Capital Markets Recap
May 29, 2009
I’m forced to dispense with flowery prose on account of an early departure today.
|Current||Last Week||$ Chg||% Chg|
|DJ Industrial Average||8,401.17||8,292.13||109.04||1.31%|
|S&P Mid Cap 400||569.33||554.09||15.24||2.75%|
|NASDAQ Composite Index||1,750.44||1,695.25||55.19||3.26%|
|Dow Jones World & Region – World x U.S.||164.86||159.57||5.29||3.32%|
Equity market action can best be described as “yawn.” Stock markets are stuck in a range. The S & P 500 is depicted in the chart close by. I suspect we’re going to have a June resolution to this small band of sideways trading as the market is forced to confront the 200-day moving average (the declining green line in the thumbnail). Expect a number of sellers to emerge there in what could be a pitched battle–an apt metaphor.
|Current||Last Week||$ Chg||% Chg|
|30-year Treasury Bond||4.54||4.31||0.24||5.45%|
For reasons described below, the rise in Treasury yields is troubling. The chart below shows the steepness of its move. It also shows a trendline that served to reverse the move. When looking at trendlines, it’s best to view the first two touches (numbered) of it as entirely coincidental. The third touch (numbered), however, confirms the trendline.
|Current||Last Week||$ Chg||% Chg|
|Light Crude Oil – Continuous Contract||65.08||61.05||4.03||6.60%|
|Natural Gas – Continuous Contract||3.96||3.60||0.35||9.83%|
|Gold – Continuous Contract||961.50||951.20||10.30||1.08%|
|United States Dollar Index||79.39||80.56||-1.17||-1.45%|
Courtesy of the declining dollar, commodities rose this week. The dollar, while sharply oversold, now hovers below $80 support. No bounce, yet, but it’s due. In the meantime, commodities and the related equities, continue to move higher.
Direct from Bloomberg:
GM Will File for Bankruptcy June 1
Ackman Nominees to Target Board Rejected by Retailer’s Investors - Bill Ackman is a well-known activist hedge-fund manager–perhaps most well known for his agitation at Target. He wants the company to package up its real estate and spin it off as a REIT.
Dell’s Sales Miss Estimates as Consumers Delay PC Purchases
Geithner Will Urge China to Boost Domestic Demand – This one is really comical. The U.S. Treasury Secretary is going to go to a sovereign nation and tell its leaders that they need to encourage more spending. And who will that benefit? Exactly.
AOL is Worth Half of Facebook, 5% of Google as $124 Billion Merger Undone – Time Warner is finally unwinding its ill-timed acquisition of AOL, made just about at the peak of the internet bubble. The Facebook comparison is timely, as that company is expected to get a $200 million investment from a Russian party.
Facebook is Worth More Than Starbucks, Alcoa, Campbell Soup – where have I read this plot line before?
Will someone please tell the stock market that interest rates are rising. This is not a good development. The 10-year Treasuryhas begun to rise sharply, and it might tie in nicely with the following Bloomberg headline: Bond Vigilantes Confront Obama Credibility as Bernanke Housing Aid Falters. In the late ’70s and into the early ’90s bond investors were known as vigilantes as they pursued inflation on their own, demanding higher yields for inflation, regardless of the company line. The rise in benchmark interest rates is troubling for the following reasons:
They underpin mortgage rates, and low mortgage rates are key to housing affordability and a healing of housing, in general.
Benchmark interest rates are used to discount future cash flows (i.e. earnings), and higher discount rates lower present values.
Bonds compete with stocks for investment dollars. At the margin, higher bond yields make bonds relatively more attractive than stocks.
The increase also suggests that the Federal Reserve’s Quantitative Easing program (i.e. printing money and buying Treasury bonds) isn’t working. It also suggests that some might be worrying about the inflationary implications of drunken-sailor spending by the government.
See comments on Conference Board Consumer Confidence by clicking here.
See Mortgage Delinquency thoughts here.
