Tower Private Advisors
- Shallow pullback
- News hodgepodge (hello, Ed Meese?)
- Economics: inventory spring gets further compressed
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Capital Markets Recap
The S & P 500 stubbornly held above the 1,000 level after dipping below it today. So far the dominant strategy seems to be “buy all pullbacks.” That’s a sign of investors thinking the markets are going higher, and so far they’ve been well served. The interest rate markets are helping to support equities with big drops in Treasuries this week, but the dollar’s not helping out.
Here’s a look at the S & P 500 and its current bumptious–no, that word doesn’t make sense, but I had to work it in–machinations.
I’ve added a Fibonacci retracement of the all-time high to the March lows. (Click here for a Fibonacci primer). The market is churning below the important 38.2% retracement and below October and November resistance (red rectangle). If the S & P 500 can close convincingly above 1,014, it should be a quick and relatively unimpeded sprint to 1,200. Looking at the chart above you can envision the almost too neat symmetry of such a move.
The tone in this sometimes-weekly missive, and in related posts, has recently taken on a nervous, bearish tone that is in contradiction to the financial press, and until 1,014 is taken out it will remain that way. You’ll hear the trumpet blast and likely receive a between-Friday’s e-mail announcing the fact that the SPX closed above 1,014. Until then dance near the door.
Friday evening is when the FDIC announces the week’s bank failures. They’re usually small banks with quaint names like Vineyard Bank of Rancho Cucamonga, CA. Among other things there seems to be a preponderance of Illinois banks, which presently make up 18.1% of the list, and Georgia banks, which make up 22.2% of the list. After those states it’s California (11.1%)–surprising, no?–and Florida (8.3%). Well, chalk up Alabama’s first. The biggest bank failure of 2009 occured this week as Colonial BanCorp was forced into the waiting arms of BB&T, or Branch Banking and Trust Company, named for the founder Alpheus Branch. According to Bloomberg, Colonial is Alabama’s second-biggest bank, and it just couldn’t resist the Sirens’ song of Florida real estate lending.
Calvin Coolidge said that, “if you see ten troubles coming down the road, you can be sure that nine will run into the ditch before they reach you.” There might be a few banks hoping that a FASB proposal is one of the nine. This has been percolating for a couple of weeks now, but it popped up on Bloomberg’s top stories of today. In short, the Financial Accounting Standards Board wants to increase the scope of assets that would be subject to mark-to-market accounting rules, and that could affect a lot of banks. A proposal is expected late this year or early next. In short, mark-to-market requires marking or re-pricing difficult-to-value securities to most recent prices. It was blamed for a host of problems in the financial crisis of the last 18 months.
The FOMC released a statement on Wednesday that was little changed from the statement of the meeting six weeks ago, although it did say the economy was “leveling out.” One of the big questions going into the meeting was what would happen with quantitative easing, the monetary policy tool used when rates can’t lowered any further, and the Fed said that its buying of Treasury securities to push/keep rates low would end in October. Seemingly bearish for bonds, that was released on Wednesday. The 10-year’s yield is 0.17% lower today.
In this time of new-found austerity some folks are sticking out like a sore appendage. Exhibit #1 this week is Steve Schwarzman, the CEO of Blackstone Group, who took down a cool $702,000,000 in compensation this year. Hey, wait a minute, that’s not right! His pay is only $2,300,000. The rest is 1/4 of the vested equity interest he has in the company. For a while there, John Paulson, the hedgefund manager who made an icy $2,500,000,000 betting on the trainwrect that was sub-prime, was probably getting nervous. Speaking of John Paulson, his hedge fund’s 13F filing showed some interesting purchases in the second quarter. He made the following $1+ million purchases in Q2:
- Bank of America – 167,990,500 shares
- Anglogold Ashanti – 39,911,300 shares
- Schering Plough – 46,072,000 shares
His portfolio is an interesting mix of gold-related investments, which comprise 30.8% of his holdings, including a 16.8% holding of the Gold ETF (GLD), health care–namely pharmaceuticals–which makes up at least 27% of his holdings, with the lion’s share of the rest comprised of bank stocks. You could probably do worse than mimic the holdings of that guy . . . if you knew what he was doing today.
JPMorgan‘s Chief Investment Strategist disputed the claims of PIMCO’s outlook of subdued growth in its “New Normal” outlook by saying that there is so much pent-up demand that this economic recovery is going to be V-shaped. I confess to having a little pent-up demand of my own, and I suspect the average, formerly profligate consumer has much of the same, but it’s going to be a while.
Repeat after me: the consumer is 70% of the economy; the consumer is saving like crazy; the consumer is worried about his neighbor’s job (in survey’s consumers usually worry not about their own jobs, but their neighbor’s); the recovery’s going to be slow.
