Weekly Recap & Outlook – 11.23.12

Tower Private Advisors


  • Stocks catch fire
  • Leading economic indicators send a warning signal

 Capital Markets Update

Top Stories

The ratings agencies were busy this week…

  • Moody’s downgraded France from AAA to Aa1, one notch lower.
  • Standard & Poor’s downgraded Hungary to BB, from BBB

Leading to this seemingly-perverse headline…

  • French bond rally continues despite Moody’s downgrade

On the other hand, it probably reinforces the notion that by the time the ratings agencies arrive on the scene, the fire’s nearly out.

  • Hewlett Packard took an $8.8 billion writedown of its investment in Autonomy and pushed the due diligence concep under the bus, saying it was the victim of “serious accounting improprieties.” In its own version of Black Friday, the share price was rolled back to a level last seen in September 2002, and before that, March 1995…uh huh… 1 9 9 5.
  • Bernanke supports the discussion of the Fed moving toward targeting economic variables instead of times. So for example, instead of saying rates will stay extraordinarily low through 2015, it is likely to move toward statements like, we intend to keep rates low until the unemployment rate falls below, say, 6%.
  • President Obama met with corporate leaders to talk about the fiscal cliff. Naturally, these uber-wealthy guys–including Jamie Dimon and Warren Buffett–threw themselves under the bus by supporting higher taxes on the wealthy….yawn. As was pointed out to us recently, however, those folks are wealthy earners, not necessarily all of the wealthy, so that leaves out some of the buyers of Neiman Marcus’s $100,000 chicken coop (not kidding; click here.)
  • Jamie Dimon, in particular, criticized the President for waiting for so long. Indeed, I think it was Ben Bernanke, who coined the phrase, back in February 2012. ‘Plenty of time to procrastinate.
  • High yield bonds remain on alert for bubble status, and the continued increase of funds targeting the sector highlights that risk. This week, fund family, Van Eck filed to launch a high-yield bond ETF.
  • The fiscal cliff exemplified: Pace of business investment drops at the quickest rate since the financial crisis.
  • The Economist published an article saying that capping tax deductions by the wealthy would raise more tax revenues than would raising the rates. That, however, doesn’t win as many votes from the schadenfreude (pleasure derived from the misfortunes of others) crowd. The reason why capping deductions works better is because higher rates discourage economic activity, as affected tax payers seek different ways to categorize their income.
  • Naturally, as they should, advisers “warn against tax-driven decisions.” Really, now, do you really need to sell that appreciated stock in 2012 when you otherwise had no intention of selling it….ever?

This Week

Everything economic looked pretty good this week. The National Association of Home Builders Housing Market Index suggested that homebuilders are as optimistic as they’ve been since mid-2006 even though Housing Starts and Building Permits are only back to where they were in mid-2008. All three components of the survey, Present Sales, Future Sales, and Traffic support the optimism. In addition, the optimism is understandable, given the chatter about the budding recovery in housing markets.Existing Home Sales continues to move in the right direction, albeit in fits and starts.

Hurricane Sandy has served to make Initial Jobless Claims next to meaningless, with spikes higher and lower being untrustworthy as to the economy’s strength or weakness. The chart on display below illustrates this.

Various measures of consumer confidence continue to head the right direction (above), albeit grudgingly. The latest, University of Michigan, stalled out this week, but it, too, continues to heal. All three measures remain significantly below their pre-crisis levels and will likely require some good news on the employment front to move considerably higher.

On of the more auspicious-sounding indexes was released this week, that being the Leading Economic Indicators, leading suggesting that the economy will shortly follow. If they’re headed up, ostensibly, so will the economy and vice versa. Some smart folks, however, prefer to look at a particular ratio of the three series that comprise the release. The Leading indicators are accompanies by Lagging and Coincident indicators, and a common ratio is the Coincident:Lagging indicators. The importance of considering the so-called CoLag is on display below. Naturally, a decline in the Leading series would suggest the economy is about to decline, but when the leading series is still rising, the CoLag indicator can lead the leading index, as it may do now. As you can see, the CoLag indicator is in decline mode.

Cue the Jaws music.

Next Week

Key indicators to watch

  • Durable Goods Orders
  • Q3 GDP – second release
  • Initial Jobless Claims
  • Personal Income, Spending, and Saving

Housing related indicators

  • CaseShiller Home Price Index
  • House Price Index
  • New Home Sales
  • Mortgage Applications
  • Pending Home Sales

Regional indicators

  • Dallas Fed Manufacturing Activity
  • Kansas City Fed Manufacturing Activity
  • NAPM – Milwaukee
  • Chicago Purchasing Manager survey

Graig P. Stettner, CFA, CMT

Chief Investment Officer

Tower Private Advisors


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