Tower Private Advisors
- Technical damage
- Mostly rosy economics
I’ve been busy, trying to justify my existence, trying to avoid becoming a recession statistic. Of the postings, below, I especially commend the Nonfarm Payrolls and Eye of the Storm postings, not because they’re worthy of some journalism award or represent cutting-edge insights (these are Obvious Insights, after all), but because I think they’re important to your understanding of what might be ahead. As usual, clicking on one will take you to a separate posting in the same internet browser window; the <back> button will bring you back, naturally.
- Maximum Stress Testage
- Curious Drop in Investor Enthusiasm
- Nonfarm Payrolls
- Railroad Traffic – 2009 versus 2008
- Eye of the Storm
Capital Markets Recap
It certainly looked dicey for a while there, and I’d say the coast is still not clear. We suffered some technical damage over the last couple of weeks, with the market’s (S & P 500) first dip below the 55-day moving average (yellow) since July. Today it managed to finish just below the 21-day moving average (red). What’s more, that moving average is rolling over, it’s beginning to head lower, but who knows what will happen.
We’re past the historically horrific months of September and October, and now enter into the most favorable time of the year (November to April), which didn’t work out so well last year. On the other hand, in those years when sell-in-May-and-go-away doesn’t work, the November – April period tends to work pretty well. Translation: sell-in-May didn’t work this year, so November-April has even higher odds of being positive.
Prepare to get worked up over this first one.
- Goldman Sachs, which was on the receiving end of some of those too-big-to-fail handouts, is in talks to buy tax credits from Fannie Mae. The latter is on the ropes, again, and is hoping to raise some capital. I don’t have enough time to string together some cogent analysis, but something just doesn’t seem right. Isn’t Goldie using Uncle Sam’s money to get out of paying taxes to Uncle Sam?
- Starbucks saw its profits increase to $150 million, “on store closings, job reductions,” which doesn’t sound like a path to greatness. Investors thought otherwise, and the stock ripped higher on the week.
- Jefferson County, Alabama, is poised to become the nation’s largest bankruptcy filing after some derivative-based municipal bond financing went bad, but only after lining JPMorgan‘s pockets. JPM is going to pay $75 million to settle a probe into its shenanigans. According to the Birmingham News, however, the county still has $3.2 billion of debt it can’t repay.
- Chrysler announced abysmal results this week–especially when compared to its peers–but said it expects to break even in 2010. Maybe they’ll continue to do what the Big 3 have done for a while, but this time with an Italian flare, bring back the X19
- ‘Heard of Android? It’s Google‘s cell/smartphone operating system software. Apparently, Google’s CEO says it’s at an inflection point, and I say that could spell trouble for the iPhone. Motorola is banking on that with the release of the Droid, and that could make a compelling investment case for MOT, were it not such a disastrous companies when it comes to managing successful products.
- The week’s big news had to be the Oracle of Omaha’s purchase of Burlington Northern Santa Fein a combination of stock and cash combination–at a monster premium of 30% to BNI’s closing price. Handing out shares, was something that Buffett formerly eschewed, saying it dilutes the interest of Berkshire Hathaway‘s shareholders. The soundbyte from the acquisition was this: “Most important of all, however, it’s an all-in wager on the economic future of the United States. I love these bets.” The old man does seem to be going a bit daft, however, as he agreed to a split of the B-class shares of Berkshire Hathaway at a ratio of 50:1. A value manager interviewed by Bloomberg said something to the effect that WB is mired in the 1965-1999 era. On the other hand, the Oracle appears to love railroads, and it hasn’t paid to second guess him over longer periods of time.
- Stanley Works is buying Black and Decker
- Ford is raising $3 billion to pay down its credit line in an attempt to get back to an investment-grade credit rating, according to Bloomberg.
- In a sign of what the world’s central banks may have in mind, it was announced on Monday that India would buy 200 tons of gold from the International Monetary Fund. The Indians have a certain fondness for the yellow metal, being the world’s largest buyer of bullion.
