Tower Private Advisors
- Surprising drop in bullish sentiment amongst the dumb money
- Mixed economics
- Municipal bonds a little too attractive?
- Current Investment Outlook
- Portfolio position: fetal, part II
- Trop évident
Capital Markets Recap
In contrast to the bearish tone struck in this weekly missive and recent posts, although closely tied in to the Trop évident post listed above, the weekly survey of individual investors, the American Association of Individual Investors (AAII) showed a marked decrease in bullish sentiment and a concomitant increase in bearish and neutral sentiment. Respondents checking the “neutral” box are indicating they are neutral on their sentiment toward stocks and/or expecting a correction. Those checking the box for the latter reason are not all-out bears, as they’re just waiting on the sideline for prices that might not draw the bears from their dens. That downshift in sentiment suggests that, in fact, the signs may be too evident–not necessarily for a correction, period, but a correction when most expect it. It may also mean enough bullish sentiment has been worked off to let stocks work their way higher.
This is the week for the big Jackson Hole Federal Reserve meeting, which is put on by the Kansas City Federal Reserve. There will be a lot more to come from the conference, but one shouldn’t be surprised that Fed Chairman Ben Bernanke suggested, again, that the economis is “starting to emerge from recession,” and as has been mentioned here before that largely means the decline in the nation’s output will have gone from declining to flat. As some savvy commentators have put it, this could be a recovery that feels like a recession.
Another big name catching some attention this week was Meredith Whitney, the former Oppenheimer analyst who made brilliant calls throughout the credit crunch and before. She said that the number of bank failures would quadruple, and as others have pointed out, the troubles won’t come from exotic securities but from the core business of banking. In my book, any one with as many good calls as she had deserves more than passing attention, but I’d also say the chances are high that she makes one bad call too many. This doesn’t seem like it’ll be the one, though.
As you’ve probably heard, the Cash for Clunkers (CfC) program will end on Monday, August 24. You’d think with the debate over national healthcare concerns that the powers that be would have put on a good show to prove that bureaucracy doesn’t have to work badly. Instead, car dealers are angry–some having pulled out of CfC over delays in being reimbursed for clunker cash they fronted. Not to worry, $300 million of our money is being carved out to pay for a Cash for Appliances scheme to replace old appliances and furnaces with new, more fuel-efficient models. Oh, and GM had to bring back 1,350 union workers as it and other car companies rushed to ramp up production. Like President Bush’s get-out-and-spend charge and the 0% auto financing that followed on its heels, CfC will likely only pull forward sales that would have happened anyway.
American International Group gave stocks a boost on Thursday by saying that it expects to repay the government’s bailout funds–probably not just sooner than expected, but at all expected. The company also said that it wouldn’t be rushed into selling asset and units. Oracle received the U.S. Government’s approval for its intended $7.4 billion takeover of Sun Microsystems. We received a few more straggling earnings pieces this week. Hewlett-Packard announced that its third-quarter earnings had met analyst expectations, but investors were less than enthused and in their usual what-will-you-do-for-me-next-quarter mood. The stock was unchanged on the week and lower from the announcement price.
There is still some disbelief among investors about the durability of the present rally and the future for stocks. Bloomberg featured a story on Monday that several pension funds, including the California State Teachers fund, were cutting back their allocations to common stocks. They will, undoubtedly, be headed for alternative asset classes, which, to us, suffered a collective bloody nose–or is it black eye–in the last year. Given the advice and track record of Wall Street’s best and brightest, however, it’s no wonder that some are disenchanted with conflicted advice. According to Bloomberg, Wall Street’s advice has been especially lousy since the rally began in March. In fact, investing $10,000 in the most highly-rated companies (i.e. most fundamentally sound) and selling short the worst-rated would have produced a loss of $6,000. A “head of equities” in Paris said that, “analysts are attached to fundamentals. This is a technical rally, a rally of sentiment. Analysts were too defensive. There was an inflection point and they didn’t see it. Amen.
