Tower Private Advisors
Capital Markets Recap
April 17, 2009
- Earnings season starts off nicely
- Jamie Dimon
- Stabilizing economics
This week, the Dow 30 rose by 80.68 points, or 1.00%, to 8,164.06. The S & P 500 (SPX) rose by 16.60 points, or 1.94%, to close at 873.16. The NASDAQ Composite rose by 25.37 points, or 1.54%, to 1,677.91. The S & P Mid-cap index rose by 15.97 points, or 2.98%, to close at 552.40. The Russell 2000 small-cap index rose by 14.12 points, or 1.21%, to close at 1,177.72. Finally, the Morgan Stanley EAFE(Europe Australasia & Far East) index rose by 8.70 points, or 1.41%, to close at 625.40. Today was option expiration, and that often produces some whacky action. Today was eerily quiet, and it makes us think that next week could be quite interesting.
We’re looking for a correction in stocks, although a modest one. Perhaps the reason we’re still waiting is that so is everyone else. If everyone’s waiting for stocks to fall, they won’t; that simple. If I were to hazard a guess–whatever that means–I’d say stocks are still in for a short-term setback. To far, to fast, on too much good news. Running on fumes. Beyond the short term, however, we are optimistic on stocks, although we still believe we’re in for a multi-year band of sideways action. See our post here on that theory.
The 10-year note was fairly stable, rising by just by 0.024% to a yield 0f 2.945%. The 30-year bond rose by 0.046% to 3.797%.
West Texas Intermediate Crude Oil (aka light, sweet crude) futures fell this week. The front month contract fell by $2.26, or 4.33%, to $49.98. Natural Gas was almost unchanged; it fell by $0.01/mmbtu, or 0.30%, to $3.60.
Gold futures retreated again this week, falling by $3.50, or 0.40%, to $879.80/ounce. See the ”Critical Juncture” post by clicking here. Finally, the U.S. Dollar Index gained back a little ground, rising by 0.19, or 0.22%, to $85.98.
The first-quarter earnings season continued this week. So far, 35 of 499 companies (S & P 500 sounds better than S & P 499) have reported. Not surprisingly, the positive surprises (earnings better than expected) are outpacing negative surprises (earnings worth than expected) by an almost 2:1 ratio. The average earnings growth from the year-earlier quarter has been -33.2%, and if we remove two outliers (-341% and -150%) the decline improves to -18.6%. With regard to industry groups, the few companies that have reported make for meager industry statistics (e.g. one energy company has reported), although 10% of the companies in the finance sector have reported and have beaten estimates by a cool 389.5%. Wonder why finance has been the place to be for the last month? Wonder no longer.
Heavies reporting this weekwere Intel, Goldman Sachs, Citigroup, JPMorgan Chase, GE, and Google. Next week we get 145 companies, or 36.3% of the total. Heavies next weekwill be IBM, Bank of Amerill Lynch and Wells Fargo, McDonald’s (folks still eating out?), Burlington Northern Santa Fe and Norfolk Southern (anything being shipped?)
JPMorgan Chasereported its results this week, handily beating estimates ($0.40 v. 0.32). The results were accompanied with a 28-page, masterfully-written letter by Jamie Dimon (Diamond?) to shareholders. Among other things, it repeatedly takes jabs at weaker companies, like in this gem:
In short, we did not ask for the TARP capital infusion, and we did not feel we needed it (our Tier 1 capital at year-end would have been 8.9% without it). In act, the TARP program had asymmetric benefits to those accepting it; i.e., it was least beneficial to strong companies like ours and vice versa. That said, we believe that accepting the TARP funds was the right thing to do for the U.S. financial system – and that JPMorgan Chase should not be parochial or selfish and stand in the way of actions that the government wanted to take to help the whole financial system.
You can read the entire letter by clicking here. It’s not a boastful letter (” . . . but we missed the ferocity and magnitude that was lurking beneath.”) JPM also thumbed its nose in the general direction of Goldie, saying that it could pay off its TARP funds any time it wanted to. In contrast, Goldman Sachs said it would offer shares for sale to raise funds to pay back its TARP funds.
Citigroup and Goldman Sachsalso reported estimate-beating results, but they were largely the result of trading desk results reducing–especially in the case of Citigroup–ostensibly a bank–the quality of the results. The results also suggest that larger institutions with more diverse revenue streams than traditional lending might do better sooner. Mall giant General Growth Properties filed for bankruptcy protection this week. That the market took the action in stride suggests that the filing was widely anticipated (it was) and the market is in better condition to receive such news (it probably is). General Motors is expected to give its bond holders the opportunity to become shareholders [one last time, before the courts force the action] in an offering scheduled for later in the month. It’s also taking a hard look at some of its brands, including GMC, Pontiac, and Saturn. Ebay announced it would IPO its Skype phone service, recognizing that while it has value, it doesn’t really have a part in the core PayPal/Ebay franchise.
The Boy Wonder, Treasury Secretary Tim Geithner, dismounted his high horse as the U.S. refused to label China an official–or is that officious?–currency manipulator. Desperado (“why don’t you come to your senses, been out mending fences . . . “) Geithner must have realized that the official sanctions that accompany such a tag would not be good for the state of the global economy.
PIMCO, home of the Bond King, Bill Gross, said it had increased its Government bond holdings from 15% to 28%. This comes at a time of record low yields and a Treasury/Fed intent on issuing more of the stuff. Granted, deflation won’t be an issue for a while, so the yields represent pure interest rate (i.e. no or modest inflation premium). But who are we to say that’s strange. It doesn’t pay to second guess PIMCO, although it’s not a stretch to say the firm talks its book.
