Tower Private Advisors
- Rally continues + more sentiment
- Nonfarm Payrolls relief
- No WR&O next week
Capital Markets Recap
If you check out the prior posts and read below, you’ll get the impression of a dead horse being beaten, but the subject of sentiment is a powerful and important one, in my opinion. There has been excessive bearishness, and here’s another version of it.
We know that individuals–based on their preference for bonds over stocks–aren’t enamored with the outlook for stocks. That’s evident everywhere from what they search for on Google to how they respond to surveys. But they’re not the only group. Speculators in futures, those who aren’t commercials (the commercials are investment banks, in this case) are even more bearish, and they’ve expressed that view with real money. Their net-long position (long futures minus short futures) is negative; that is, they have more shorts than longs; that is, they’re betting on stocks falling (middle panel, below.) Whereas individuals might stop searching for “Hindenburg Omen” on Google and respond to surveys different–that’ll reduce their bearishness–the only way for the speculators to be less bullish is to close their short futures contracts, and that will push stocks higher. In other words, if stocks continue to rally it’ll produce a vicious cycle–if you’re short and have to cover.
- Somebody once said that it’s impossible to take any three letters in the English language, put them together in any order and not come up with a government agency we couldn’t do without. This week a newish one was brought to the fore. Not to be confused with the body that insures the safety of your deposits, the FCIC–the Financial Crisis Inquiry Commission–grilled a number of folks who were on the scene when the financial world collapsed, almost bringing down Main Street. Dick Fuld of Lehman Brothers insisted it wasn’t an issue of capital that brought the firm down, it was an issue of liquidity. Chairman Bernanke, however, said the Fed didn’t think it was possible to save the company. The discount window had been opened for other firms because they had collateral the government felt confident in, as AIG did.
- Burger King (BKC) was bought out by a Brazilian private equity firm, and as often happens, it was discovered that option trading in the stock ballooned just before the bid. The same thing happened this morning, with the S & P futures rising a minute before the [positive] Nonfarm Payrolls Report was released. Some guys have all the luck.
- Last week’s recap featured a chart showing that searches for “double dip”–as in another recession–hit a high for the year. That’s another source of fear for the bears who are sitting on cash or in bonds, yet another high was reached that contradicts that fear. Copper is often referred to as the metal with a PhD because of its leading tendency with respect to the global economy. It, too, made a high this week. It was just a 90-day high, but were it not for April, it would have been a high for the year. It’s fair to ponder removing April, too, as that was a time of high enthusiasm about stocks. That enthusiasm translated to a bullish copper position. Now, though, it’s copper showing strength, and it’s not supported by bullish sentiment on stocks. I conclude, therefore, that the strength in copper is signaling something else is afoot . . . like a global economy that is not flirting with the dreaded double dip.
- We like emerging markets as an investment favorite, if for no other reason than that emerging market economies look stronger than developed markets in terms of their economic fundamentals. For example, virtually all measures of debt relative to their economy look supremely better than that of the developed nations. That’s widely known, however, making the emerging markets area–as they say–a crowded trade. In terms of rowboats, it’s like everyone looking over the same side of the boat. The Bloomberg terminal featured a four-word phrase that should send shivers through anyone who was older than 30 when the internet bubble burst: this time it’s different. And the circumstances of this version are a lot like then, when we were presented with the new economy. According to this week’s Bloomberg story, the MSCI Emerging Markets index is trading at levels that, in 2008, marked the peak in that market. HSBC, Deutsche Bank, and Morgan Stanley say it’s different this time because, “developing nations have less debt, more profitable companies and are growingg twice as fast as advanced economies.” Write this down: all asset bubbles have their beginnings in trust, and they’re inflated by a so-called paradigm shift–the this time it’s different.
- Copper is used around the world, and, withouth looking, China is probably the minor buyer. The U.S. surely uses more, but China is likely behind the growth in copper demand. So you might assume that means the global double-dip risk is low, but the Cass index of Freight Shipments says the risk is low in the U.S., too. That index reached its second-highest level in two year, as shown below.
As I pointed out in two prior posts, this market has been primed to rally. There has been too much pessimism. In addition to the sentiment surveys cited and the political winds blowing, there was also a 2010 record of selling climaxes last week. That occurs when a stock hits a 52-week low but finishes the week up more than 10%. It’s a measure of the weak hands (i.e. dumb money) selling their shares to the strong hands (i.e. smart money.)
While there were some positive-surprise reports this week–e.g. Pending Home Sales up by 5.2%; prior -2.6%; expected -1.0%–they were just excuses for stocks to rally. Given that today’s Nonfarm Payrolls Report measures the one-month change in payrolls–very imprecisely, to boot–it, too, is just an excuse.
Still, at the margin of the margin it was positive. Instead of the loss of (-)105,000 jobs that was expected, the headline loss was just (-)54,000. That was lower than last month’s headline figure (-131,000), but the same as the revised figure. Private Payrolls rose by 67,000; more than the 40,000 anticipated. July’s change was revised up from 71,000 to 107,000, making the two-month average 87,000.
Manufacturing Payrolls, however, were disappointing, as they fell by (-)27,000 instead of the 10,000 increase economists expected. The Unemployment Rate ticked up to 9.6% from 9.5%, but was the result of more folks entering the labor force, looking for jobs. The Participation Rate–the percentage of the population in the work force, either working or looking for work–rose from 64.6% to 64.7%. That translates to an additional 685,000 looking for work. This is a to-be-expected phenomenon as the economy improves–grudgingly or not.
Another minor positive was the increase in Average Hourly Earnings. They rose by 0.3%, versus expectations of +0.1% and July’s +0.2%. That pace is well above 2010′s average and is better than the average of 2007, 2009, and just shy of 2008′s mark.
There are less than a handful of indicators in all of next-week’s holiday shortened work week.
Key indicators to watch
- Initial Jobless Claims (weekly) – Thursday