Weekly Recap & Outlook – 09.11.09

Tower Private Advisors

While we all recognize the great significance of this date–who doesn’t remember precisely what they were doing then?–I’ll leave it to others to provide the tributes and remembrances, along with the links to websites and photos.


  • Still strong markets 
  • Brilliant hindsight by regulators
  • Deleveraging continues, and where is the inventory restocking?

Recent Posts

  •  Not much; just the addition of the Buzzword Bingo website to the Blogroll.  Check it out.

Capital Markets Recap











 Those closes in the equity indices above all represent new highs stretching back to 11/5/09 (DJIA), 10/14 (SPX), and late September (all others.)  There is little to fault in the action of any, save the DJIA, which made a less conclusive high, having struggled with the same level last week.  If the bugaboos mentioned here in the last couple of weeks don’t rear their ugly heads, we could be set up for a run at 1,121 on the SPX, which would be the 50% retracement from the all-time high.  That’s just 7.51% away from today’s close.

Those bugaboos, by the way, haven’t gone away, but as an earlier clever posting suggested (key excerpt below), too many seem to be expecting the inevitable correction, and the market has an uncanny way of making the majority of people look stupid.

Here, though, is a critical question: is there any well-informed investor with no particular style axe to grind (e.g. long-only) or investment mandate (e.g. fully invested at all times) who is not aware of all these. Does that create a well-informed group of lemmings whose fingers are poised too close to the sell button?

The equally brilliant weekly dispatch that followed suggested the same thing, as some sentiment surveys have shown investors too clever by half (I have no idea what that means.)  Here’s an excerpt from it.

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.

Running out of time on this Friday afternoon . . .

How could one not notice the action in gold, the spot price of which finished the week at $1,005.20 per ounce.  Closing the day above a critical level is one thing, closing the week above is another thing, still, so the week’s action was positive (a monthly close is even better).  Whether it can maintain the level, which it has seen only two times before, remains to be seen.  There is no doubt the action will enliven the gold bugs and end-times types.  This is, seasonally, the strongest time of the year for the yellow metal, but we haven’t seen the last of the sub-$1,000 pricetags for gold.  The dollar will rally, and gold will drop.  The producers will begin to dump gold, and scrap sales are increasing. While that may fairly sound like an axe being ground, don’t be too hasty to chase this move.

Top Stories

 What has been dubbed Merger Monday continued this week with the announcement the Kraft would pursue playing-hard-to-get Cadbury.  Bloomberg reported that Former Fed Chairman Alan Greenspan, aka Roy Riegels, said that banks will need to increase their capital levels, and that another financial crisis “will happen again.”  Until human nature eliminated that can be counted on.  The problem now is that crises are likely to happen against a bag drop of immense leverage.  Not to be outdone, the G-20 finance bosses said that bank bonuses should be curbed, and just to sound tough, Timmy Geithner said that bonuses should have a “clawback provision,” something that’s likely to come to bear in his career, when he gets clawed back from being Treasury Secretary.

Bloomberg also reported that this week’s Treasury auction went off without a hitch, and that makes fears of the immense and impending supply of Treasury securities not so much a worry.  Indeed, Treasury rates are low and heading lower, something that shouldn’t be expected if the economy has righted itself.  That’s also contrary to a weakening trade-weighted dollar (Bloomberg headline:  “Dollar Falls to Lowest Level Against Euro in 2009 . . . “)  In contrast, Stanford professor, John Taylor, who created the so-called “Taylor Rule,” which is said to determine what the Federal Funds rate should be, said that the Fed may have to raise rates in 2010.  I’d say that’s quite unlikely.  Thanks, Doctor, now please go back to estimating Housing Starts or some such thing.

Remember Dubai?  The islands shaped as countries–minus, of course a few also-ran nations like neighborhood favorite, Israel?  The hotel shaped like an ancient ship? Yep, that place. Turns out that maybe it doesn’t have as much sovereign wealth as it thought it did, or at least that’s what I’m guessing it means when it’s “Said to Quit Investments, [Weigh] Fund Sale,” according to Bloomberg.

Thinking about sending the kiddos to an Ivy League school?  Don’t expect to get any tuition help from the schools’ investment funds.  Harvard said its endowment lost 27.3% in the last year; Yale said its endowment was down by 30.4%; Brown University said its had fallen by “nearly 27%” in the fiscal year ending June 30.  That’s according to a JPMorgan dispatch, which cited additional sources (WSJ, AP, Reuters).  We’ve thought this would drive the ivory tower folks back to basics, but from all indications they’re going further into alternative assets (read, hedge funds.)

