Weekly Recap & Outlook – 10.30.09

Tower Private Advisors


  • Rising dollar rocks stocks
  • Consumer confidence fading
  • GDP positive

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Capital Markets Recap wro6

Nope, that wasn’t pretty, by any means.  You can see where the carnage was this week, and the sharp eye might detect a likely cause.  If I’m worth the lint on my Casual Friday sweater I’d say it was the last line item, the once-mighty dollar.  That may be an over-simplification, but the chart below suggests it has merit.  If it has merit, consider that stocks dropped between 4-6% this week on a 1.17% increase in the dollar.  We eliminated small-cap stocks from full-discretion portfolios this week.  They had been showing signs of weakness, and they don’t do well in a strengthening-dollar environment.


Furthermore, volume isn’t acting right.  That is, volume should go with the trend.  Prices increasing should see volume increasing.  If it doesn’t, the rally is suspect, something that has been pointed out here before.  Falling prices should be paired with falling volume.  Instead, it’s increasing–with a huge caveat in the chart below.  Volume is on the NYSE, which trades a lot more than stocks.  It also includes exchange-traded bond funds, so it’s noisy, but a decent enough approximation.













That should make one as nervous as a cat in a room of rocking chairs.  The next level of support by my reckoning is about 990, or another 6% lower.  If we can, as they say, hold that, we can consider the correction healthy, a breath that refreshes, etc., but it will need to be accompanied by more subdued sentiment.  In the meantime, we’re looking for ideas to pile into at lower prices, some of which are mentioned immediately below.

An interesting dynamic for the next few weeks will be the effect of hyper-sensitive investors, those who by virtue of their now hawk-like surveillance of their portfolios expect to escape disaster this time.  Will they pull the ripcord sooner?  Will sentiment drop like a rock?  We shall see.

Top Stories

  • Bloomberg cemented its rank as the source of the most ridiculous market headlines.  The first story listed in Monday’s top stories was this dandy:  “Stocks in U.S. Fall, Led by Banks, on Concern Homebuyer Tax Credit to End.”  And that, apparently, just occured to investors–they didn’t realize the provision would end in November.  Get the interns out of the news room!  Naturally, the second headline in the list was, “Homebuyer Credit to be Extended, Gradually Phased Out, Senator Nelson Says.”  Hello? 
  • Speaking of homebuyer tax credits, the Brookings Insitutute estimated that, with “85% of first time home buyers,” planning to buy a house anyway, it cost $43,000 to induce every marginal home buyer to buy a home.  The capital markets should have rejoiced that such a program was coming to an end.
  • Here was another Bloomberg headline this week:  “Stocks in U.S., Commodities Rally as GDP Signals ‘Waterloo of the Bears’.  Although I know what Waterloo and Bears is (yes, I know that, too), I don’t know where they came up with that one, or what the Waterloo bit means, but the positive bounce in GDP (see below for more on that) merely, to some marked out the middle peak of a “W,” for those into letters.  In other words, a positive blip in GDP means little to future rebound potential.  I’d call this week a dandy for the agile short-selling bear.
  • Baidu, the Chinese version of Google, released a fourth quarter sales forecast that didn’t match up to the snazzy forecasts of analysts, and that stock, which had closed on Tuesday at $432.97, opened on Wednesday at $355.71, down 17%.  By the end of the week it had managed to close back at $379.58.  Such are the risks of stocks with high expectations.
  • Monsanto was bludgeoned on similar news:  sales ≠ forecast.  It closed Monday at $75.23 and closed today at $67.23.  This is becoming a very intriguing area of investment for us.  China still sports statistics like–and I’m just grabbing these, carefully, from the sky–something close to 7% of the globe’s arable land and 23% of its mouths.  There are a number of ways to capitalize on this, including companies like MON and Syngenta, as well as the fertilizer companies like Mosaic and Agrium.
  • We should begin to see fewer earnings-related blowups as the third-quarter earnings reporting season comes to a close, although 34% of S & P 500 companies have yet to report earnings.  Earnings for the quarter look to be pretty good, with respect to actual versus estimated earnings.  Of 326 companies that have reported, 273 (83.7%) beat analyst estimates; 49 (15%) did worse than analysts estimated; 4 met the estimates exactly.  That’s better than the usual average of about 68%.  On average, earnings are still (-)23.8% below a year ago, however. As usual, though, it wasn’t so much about the beat or the miss, but about the outlook, and that disappointed many.

This Week

Cut to the chase:  other releases belie the apparent strength shown in Q3 GDP

This week produced four regional surveys.  Two were from Federal Reserve districts:   Dallas Fed Manufacturing Activity, and Richmond Fed Manufacturing Index.  Both of those were worse than economists expected.  The Dallas report was less bad than the September version, while the Richmond report was worse than in September.  The other two regional reports were of the Purchasing Manager sort.  The Chicago Purchasing Managers Index was better than expected (54.2 v. 49.0) and better than in September (46.1).  Other than the outlook for Employment and Order Backlog, the component indexes were all positive.  Unfortunately for Joe Your Neighbor, the employment component is the most visible sign of the economy’s strength.  The same survey for Milwaukee produced the opposite results.  Survey said 50.0 versus an expectation for 57.0 and a previous reading of 58.0.  That series, too, features a weak employment outlook–although much closer to the expansion/contraction line than in Chicago–but it showed big drops in Production and New Orders.

