. The ISM Non-Manufacturing composite is due out. As silly as the moniker “non fiction,” the report could better be called the ISM Service Sector report. This index was one of the last ones to throw in the towel as the economy began to decline, and it’s also had a shallow decline. Although it sports a higher number (48) than the Manufacturing version, its component indexes don’t look as good. Given the transition of our economy to more service driven, this is a series to watch closely.
Thursday – Initial Jobless Claims is the only report of interest to us on this day. Economists expect another uptick to 595,000, while we expect 619,000. Hopefully, we’re way high.
Friday – none of any of that will matter at 8:30, with the release of Nonfarm Payrolls, which is probably the single-best gauge for what’s going on in the economy, although the trend is more important than one month’s data. Economists expect that (-)340,000 jobs were shed in the month of July, with 100,000 of the decline having come from the manufacturing sector. If those economic dreams come true, they will mark considerable improvements in the rates of decline in both. Meanwhile, the Unemployment Rate, which comes from the Household Survey, is expected to have ticked up by 0.10% to 9.60%. From September 2008, the unemployment rate rose in a virtual straight line until June, when it rose by just 0.10%, so a similar reading should cement the trend. As much as you’d hate to, don’t forget the chart below. It’s the one that shows the government spin job, which doesn’t seem to have a political party preference (click to enlarge.)
Here’s hoping you enjoy the shorter days of summer as we charge into August, the 2/3 mark of the year.
Graig Stettner, CFA, CMT – Vice President & Portfolio Manager – Tower Private Advisors