Company NewsGM is said to be offering a 60-day money back guarantee on Chevrolet, Buick, GMC, and Cadillacs.  There’s a witty comment in this somewhere, but you’ll have to read the weekend’s Barron’s to get Alan Abelson’s version of it.  I can’t come up with anything.  The CEO of Morgan Stanley, John Mack, will retain his Chairman title but pass on his CEO title to James Gorman.  Texas Instruments boosted its third-quarter outlook as it sees the demand for its chips growing.

This Week

The week started off with a bang, with what wouldn’t otherwise sound like a critical report.  Yet the July Consumer Credit report showed that consumers had reduced their outstanding debt by $21.6 billion.  June’s reduction of (-)$10.3B was revised upward–or downward, whichever–to (-)15.5B.  Economists expected [hoped?] consumer debt to fall by a slightly smaller amount, say (-)$4B.  The report, from the Federal Reserve, breaks down debt into two categories, revolving and nonrevolving debt.  Revolving debt fell at an annual rate of 8%, while nonrevolving debt fell by 11.7%, the latter including auto loans.  While this is good for the consumer’s balance sheet, and represents the deleveraging trend that is likely to continue for some time, it is decidedly not good for the economy.  In the past the consumer has pulled the economy out of recession by spending, incurring debt at the same time.

Wednesday featured an interesting story in the same vein, although more drastic.  Bloomberg featured the following headline:  “Wealthy Families Face Bankruptcy on Real Estate Crash.”  Chapter 11 (yep, 11) filings among the snooty rose by 73% in Q2 from Q1.  Recall that Chapter 11, as opposed to 7, allows for a reorganization of finances.  The story mentioned that listings of homes selling for more than $1 million rose by 27.3% “in July from October.”

Also from the Federal Reserve, its Beige Book showed an economy that appears to be stabilizing.  Here are some choice excerpts from the report.

Reports from the 12 Federal Reserve Districts indicate that economic activity continued to stabilize in July and August.

The majority of Districts reported flat retail sales.

A majority of Districts confirmed that the “cash-for-clunkers” program boosted traffic and sales

Reports on commercial real estate suggest that the demand for space remained weak and that nonresidential construction-related activity continued to decline

Consumer spending remained soft in most Districts

Residential real estate markets remained weak, but signs of improvement continued to be noted.

Reports on the demand for nonfinancial services were mixed. Demand for transportation services were mixed, with some Districts noting stabilization at weak levels. Reports indicated that freight volume declines were moderating in Cleveland, while Dallas and Atlanta reported a modest pickup in rail shipments [keep this one in mind when I take a shot at the rose-colored glasses crowd later].

 Labor market conditions remained weak across all Districts, but several also noted an uptick in temporary hiring and a decline in the pace of layoffs

And that’s all you need to know.  Weak but improving.

The Trade Deficit jumped by 16%, to $32 billion, which marked a six-month high.  Petroleum-based imports were a big contribution, but so were non-petroleum imports, all while exports grew by 3.9%.  Recall the equation for Gross Domestic Product:

GDP = C(onsumption) + I(nvestment) + G(overnment) + X (exports – imports)

X is usually a negative number with our persistent trade deficit, and while inventory rebuilding is being touted as the savior of second half GDP, net exports will likely trim GDP.  The silver lining in this is that the dollars we sent abroad will need to be recycled–and likely into our Treasuries, helping to keep interest rates low.

Initial Jobless Claims fell by 26,000, but part of the drop came from an upward revision of 6,000 to last week’s number.  We are still not seeing downward revisions to past numbers, however, which will be a confirming signal.  Still, consumers are taking comfort in something, most likely from stock market cues, as University of Michigan Consumer Confidence  for the first half of September jumped by 4.5 points to 70.2, well above expectations of 67.5.  In the only housing data point of the week, Mortgage Applications jumped by 17.0%, with a 22.5% increase in the Refinance index and a 9.5% boost in the Purchase index.