That last point’s with good reason. Take a look at the chart below from ShadowStats. That blue line above 20% is a measure of unemployment dispensed with during the Clinton administration. 1 of 5 is effectively unemployed. He or she is collecting unemployment benefits, discouraged and not looking for a job, working multiple part-time jobs, etc.
One of the great hopes for the third quarter is that inventory restocking will provide a boost to the economy and, further, that that boost might be enough to get us through to some real strength in the economy. In terms of the quality of GDP, inventory is of lesser quality than real demand. This week we saw two data points that showed businesses continue to draw down their inventories. Wholesale Inventories declined by (-)1.7%, while Business Inventories fell by (-)1.1%. Both were weaker than expected. Wholesale inventories include those of agriculture, mining, manufacturing, and a few others. According to the Census Bureau, these companies don’t transform the goods in any way. In contrast, business inventories are of retail establishments and others involved in selling goods further down the food change. This report covers three sectors: manufacturers, retailers, and merchant wholesalers, all of which drew down their inventories in June. One of the problems with the inventory-restocking hope is that, other than in stock prices, the companies who would ship the stuff to restock inventories aren’t seeing any sign of it. As of tomorrow we’ll be halfway through the third quarter. If we’re to get a positive GDP bounce, they’d better start ordering.
There were a couple of pieces of good news this week. Industrial Production rose for the first time since December 2007, and the same report showed that Capacity Utilization increased for only the second time since that date. IP was, however, heavily boosted by just one industry: automotive. At the broad major industry groups level, output from Utilities fell by (-2.4%) while Mining (+0.7%) and Manufacturing (+1.0%) both rose. Likewise, capacity utilization grew most in the “motor vehicles and parts” category, while remaining categories were mixed. To see if the growth in these indicators was based on more than automotive, we’ll have to wait to see the data for the next couple of months. Charts below.
University of Michigan Consumer Confidence for the first half of the month surprised on the downside. While economists expected a 5% increase to 69.0, the average consumer was not feeling it, and the index fell by a cool (-)5%. What’s not to like? Cash for clunkers. Survey of economists says the recession’s over*. Free health care. What $1,266,958,000,000 deficit? Oh, that deficit. The Treasury Department’s Monthly Treasury Statement showed a new high for the deficit with a net outlay in July of $180.7 billion. Compared to a year ago, the year to date Total Expenditures have totalled $3 trillion, up a modest $517 billion, while Total Receipts are $354 billion lower. All those wishes of lower taxes have been granted: individual income tax receipts are down by $193 billion; corporation taxes are down by $142 billion.
* Is it possible that folks are wising up to the inanity that it economic forecasting? This is the same group that never sees a risk of recession, that sees all contagions contained, and that gives meteorologists a good name.
Monday – the Empire State Manufacturing index is the first of the more important regional surveys, the other coming on Friday. The survey of the New York economy is expected to have shown a move into positive territory. If that wish comes true it’ll be the first time since April 2008 that the survey was positive. We get the first of four housing data points in the form of the National Association of Home Builders’ Housing Market Index. Economists expect the index to have moved up a point because that’s what their models told them would happen. Broadly interpreted that would mean that about 18% of homebuilders are optimistic.
Tuesday – Producer Price Index data will be released. Thanks to lower energy prices, on a year-over-year basis, prices at the wholesale level have fallen by (-)5.8%. That rate of decline is accelerating. Similarly, while Core PPI is expected to be positive at 2.8%, that will be lower than the rate (3.3%) in June. Housing Starts and Building Permits will be announced, and economists expect the former to almost touch the 600,000 mark, a mark we haven’t seen since last November. To put it all in perspective, here are some reference points: average level since 1950: 1,524; past lows since 1950: 810; January 2006 peak: 2,273.
Thursday – Initial Jobless Claims will be reported. Economists are looking for 550,000 new claims for unemployment insurance. Our highly-sophisticated model calls for 570,000 claims. An hour-and-a-half later we get Leading Economic Indicators, which economists expect (hope) will be positive again. If that happens, it’ll be the first time since December 2004 that we’ve seen four straight positive readings. That doesn’t seem likely to me, but what do I know. The second regional Fed report, the Philly Fed report, is released. It should be mildly negative, but as close to positive since the September 2008 headfake that poked above the zero line.
Friday – we get the fourth housing data point with the 10:00 release of Existing Home Sales. Economists think the figure might tally 5 million. If so, that’ll be the first time since September 2008–and before that, November 2007–that we’ve breached that level.
Graig Stettner, CFA, CMT
If you made it this far, congratulations. Click here for a little treat. It’s Slate magazine’s “Choose Your Own Apocalypse” game. It’ll make for great weekend fun.