We saw three housing data points this week.  The first and, arguably most influential, was the Case-Shiller Home Price Index.  It was the usual greenshoots release–better than expected and versus the prior release, but still falling.  Professor If-it’s-up-it’s-a-bubble Shiller appeared on Bloomberg TV earlier this week to say that he didn’t think the improvement was the result of the first-time home buyer credit.  He also didn’t expect to see the rosiness continue.  He pointed out the housing bottomed about a month after stocks bottomed, suggesting that the bounce in housing has been the result of rising confidence from stock prices.  Here’s a look at the Case-Shiller 20-City index released this week.  As always, click to enlarge.  This chart does show the power of stocks to affect sentiment and, thus, drive economic activity.  Some say that indicators like stocks weaken the effectiveness of indicators like the Leading Economic Indicators.  Indeed, stock gains can be ephemeral, but they can also give a timely crack-cocaine boost to an economy.


New Home Sales failed to rise as economists hoped they would.  Instead of rising to the expected 440,000 level (from 429,000), they dropped to 402,000.  Mortgage Applications reflected to lowered sales activity, too, falling by (-)12.3%.

University of Michigan Consumer Confidence was announced this week, and it came in slightly higher than the mid-month reading (70.6 v. 70.0), which also marked a slight improvement over September’s final reading.cc  The chart to the left, however, displays a tale of three confidences, each in various states of disrepair.  The top one is from the Conference Board (released 10/27).  It showed confidence had held above July levels.  The second is from the University of Michigan, and it showed that confidence held above July levels.  The final one is ABC’s Consumer Comfort, and it showed confidence falling below July levels.  Three indexes, three levels of deterioration.

Job losses were a bit higher than expected as Initial Jobless Claims fell insignificantly (from 531,000 to 530,000.)  According to Dennis Gartman in his eponymous letter of this morning, some TV clown said that was an improvement.  I’d say it was a rounding error.  The less volatile four-week average continued to head lower, marking a new low since mid-January.  Some one also should have informed Mrs. Average Consumer that GDP was positive in the third quarter!  Positive–do you understand?  What’s not to be happy about?  Oh, that–and that–well, sure, but positive! 

Third Quarter GDP, in its first of three incarnations, was released on Thursday, and it showed a big 3.5% increase, which was better than the miraculous guess of economists everywhere, 3.3%.  Quite remarkable, in my opinion, that they were that close.  The biggest source of strength in the economy was the consumer, whose spending jumped by 3.4% in the quarter, and from the Bureau of Economic Analysis, “largely reflected motor vehicle purchases under the . . . Cash for Clunkers Program.”  Sadly, you probably saw that the cost to taxpayers, to subsidize the marginal car buyers–those who wouldn’t have bought without C-for-C–was $24,000 per vehicle (source:  Edmunds).  Your tax dollars at work.  Oh, and speaking of government, its expenditures grew by 7.9% in the quarter.  Finally, the great and much ballyhooed inventory rebuilding added a modest 0.97% to GDP growth.  Now, I’m just eyeball-ing a picture when I make the following comment, but it looks like the growth in inventories–assuming 6/30 marked the end of the recession–was one of the more tepid responses by businesses since the 1950s. 

Next Week

I’m running out of time on this Friday afternoon, and in respect of that I’ll focus on the only–sorta–report that will matter next week.

Wednesday – we get a preview of the only report that will matter in the release of the ADP Employment Change index.  It will attempt to foretell Friday’s figure, although it rarely does.  It’s expected to show that payrolls fell by (-)190,000, which will mark a sizeable improvement (falling, but at a slower pace) from September, when the report showed that 254,000 had lost their jobs.

Friday – the monthly report on payrolls is released in the form of Nonfarm Payrolls, and it will move markets.  The report comes from two separate surveys, the Establishment and the Household surveys.  The former surveys brick-and-mortar establishments, and it estimates the birth (of new) and death (of existing) rate of businesses.  The latter surveys, well, duh, households, calling households and asking how many are employed.  It tends to catch smaller businesses, stay-at-home businesses, etc.  The establishment survey is the source of the jobs gained/lost figure, while the household survey provides the Unemployment Rate.  In September the unemployment rate was 9.8%.  It’s estimated to be 9.9% in October.  Ask yourself, which does more for you a 10,000 Dow Jones Industrial Average or a 10.000% unemployment rate.  While folks likely yawned–as they should have–over an arbitrary index of faulty construction that covers 30 companies–I suspect a double-digit handle on the unemployment rate could rip the chest hairs off of consumer confidence.

At best, the unemployment rate that’s reported is inaccurate.  At worst, it’s totally misleading.  Here’s a look at three unemployment rates.  The chart is from Shadow Government Statistics, a link to which is included on the home page of the blog.











As you might expect, “Official” is what the fawning media report.  The “BLS Broadest (U6)” is the broadest measure of unemployment presently reported.  The BLS has this definition for U6:

Total unemployed, plus all marginally attached workers, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all marginally attached workers

What it doesn’t include are “discourage workers,” those who have just given up.  That was removed from U6 during the Clinton administration.  John, at Shadow Stats, estimates it in the blue line above, and it’s not a pretty figure.  But relax, during the Great Depression, this figure approached 50%.

That’s all, folks.  Have a nice weekend.

Graig Stettner, CFA, CMT – VP & Portfolio Manager – Tower Private Advisors

Surely every one of my colleagues cringes when they see this dispatch, and so should you.  It doesn’t reflect the views of anyone here, and I’m just fine with that.  Blah, blah, blah [insert boilerplate here.]


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