Wholesale Inventories continued to fall, albeit at a lower pace.  June’s 1.7% drop was boosted to (-)2.1%; economists expected a drop of (-)1.0%; the actual decline was (-)1.4%.  For economists, an eventual inventory restocking is what could produce a positive GDP number for the third or fourth quarter, but there are scant signs of it so far.  The Beige Book report (above) held out some hope, however; note the Dallas and Atlanta railcar traffic excerpt. 

Next Week

Tuesday – this is my older daughter’s birthday (she’ll be 12; thanks for asking), and it will forever be etched in my mind as the day (Monday, then) the markets started trading after the default of Lehman Brothers.  I’ve made it a tradition of taking the kids’ birthdays off, and I remember the pit in my stomach as we made pear butter.  Hopefully, a similar episode won’t be repeated this year.  Instead, we should get a view of the Producer Price Index, which economists expect will show less deflationary pressure.  For example, the year-over-year change in the headline figure is expected to have moderated from -6.8% to -5.4%.  Also, the Empire State Manufacturing index is due out and is expected to add to August’s strong reading of 12.08, by recording 15.00.  We won’t be surprised to see a weakening, which is typical at turning points in the economy.  Lastly for Tuesday, we get another look at inventories, this time in the form of Business Inventories, which are expected to have contracted further, but at a slower rate (-0.8% v. -1.1%).

  • The thinking behind inventory rebuilding is this.  At the tail end of a recession, businesses are busy cutting inventories in response to declining sales.  The economy begins to improve via the consumer’s mood, of which businesses are either unaware or unconcerned, and they continue to cut inventories.  Eventually, the ratio of inventories to sales begins to get uncomfortably low, businesses fear missing out on sales, and ratchet up their inventories in response.
  • Here’s the economic progression from that point:  inventories up → increased production → increased hours worked (either through existing workers working longer or through workers getting called back) → increased wages → increased spending → economy improves → everyone lives happily ever after.

Wednesday - the weekly report on Mortgage Applications is released.  Economists don’t bother to estimate the figure.  We get a glimpse into price changes at the wholesale level with the release of the Consumer Price Index.  It, too, is expected to show a slight moderation in consumer price changes.  With the huge contraction in consumer credit mentioned above + continued layoffs and little hiring, it’s likely that we’ll see more stories like the ones in the link you can find by clicking here, which has huge deflationary implications.  Later in the morning we get the twin release of Industrial Production and Capacity Utilization, both of which are excellent indicators of economic activity at the business level.  Economists expect slight upticks in both.  In the afternoon, we get the monthly homebuilder sentiment survey, the NAHB Housing Market Index.  While it has more than doubled in 2009, it’s well below both its highs and any Fibonacci retracement level of almost any significance.  When it begins to recapture those, which are shown below, we can begin to think about celebrating.











Thursday - we get the week’s second housing data point with the release of August Housing Starts and Building Permits.  Consider the latter the backlog to support the former.  Both are expected to rise.  If the NAHB index looked like the bounce of a dead cat, you should see what housing starts look like.  The picture is below.  Like with the NAHB index, we’ll look for recaptures of the Fibonacci retracements, as well as the 12-month moving average, which is shown in green, below.













Initial Jobless Claims are expected to have ticked up slightly (555,000) due to some economist’s clever model.  Our clever model says 536,000 will be the number.  You may have noticed that our model is rarely, if ever, correct, which is to say it has the same predictive accuracy of the mass of economists.  And save for salary decimal points, your humble servant’s compensation doesn’t come close to that of the overpaid dismal scientists.  The last report for the week will be from the Philadelphia Federal Reserve, in the form of the Philly Fed index.  Depending on your perspective it’s expected to either “have doubled” or to “remain stuck in the single digits,” as economists look for it have gone from a reading of 4.2 to 8.0.  We prefer objective, here, and it looks sure to have improved, although setbacks are common at turning points.

That’s if for this week, another raft of wasted pixels, and a precious three minutes of your time if, that is, you lasted this long.

Have a great weekend.

Yours truly,

Graig Stettner, CFA, CMT    Δ   Vice President & Portfolio Manager   Δ   Tower Private Advisors

Don’t bother to reply with your grammatical corrections, as all mistakes are made intentionally and with an eye toward an avant garde grammer (catch that one?) style.  More importantly, this dispatch very clearly does not reflect the viewpoint of anyone here at Tower Bank or Tower Private Advisors.  In fact, they are likely to have cringed upon receipt of the e-mail announcing the posting of this blog entry.  Oh, well.


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