- John Reed, the former co-CEO of Citigroup, apologized for his role in supporting legislation to repeal the Glass-Steagal act, passed after during the Great Depression, which arguably shares a part in the list of things to blame for the credit crisis. In short, it kept separate the traditional businesses of commercial and investment banking.
Cut to the chase: yippee skippee . . . well, mostly
For the most part, economic releases this week were pretty positive. Unfortunately, the biggie, Nonfarm Payrolls could have been better, although, at the margin improvements could be found in it. For more color on it, check out these other postings from earlier today.
The other modest downer was the ISM Non-manufacturing (i.e. service sector) Composite. This is one of those surveys with a fuzzy line that separates expansion from contraction. Against a September release of 50.9, the October figure was 50.6, which was also worse than the guess of economists for 51.5. Considering that the service sector makes up a huge portion of our economy, it’s got to kick into gear. Its brother, the ISM Manufacturing survey, however, rose above the consensus estimate (53.0) and the September figure (52.6) to 55.7. It’s hard to believe, but that’s a record high since April 30, 2006. One of the components of the survey is Prices Paid, and it edged higher. That should be a positive for the folks at the Fed, for as a Dow Jones blog, Market Talk, pointed out, “that’s the Fed’s worse nightmare.” (Actual blog link here.) Further,
Ever notice how badly the Fed contorts its words to avoid saying deflation? Check out this chestnut from the minutes of the September FOMC meeting:
…the expected policy path shifted down further, on net, as investors apparently interpreted weak labor market conditions and generally quiescent inflation as consistent with an outlook that would lead the FOMC to maintain low policy rates over the medium term.
Also, for only the second time since the recession began, the Employment component popped firmly, and more decisively, into expansion territory. Without bothering to look it up, I think that means that survey participants see employment improving in the next six months. Of course, there’s nothing to suggest these weren’t some of the same participants who saw the world ending on March 6, like the survey participants found at the Curious Drop in Investor Enthusiasm link above. That’s another of my classic, long-winded ways of saying that survey participants can’t be trusted.
Here’s a quick rundown of the other positive sounding releases from the week. Unless otherwise noted, all are monthly changes.:
- Construction Spending: +0.8% | -0.2% expected | +0.8% previous
- Pending Home Sales: +6.1% | 0.0% expected | 6.4% previous
- Factory Orders: +0.9% |+0.8% expected | -0.8% previous
- Challenger Layoff Announcements: -50.7% | -30.2% previous (negative #s indicate fewer job cuts)
- ADP Employment Change: -203,000 | -198,000 expected | -30.2% previous
The following data points seem positive, but they have some negative implications, as well. The first item, unit labor costs, is a positive since goods we buy should be cheaper, reflecting a lower labor cost input, but they also fall into the deflation pot. The second is a positive for the economy, but it needs fewer workers are needed.
- Unit Labor Costs: -5.2% | -4.2% expected | -5.9% previous
- Nonfarm Productivity: +9.5% (!)| +6.5% expected | 6.9% previous
Not much going on next week
Thursday – MBA Mortgage Applications are released. Applications for mortgages are pushing levels last seen in 2003–and, briefly, in January 2009–but not surprisingly, the increases are coming in refinance applications. Initial Jobless Claims are released. Our forecasting quote-unquote model, calls for 496,000, while the consensus of economists is for 510,000.
Friday – we get Trade Balance figures. A trade deficit will be a marginal positive in that the dollars recycled will sop up the supply of Treasury debt. In future years, we will almost require a whopping-big trade deficit since the budget deficit is expected to stay in the $ trillions. Big Ben Bernanke might actually hope that we import some higher prices, and that’s what economists expect Friday’s Import Price Index to say, as they look for a 1.0% increase. On a year-over-year basis, however, import prices are down by (-)12.0%. Lastly, we can expect the preliminary November reading of the University of Michigan Consumer Confidence.
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.]