Tower Private Advisors
- Option expiration Friday
- Brilliant insight on government debt outstanding
- Earnings season in full swing
- Economy limping along, dragging its bum leg
Capital Markets Recap
Today is option expiration Friday, and that often can distort the market action. When stocks are up and close to an option strike price, covered call writers/sellers often bid up the prices of stocks as they buy the calls back. That can produce moves upward in the underlying stocks. In short, option-expiration Friday can often obscure the true action. We’ll have to wait for Monday and Tuesday for that.
Related to options is the CBOE’s Market Volatility Index (the passive voice is regretted), better known as the VIX, its ticker. It measures the 30-day volatility implied in index options and can often be a sign of investor anxiety or complacency. This morning, when the market was falling by triple digits (finished down by 67.03), the VIX spiked up to 22.50, suggesting heightened investor anxiety but it finished the day at a new low for 2009. I suspect that option expiration might have had something to do with that. It’s likely that a large number of call options were in the money and at risk of getting assigned (i.e. the call buyers exercising). Thus, they were being bought back, driving the implied volatility down. Again, we’ll need to look at this next week for a better gauge of investor anxiety.
- Earnings are responsible for most of the big index moves, and as you should know by now, it’s not the outright tenor of the news (GE’s profit soars, for example, which I’m making up) but 1) the earnings in light of analyst expectations (GE’s earnings better than expected = stock going up, ceteris parabis); and 2) the outlook for revenues (GE’s sales outlook down = stock gets crushed). Crushed stocks today included Bank of America and GE, the former a reminder of the viciousness of the credit cycle. In contrast, JPMorgan, Intel and Google shares rose this week as the numbers those companies put up were decent. We’ll take a closer look at earnings next week, when I won’t procrastinate about putting this together.
The Dow Jones Industrial Average hit 10,000 this week. You shouldn’t care. It’s 30 stocks, and your portfolio doesn’t look like it at all. Please disperse. There’s nothing to see here. Go about your business.
This last one isn’t a top story at all. In fact, the chart is mostly lifted from something I saw in a blog posting that referenced some work by Strategas research, a top-notch shop, although the conclusions are mine. Check out this picture. Dwell on it, and then read my thinking below. See if you concur. The top panel (lifted entirely) displays the total federal debt outstanding (orange-ish line), while the white line shows the average maturity of the total debt. The bottom panel shows the yield of the ten-year Treasury note; label it with the generic term “interest rate.” All go back to 12/31/80, and all are shown quarterly.
Here’s the summary of what’s gone on.
- Total federal debt has increased at an ever increasing rate.
- The average maturity of the debt is near an all-time (this chart being the context) low.
- Interest rates are also near an all-time low.
- While it’s not on this chart, you should know by now that the dollar has gotten the nasal mucous kicked out of it, and countries are anxious to both transact in other currencies and reduce dollar reserves.
I conclude that the Treasury is not exercising all its metaphorical mental faculties. At a time when interest rates are at their lowest–again, the context is only the 29 years shown in this chart–the average maturity of the debt ought to be the longest. In about four years and three months (the 51 months shown) half of the entire U.S. debt is going to have to be refinanced. Something tells me that deflation won’t then be a threat. We will have had four years of trillion dollar deficits. We will, hopefully, be past the bottom in housing, and banks will be lending again, which will begin to uncork some of the pent-up cash that banks now hold at the Federal Reserve. In short, some inflationary forces will by then be unleashed, and we could be looking at some serious trouble refinancing the debt. If so, that means higher rates, rates high enough to induce buyers to buy.
To be fair, it may be that the Treasury is financing the debt where it can, and, admittedly, the janitor at Treasury is smarter than I am. Indeed, we may be looking at lower long-term rates in just a few months, and that may be when the Treasury department unleashes its mental firepower. Count me skeptical.
Cut to the chase: no inventory stocking yet; pace of layoffs continues to decline; capacity utilization perks up, but consumer moods sour.