We seem to be running out of Bernanke’s green shoots for two reasons. (Speaking of green shoots, if you’re tired of the phrase, head on over to CNBC’s website (here) and vote for your favorite replacement. Choices range from “meadow muffins” to “bamboo roots.”) First, it’s one thing to have moderation in the decline, but it’s still a decline. In the words of John Mauldin, the bucket is still leaking. At the risk of taking the metaphor too far, the shoots are going to start wilting soon. So, we have to start seeing some actual improvement improvement. In other words, what have you done for me lately? Second, some of the indicators are either continuing to get worse or are backing off from earlier improvements–not the improvement improvement type.
In the second category, the Case-Shiller Home Price Index–the national version–recorded its worst yet annualized decline as you can see in the chart below. Whereas economists looked for an 18.7% decline, the index fell by 19.1%–not exactly a disaster, but no green shoots there, although the rate of decline has moderated. Oh, and the week’s 14.2% decline in mortgage applications isn’t helpful.
Also in the second category is the Chicago Purchasing Managers Index, which had posted a nice bounce, but which fell sharply in May. Economists had expected a further improvement, from 40.1 to 42.0. Instead, the reading was 34.9. This is an economic series that can provoke market responses–ostensible ones, anyway, as I’m loathe to attribute much to a single data point–since it often foreshadows the nation version (ISM Manufacturing), which is due out next week. Suggesting that we’re in a bull market of some duration, the news was shrugged off by Mr. Market.
First quarter 2009 GDP was revised slightly upward in today’s Preliminary release. Economists thought the revision might be from -6.1% to -5.5%. Instead, it improved to -5.7%.
Finally, Initial Jobless Claims came out at 623,000, which was below our key 641,000 level, and it was better than economists guess of 627,000. Unfortunately, last week’s figure was revised upward, from 631,000 to 636,000.
Speaking of a guess, I’m going to start to provide one here for Jobless Claims in an effort to show you how ridiculous it is that economists get paid to make meaningless forecasts. And getting paid means getting paid well into the six figures. I’m also paid well into the six figures, when you include the decimals. In perfect transparency, I’ll tell you how we’re going to get it. We’ll take the difference between the current week’s result and the prior week’s preliminary result and adjust it by the revision. Finally, we’ll add the resulting figure to the current week’s result. For example:
Last week’s figure was 631,000
This week’s figure was 623,000, for a difference of -8,000
Last week’s figure was revised upward to 636,000, or by 5,000
So, we’ll add -3,000 (-8,000 + 5,000) to this week’s release of 623,000
Our estimate for next week is 620,000
Let’s see how we do. I’m guessing that the Weekly Recap’s estimate won’t perform any worse than the Dismal Scientists.
Monday – Personal Income and Personal Spending will be released and will give us an idea of the consumer’s profligacy or frugality in May. Many commentators are saying that the savings rate will be heading much higher, and thus muting spending. It’s in these releases that will be determined. While a higher savings rate is better for individual households–witness China where its stimulus plan will be paid for out of savings–it’s not so good for the economy, where we are usually pulled out of recession by consumer spending. ISM Manufacturing, the national version of Friday’s Chicago Purchasing Managers Index, is due out. Economists, innovative lot they are, are using the same estimates as they did for the Chicago index. To review: previous release was 40.1; current estimate, 42.0. As with all the diffusion indexes, 50 separates expansion from contraction.
Wednesday – ADP Employment Changeindex is released. Recall that this index front runs Friday’s Nonfarm Payrolls report, but, so far, it hasn’t done so well. That’s not stopping the economists. They expect the figure to be -530,000 for both it and Friday’s biggie. Later in the morning we get ISM Non-manufacturing (i.e. service sector). With a last reading of 43.7, it’s the closest of the diffusion indexes in getting to expansion territory, and economists hope it nudges closer, as they estimate a release of 45.
Thursday – Initial Jobless Claims are released. No consensus estimate is available, but we have our own: 620,000. Keep in mind 641,000.
Friday – the biggie for the week is the monthly Nonfarm Payrolls report. All other reports will pale in comparison. The figure for April was (-)539,000. Economists look for (-)530,000. They expect the manufacturing sector shed 150,000 jobs. The Unemployment Rate is expected to have inched closer to the Stress Test’s “more adverse” level of 10%, as economists look for 9.2%.