Weekly Recap & Outlook – 11.02.12

Tower Private Advisors


  • Slew of headlines
  • Payrolls report
  • Comics

Capital Markets Update

Top Stories

Here is a collection of this week’s headlines or headline paraphrases I found important.


  • U.S. markets are set to open after 2-day closure
  • Markets could see trading frenzy, strategists say [they didn't]
  • Wall Street returns to business after smooth reopening
  • Sandy won’t alter Q4 GDP, economists say [they said natural disasters tend to supress economic activity, then stimulate it]
  • U.S. home prices post biggest annual gain in 2 years
  • U.S. employment picture brightens [whatever. see below]
  • Firms pay out special dividends ahead of Fiscal Cliff

Europe mess

  • Greek affluent continue to evade taxes, study finds
  • IMF gives nod to ECB bond-buyback plan for Greece
  • Greece adopts privatization law, but other reform stalls
  • Greek finance officials are among those with Swiss bank accounts
  • Spain will continue short-selling bank for 3 months
  • Traders sidestep ban on shorting government debt [No! This new rule was announced last week]

Other overseas

  • Japan could face recession, BoJ officials say [I didn't realize they were evernotin recession for, what, 20 years?]


  • Financials advisers become more optimistic – “Financial advisers’ confidence…increased modestly this month. Meanwhile..institutional investors were the most negative since the index launched in 1998.”
  • Prudential rolls out high-yield mutual fund*
  • Blackrock is bullish on commodity markets

Exchange Traded Products

  • Financial advisers expect ETF use to increase, survey finds [78% expect to make more extensive use of them]…and in response:
    • Royal Bank of Scotland readies 5 ETNs (exchange traded note) tracking Rogers’ index series
    • Pyxis nears debut of leveraged-loan ETF*

*  Two very hot investment areas are high-yield bonds and leveraged [bank] loans, both of which represent debt of below-investment grade borrowers. Before Michael Milken, these were known as junk bonds. As the Federal Reserve manipulates intereste rates, it is trying to push investors out on the risk curve, into corporate bonds–both investment grade and below investment grade–stocks and other stuff, rising prices of which will make you and me feel wealthier. Perfect! The one group of investors gets higher interest income (at last!); the other gets higher 401(k) balances (at last!). We all go out and spend more. Voila! The economy blossoms, and things go swimmingly…until they don’t. I’m just guessing, but I’d say the hottest area for new ETFs is in income-producing vehicles. Now, the advent of the big iShares Gold ETF didn’t spell the end of the gold rally–in fact, it would have marked a great time to go buy some of the shiny yellow stuff, but with yields on junk bonds at their lowest ever (!) this seems like an inauspicious time to be launching funds, luring investors in. To be fair, junk bonds could be many, many months away from bubblicious stage, but they’re pushing closer. We like high-yield bonds, in fact, but we’re getting nervouser (I know.)

This Week

Naturally, with this the first Friday of the month, the Nonfarm Payrolls report was this week’s big report, and it didn’t disappoint, producing an increase in Private Payrolls of 184,000. Ostensible cuts in public payrolls, however, produced a headline Nonfarm Payrolls increase of 171,000. Equally equally naturally was that this was spun as good news. The trouble is, we need to increase jobs by about 165,000 per month just to keep pace with the increase in the working age population. Still, to join the drum-beating crowd, it was better than a sharp stick in the eye, or a negative number. The Unemployment Rate ticked up by 0.1%, because–according to at least one economist–folks felt emboldened to join the labor force and become one of the unemployed. Huh? Yep. If you’re not working, you may not be considered unemployed. Decide to look for work, though, and you are. Employers aren’t being forced to pay up to get employees, though, on a year-over-year basis, Average Hourly Earnings are up by just 1.6%, and the Average Workweek fell from 34.5 to 34.4 hours.

