Tower Private Advisors
- Dollar rally continues
- Take a survey
- Positive economic news
- Winners and Losers as the Dollar Falls
- In spite of the fact that you still have a tendency to write 2008 on your checks, another year is wrapping up. Here is a timely reminder of some year-end Health Savings Account considerations.
Capital Markets Recap
Last week you were warned about the imminent breakout of the dollar. It looked like it would take out its 55-day moving average, and it did so, decisively, this week, as the chart below evidences. The dollar should be able to continue to rally for a while before running into resistance (red ovals). The downward sloping trendline has been decisively broken, suggesting, too, that the near-term trend is upward. The effect on gold, crude oil, and most commodities was quickly evident. Broad measures of stocks, however, suggested that stocks were little phased by the dollar strength.
I’ve seen the case made, and I’ve made it here, that there has been too much skepticism for the rally in stocks to end just yet. Retail investors have bailed into bonds this year, fleeing stocks. The November outflow from equity funds was the second largest this year. PIMCO’s Total Return bond fund is slated to become the world’s largest mutual fund–a bond fund! That tells me a big[ger?] risk is in bonds than is in stocks, although the bigger downside risk is in the latter. On the other hand, a rally in the dollar will put the hurt to all assets.
I’d be curious what you think about that and the chart on display below.
Here’s a familiar depiction of the emotions involved with investing. Just so I can’t be accused of plagiarizing, you can click on it to see the original. Better yet, click here to see a really cool website (clicking it will open a new browser window.) Anyway, I’d like to know where you think we are as a society, because it seems clear that stocks are at optimism. Take ten seconds and make your selection at the survey below.
In the words of the Guess Who, “got, got, got, got, got no time . . . ”
Cut to the chase: almost all good news
On balance (I don’t know what that means), the economic news was of the bullish variety this week. Getting the bad news out of the way, the National Federation of Independent Business released its mis-named NFIB Small Business Optimism index. It fell to 88.3 from the 89.1 October reading. The other negative item was Initial Jobless Claims, which rose by 17,000 to 474,000, above the prior reading of 457,000 (un-revised) and expectations for 455,000.
For the first time in a year inventories–Wholesale and Business varieties–rose. The inventory situation has been perking up, but only in terms of more gradual contraction. Ben Bernanke referred to the phenomenon, although that was not a metaphor of his crafting. This development would have to be called a green stalk–or some other equally-unimaginative metaphor. Here’s my favorite thing, a picture. The dotted green line depicts the zero change line. What with every rose-colored lens banking on inventory rebuilding to boost the economy, the markets necessarily yawned at the releases, but this data does (these data do?) reinforce the likelihood of a strong Q4 GDP number.
As predicted here last week in a huge intellectual stretch, the MBA Mortgage Application index rose in response to record low mortgage rates. The index, however, includes both purchase (middle panel, below) and refinance applications (bottom panel, below), which tell different stories. The former index tells a story of a sick sector (i.e. residential real estate), while the second tells a story of a consumer with more disposable income, and you can read the story below.
The Trade Balance was lower in October than in September and lower than expected. Yippee! we’re importing less than we’re exporting relative to September, but every contraction of the trade deficit reduces the amount of dollars leaving the U.S. that have to be brought back here, most likely in the form of Treasury purchases, which has helped keep our interest rates low.
Retail Sales were stronger than expected in November with both headline (i.e. all-in) and core retail sales (i.e. net of autos and gasoline) rising more than expected. That apparent confidence was echoed in today’s very-strong University of Michigan Consumer Confidence figure, which rose to 73.4. That blew away both the final November reading (67.4) and the dismal scientists’ guess (68.8). Surprisingly–to me, at least–the vast improvement came in the form of the Current Conditions reading and not in the Expectations reading. Most of the sentiment surveys–business and consumer–include a reading of the current and future situation, and it’s been strenght in the [notoriously-fickle] latter reading that has produced improvements in headline sentiment readings. Not this time as the chart below shows. The vertical red lines mark the recent peak in sentiment. The middle panel is the current conditions index; the bottom panel is the expected conditions panel. In the first half of December, consumers gauged their current conditions to have improved more than their anticipated conditions.
I would guess, though, that when one says that the stock market is a discounting mechanism, it has discounted more than this sort of improvement. Indeed, this week the S & P 500 has fallen by (-)0.02%.
Lots to move markets
Tuesday - the Producer Price Index is released, and economists are looking for higher wholesale prices, whether of the headline or core variety. We get a look at consumer prices on Wednesday. The Empire State Manufacturing index is due out. Economists expect a reading of 25, which will be lower than recent highs, but modestly higher than the November reading. This is one of those sentiment indexes, the strength of which has been driven by the expectations component. Later in the morning we get the twin release of Industrial Production and Capacity Utilization. Both are expected to have ticked up. The first housing datapoint comes in the form of the NAHB Housing Market Index, another sentiment survey, this time of homebuilders. Economists expect a 1-point improvement, which will leave the index a couple of points below the recent high. The components are 1) current single family sales somewhat objective; 2) expected single-family sales; and 3) traffic of prospective home buyers.
Wednesday – As usual, MBA Mortgage Applications index is released, but the Housing Start and Building Permits data release at 8:30 will swing a lot more weight. Both took a nasty turn south in November, and it’ll be important to ascertain if that was a one-off event or the start of something more sinister. The Consumer Price Index is due out. Like the producer version, all varieties (headline/core or monthly/yearly) are expected to head up. Here’s a video you might find interesting on the subject of inflation, although since we’re still in disinflation mode, the popular term is reflation, and that’s the basis for a lot of crowded trades (e.g. bearish dollar view/bullish commodity view). The smirk says I’m brilliant; the hair says New York. I’m jealous–at least of the hair. Mr. New York talks about the dollar and its effects on risk assets, something we’ve belabored, of late. When you click on the picture the video will play in a separate browser window.
Wednesday is wrapped up with the Federal Open Markets Committee’s decision on what to do with interest rates. Their answer now, and for a long time in the future, will be a resounding nothing. The Federal Funds rate, the anchor of all interest rates, is going to stay at the current level. The press release, however, won’t say nothing; it’ll be carefully examined for hints of what the Fed’s thinking.
Thursday – Initial Jobless Claims are released at 8:30, and economists expect them to be 466,000, which will mark a decline of 8,000 from this week’s data. Our forecast doesn’t care what economists thing. It’s cold calculating and–boom!–says 491,000. We’ll see. Leading Economic Indicators are set to rise again. If so, that’ll mark the eighth straight time this year, after six straight negatives. Economists think the Philly Fed index will contract a bit, but if so, it’ll still be in post-recession territory. Economists are occasionally wrong, of course.
Friday – no economic releases are scheduled, but options expire, and that always makes for some interesting action in markets.
Have a smashing weekend.
Graig Stettner, CFA, CMT
Vice Presidend & Portfolio Manager
Tower Private Advisors