We had six housing data points and they were mixed. The National Association of Home Builders’ sentiment index, the Housing Market Index, improved by a point just like the intrepid economists said would happen. Still, in rough terms, just 18% of home builders are happy these days. Next Housing Starts and Building Permits were both weaker than expected and weaker than the previous releases. Mortgage Applications, however, rose by 5.6% from last week, and the strength was in the Purchase index and not the Refinance index. In the second quarter Mortgage Delinquincies rose, albeit modestly, to 9.24% from 9.12% of all mortgages. That marked another record high since the data began being recorded in 1979. The green-shooters out there were probably enthused that the rate of increase had slowed. Of course, it was virtually inevitable that it did, rising as it had been at the torrid pace of 12.7% in Q4 2008 and 15.7% in Q1 2009.
What was really well received by markets was today’s Existing Home Sales report. Whereas economists expected a 5 million annual pace (June’s pace, 4.89 million), the actual figure was 5.24 million. While that only seems like the usual economist margin of error, it actually was significant, as the chart below attests. Had economists been correct the figure would have been below last year’s peak. Instead, today’s figure exceeded 2008 peak, in the process satisfying a very simple criteria for a trendline, recording higher highs. One possible wrench in the works is that about one third of the sales involved distressed sales. Still, that reduces the number of for-sale signs.
Both of the regional manufacturing activity reports blew away the dark-colored glasses of the dismal scientists. The Empire State Manufacturing survey came in at 12.08 versus an expectation of 3.00 and a previous reading of -0.55. That’s the first positive reading since April 2008. The Philly Fed survey recorded its first positive reading since November 2007 if we factor out the September 2008 positive blip.
The Producer Price Index report suggested that fears of deflation are still well founded. Every aspect of the report–core versus headline and monthly versus year-over-year changes–were more deflationary than expected. Over the course of the last year, headline prices have fallen by (-)6.8%, providing one of the reasons why fears of hyperinflation in the short term are misplaced.
Leading Economic Indicators rose for the fourth straight month in a row, moving just above the zero line. As has been mentioned here, an alternate measure that many favor is the ratio of ratio of Coincident to Lagging indicators, the so-called CoLag indicator. It has had few false starts in the past and has turned up. On the other hand, that ratio is far from positive.
Initial Jobless Claims unexpectedly rose–naturally, most things are unexpected by economists–from 558,000 to 576,000. While economists expected 551,000, our stupid model came up with 576,000 just by adjusting the prior week’s reading by the change and adjusting for the revision.
Tuesday – the vaunted CaseShiller home price data is due out, and with its customary lag (could that be a problem for policy makers?) we’ll be seeing data for the second quarter, which seems to span an eternity, April 1 through June 30, and which includes the broader Home Price Index, which covers more of the nation. It is expected that home prices fell by 19.0%, which would be down just slightly from the -19.1% pace of the first quarter.
Wednesday – we get Durable Goods Orders, which are reported on a headline basis, where 3.0% growth is expected, and on an ex-Tranportation basis, which is purported to be a higher-quality version of the report given the lumpiness of big transportation orders. Then we get the week’s second housing report, the first being Mortgage Applications, in the form of New Home Sales, where economists expect an increase to 390,000 units, which will look like a bounce in relation to the peak. What’s more, new home sales don’t get the boost from distressed sales.
Thursday – Initial Jobless Claims are released, and economists look for 565,000 new jobless benefit recipients. Our mindless forecasting model, which, by definition, will miss almost every turn since it just extrapolates, calls for 597,000. Let’s hope it’s wrong, as a reading of 591,500 will be a violation of the downward sloping trendline established with the March 27, 2009 peak. The second coming of Q2 GDP will be released, and economists expect that the -1.0% of the Advance release will be downgraded to -1.4% and Personal Consumption to have been downgraded from -1.2% to -1.3%.
Friday – Personal Income and Spending will be announced, and with them, the Personal Savings Rate. What with Cash for Clunkers and back-to-school spending, the savings rate is likely to take a dip but stay relatively high. Lastly, University of Michigan Consumer Confidence is announced. This will be the second of two releases for August, and economists expect a modest improvement.
Graig Stettner, CFA, CMT – Vice President* & Portfolio Manager
* Don’t get too excited. It’s a bank–must be 30 vice presidents.
[Insert disclosure boilerplate nonsense here.]