Revisions to last month’s data were in the right direction, however, with the headline number revised up from 114,000 to 148,000; private payrolls, to 128,000 from 104,000. Apparently, the folks at Automatic Data Processing, which is responsible for attempting to one-up the NFP report with a payrolls report that always falls on the Wednedsay prior, were tired of their report differing widely from the very number it was supposed to predict. Accordingly, they retooled its survey and came up with better approximation. The ADP Employment Change report, released on Wednesday, showed an increase of 158,000 private payroll jobs.

To paint all of this as a positive employment picture would be to ignore the Challenger Job Cuts report, released on Thursday, which showed a year-over-year increase in announced layoffs of 11.6%. Initial Jobless Claims stayed within the 2012 range, falling by 6,000 to 363,000.

For all the talk of deleveraging, a shell-shocked, skeptical consumer, and the like, it doesn’t seem like consumers are hunkered down based on their Savings Rate. That figure is released, along with Personal Income and Spending, on a monthly basis. After a brief post-Lehman Brothers spike, the savings rate has been coming steadily down to the average rate of the 2000s. The chart below plots savings as a percent of disposable income, and, indeed, we seem to be back to our old ways, close to old lows.

One of the more closely-watched series these days are the various iterations of the Purchasing Managers surveys. These ostensibly survey corporate purchasing managers–and they’re surveyed the world over. (One of the most closely watched versions might be, not surprisingly, China’s.) Here, however, is a look at four of the U.S. surveys. They include the national version (ISM Manufacturing) and three regional surveys of purchasing managers (in fact, the green line is the Dallas Fed Manufacturing survey.) I think four distinct phases are on display here, and I’ve marked them with yellow areas in the event you can’t discern them. I think the current phase reflects increasing fear among businesses that the solons in Congress will, once again, fail to rise to the occasion, pushing things to the brink. On the other hand, markets would applaud if the politicians do what all politicians do best, kick the can down the road.

It does seem, though, that the budding recovery in housing is the real deal, as is on display below in the form of the Case Shiller Home Price Index. Note that while the post-2009 rally fizzled, the current rally is significant in that it not only rose into positive year-over-year increase territory, but it broke the downtrend. This has been the engine of past recovery’s that has been running on less than all eight cylinders, and it speaks to the inefficacy of monetary policy when rates are near zero…lending can’t be made any more attractive than it is.

And now for something completely dry…

In October, a couple of chaps at the International Monetary Fund released a dreadful 46-page report, called innocuously enough, What Determines Government Spending Multipliers?, on something you might recall from Macro Economics 101, a fiscal multiplier. It goes something like this. There is a multiplier effect to fiscal policy actions. Historically, economists have assumed that something like 50% (a multiplier of 0.5) of fiscal policy reaches the real economy. For example, for whatever reason–waste and government inefficiency are good guesses–government spending of $1 billion would only increase GDP by $500 million. What the IMF economists found is that when interest rates are near zero (i.e. the monetary policy pedal is mashed to the floor), the multiplier goes up to 0.90 – 1.70. That is important to you, why? Well, because of this thing you’re so sick and tired of hearing about, the Fiscal [Policy] Cliff. In terms of sheer numbers, fiscal policy (tax cuts and spending) reductions that go away after the end of the year tally about 4.5% of GDP. No sensible economist expects Congress to let the entire 4.5% be vaporized. It seems like I’ve heard 1.5% mentioned plenty; i.e. fiscal policy reductions will reduce GDP by (-)1.5%, but the IMF’s study’s multiplier will convert that to a 1.35% – 2.55%(!) hit. But relax, it’s in the hands of Congress. Unfortunately, I think the hands look like this, my first attempt at a WR&O comic.

Next Week

Key indicators to watch.

  • ISM Non-Manufacturing (i.e. Service) Composite
  • JOLTS – Job Openings Labor Turnover Survey
  • Intial Joblesss Claims
  • University of Michigan consumer confidence

Graig P. Stettner, CFA, CMT

Chief Investment Officer

Tower Private Advisors


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