Inflation looks like it won’t be a worry for some time. As can be seen in the chart below, the Producer Price Index fell to a level of 12-month change not seen since 1950. The cynic in me couldn’t help noting when the notion of “Core” CPI was created. Allegedly, economists look at core inflation because food and energy prices are so volatile as to make them impossible to forecast. Headline PPI appeared equally volatile before the Department of Labor introduced core PPI in 1973. What was different in 1973 was that inflation had rocketed to new highs and–conveniently–so-called core inflation was considerably lower (see the two horizontal red lines), allowing for an easy government spin job.
It should be a while, too, before prices become an issue at the producer level. A look at Capacity Utilization, which was also reported this week, shows that there is a lot of slack the company level. I’ve mentioned here, before, that Cap U has a bit of a problem, which is that some capacity will probably never be utilized again. So, over time, capacity utilization has declined, but our economy has not declined in like fashion. Even so, with 30% of so-called capacity unused, there exists considerable slack in which output can be increased without stoking inflation.
This week’s housing news was mixed with a slight bias to the positive. Mortgage Applications (chart below) fell by 11%, after rising by 4.7% the week earlier. There has been increased talk (read it by clicking here) that the 30-year mortgage rate could be headed toward the 4% neighborhood, so it seems perfectly reasonable that potential refinancers–the vast majority of mortgage applicants–might want to wait for a while.
The Wells Fargo/National Association of Home Builders released its Housing Market Index, and it showed improvement in all three components: Traffic of Prospective Buyers, Expected Sales in Next Six Months, and Current Single Family Home Sales. The index improved from 9 to 14. Keep in mind, though, that 50 is the demarcation line between optimism and pessimism. It may be a stretch to say that Housing Start and Building Permit data was positive, but why let that stop us. Housing starts fell sharply in March from a downward revised 572,000 (revised down from 583,000) to 510,000, well below what economists expected (510,000). Building permits fell, too, but more modestly. The case can still be made that housing starts hit their low in January as–even with March’s sharp drop–starts remain above their January lows, as the chart to the right shows.
Initial Jobless Claims fell quite sharply this week, but this series has a long way to go before we can say the employment picture has improved. Last week’s claims were revised upward from 654,000 to 663,000. The best that can be said for now is that the employment picture is stabilizing. To say that it has improved, we will want to see downward revisions in the prior data. We will also look for the 4-week moving average of claims to follow through on its recent downturn, suggesting a solid downward trend is established. One more chart.
Two regional economic series were released, one from the New York Fed, the Empire State Manufacturing index, the other from the Philadelphia Fed, the Philly Fed index. Both were considerably better than expected. In the case of the New York survey, economists expected a reading of -35, whereas the series came out at -14.65. The Empire State index is comprised of two components, a General Business Conditions index and an Expectations index. Not surprisingly, the current conditions index is improving from terrible to less terrible, while the expectations index is in positive territory. The Philly Fed looks much the same: bad current conditions, positive outlook. The Philly Fed index, however, has a Prices Paid Index, and it has fallen to all-time (post-1968) lows, confirming the low inflation–if not deflation–outlook.
Lastly, the University of Michigan Consumer Confidence figure was enough out of line with expectations to merit a mention here. Economists expected a slight improvement (from 57.3 to 58.5). Instead, the average consumer was downright excited felt better in the mid-month survey, as the index rose to 61.9. Before you get all excited, keep in mind that the reading gets us back to the April 2008, well into the consumer’s fun, as the chart below shows.
Monday - The Conference Board releases its Leading Economic Indicators. This report has three categories of indicators, Leading, Coincident, and Lagging. The leading indicators have lead the economy by four months, on average, since 1949, while the coincident indicators, as the name suggests, turn up at about what turns out to have been the end of a recession. While lagging indicators would seem to have little value, in fact, when a ratio of coincident-to-lagging indicators is considered, it turns out they do have predictive power, leading the economy by about three months. Economists expect that the LEI rose to -0.2% from -.04%. We shall see.
Tuesday – nothing
Wednesday – Mortgage Applications are released by the Mortgage Bankers Association. No consensus estimates are available.
Thursday – Initial Jobless Claims are released. Economists figure that last week’s drop will be reversed, to 640,000, and indeed it might. We’ll watch for a revision in this week’s number, see where next week’s takes us, and watch what happens to the 4-week moving average. The second bit of housing data comes in the form of Existing Home Sales.
Friday – a division of the Census Bureau releases Durable Goods orders report for the month of March. Last month’s 3.5% jump appears to be an anomaly, coming out of nowhere, after a string of six straight decreases. In fact, economists look for a 1.5% decrease, which will be quite modest compared to the string of declines. Finally, the week wraps up with New Home Sales. The chart below tells the picture. It’ll be many months before we can this series has improved.
Graig Stettner, CFA, CMT
Investment Management Services
Tower Private Advisors
This e-mail, its cynical style, ignorance of punctuation convention, and a host of other aspects, assuredly do not represent the views of Tower Bank or Tower Private Advisors. In fact, there are folks here who likely cringe upon receipt of it. If anything you have read here has offended your sensibilities, well, tough. Also, if there are typographical, grammatical, or stylistic errors above, you can see why we don’t teach English Composition. The passive tense, where used, is regretted. If you have suggestions for improvement, keep them to yourself. Just kidding . . . really; send ‘em in.