August Business Inventories were reported on Wednesday, and the report showed an increased rate of inventory destocking, falling by (-)1.5% versus the consensus for a (-)1.0% decline and a revised (from -1.00%) drop of (-)1.1% in July. The Consumer Price Index figures came in as expected, which you can see in last week’s Recap by clicking here. Initial Jobless Claims were 514,000 this week, while economists expected 520,000, having revised their estimates lower from last Friday’s estimate of 524,000. Our own internal, highly-complex model doesn’t have the luxury of being adaptive. It’s sort of like the annoying black-and-white, cut-to-the-chase husband (yeah, probably you) who is decisive and inflexible. It called for 494,000 last Friday, and it’s sticking to it. The Philly Fed report moderated a bit, falling from 14.1 to 11.5, below the consensus estimate of 12.0. That still leaves it firmly in expansion territory, however. Industrial Production and Capacity Utilization both were stronger than economists expected. The former rose by 0.7%, versus a consensus of 0.2% and a previous 0.8%. Output from Utilities declined by (-)0.7%, while Mining and Manufacturing production rose modestly. Capacity Utilization rose to 70.%, making a nice bounce from the 68.3% low. Manufacturing capacity is still at all-time low levels, while utilities capacity is holding above the 1982 low. Mining utilization is well off the lows seen in 1971, 1978, 1984, and 2006. University of Michigan Consumer Confidence fell, much to the consternation of the elusive consensus economist who looked for only a slight moderation (from 73.5 to 73.1), instead of the sizeable drop to 69.4.
Monday – the NAHB Housing Market Indexis released. After a bounce from below 10 to September’s 20, the economists apparently refused to come to a consensus, possibly one of the better decisions by economists. Anyone’s guess. We don’t do forecasts, just novel straight-line extrapolations of past data.
Tuesday – the Producer Price Index data is released. Economists expect that, on a year-to-year basis, the headline rate of wholesale deflation was -4.3% in September. Stripping out food and energy prices, the so-called Core rate, economists look for a 2.0% increase, revealing that most of the deflationary pressure at the wholesale level has come from food and energy. Housing Starts and Building Permits are released. While there might be something to Dow 10,000, there’s nothing to Housing Starts 600, which economists are expecting. From a high of 2,200+, 600 looks pitiful. Starts have yet to rise to even the lows prior to 2006! Building permits look even sicker. Economists expect they rose to 590,000. In the last week, however, Lumber Futures have risen by 9.4%, so there might be something to the bounce in starts and permits. Only problem is that 9%+ increases in lumber prices are and have been fairly common to which the chart below attests.
Wednesday - the Fed releases its Beige Book, the report that compiles reports of economic activity in the Fed’s 12 districts. Lacking pretty–or not-pretty pictures–it’s a dreadful report filled with “Ms.” and “Messrs” and other formalities.
Thursday – as usual, Initial Jobless Claimsare released. Economists, savvy lot the are, look for a bounce in the figures (from 514,000 to 517,000). We, cold, calculating, and utterly ruthless with slide rule and pencil, expect a reading of 510,000. The only difference between us and the economists contributing estimates to the consensus is that we recognize that our forecasting model is utterly worthless. We also anticipate partly-cloudy skies with a chance of rain tomorrow (hey, what happened to the little weather forecast thingy on the blog? Have to fix that.) Leading Economic Indicators are released. They’re expected to have advanced by 0.9%, but as you should know from reading this report that the coincident and lagging indicators can be as telling as the leading indicators. The ratio of Coincident-to-Lagging indicators has produced a significant bounce, but remains well below the zero line. Still, the co-lag indicator has very few false starts in recessions.
Friday – the week’s last significant report is Existing Home Sales. Economists expect the index to have mounted a nice rebound. It will still be well below the highs, but should look much more respectable than the anemic bounces in housing starts and building permits.
Graig Stettner, CFA, CMT – Vice President & Portfolio Manager – Tower Private Advisors
The fine folks who ostensibly sign my paycheck probably liken the opinions expressed herein to the sound of fingernails on a chalkboard, so they surely don’t agree with most of them. I am happy to provide some cognitive disonance to them. Wail and gnash away.