Wkly. Rcp. & Otlk – 09.03.09

Tower Private Advisors


Gone fishing





  • Red rover, red rover, sent bubba right over
  • Economics – same ol’, same ‘ol

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Capital Markets Recap

(As of Thursday AM)











Please note something we haven’t seen for a while:  the dollar has appreciated this week, as has gold.  Ned Davis Research has hinted that this could be in the works.  As the brief table above shows, however, the move in gold isn’t occuring in other commodities.  That may be the difference, as it is quite unlikely that the entire commodity complex could move upward with the dollar, since most commodities are priced in dollars.

Never wrong, just early

 Here’s a look at comment made back in the July 31, 2009, WR&O, that expressed our concern over the trouble the S & P 500 would have around 1,000.

What we can take from this is that the index should run into trouble at about 1015, which marks the 38.2% retracement, then 1122, then 1230.  1015 should prove to be a considerable hurdle for the market, maybe even more than the 1000 level, which proved to be just a rest stop on the way down.  A common criticism of technical analysis is that it works because so many people expect it to.  That may be, and you may have your own weighty criticisms, but irregardless (yes, I know) the 1015 neighborhood will prove to be considerable resistance, mark my typage, and keep in mind that risk goes up as prices go up.

We may be rubes at Tower Private Advisors, but the 1000 level of the Standard & Poor’s 500 makes us nervous.  We will likely raise some cash in accounts on a sprint through that level.  The index needs some time to consolidate the gains from the mid-July move, which it hasn’t yet had.

spx1Well, the market sprinted right through 1,000 . . . for a while.  Here’s a look at the trouble it’s had.  Right now it’s spending time churning (bouncing below a resistance level) below 1,000.  It’s likely to pull back further before a bulked-up Bubba makes another run at a decisive move to higher levels.



Top Stories

British Petroleum, sounding so imperial and dirty, has been replaced by BP–in a green logo, no less–which company announced the find of a “giant” oil reservoir deep (31,000 feet so) in the Gulf of Mexico.  Everywhere I’ve seen the story mentioned it’s been with a quotation-marked “giant.”  Perhaps that reflects the depth of the find or the fact that it’s expected to be 5-6 years before your Lawn Boy is belching Tiber-field petro, but do you want to go to Golden Corral to have the “crab” legs? or take part in the company’s workforce “enhancement” project? 

U.S. auto sales rose sharply in August, raising the worries of some that the sales were merely pulled forward from the future.  The accompanying chart shows the rebound to still below autosaverage levels.  Ford, Honda, Hyundai, and Toyota–the last three not surprising–saw their sales rise by double digits.  Government Motors and Chrysler did not.  Both lost market share, GM down by 5.1% to 19.4%; Chrysler down 1.4% to 7.4%.

Wells Fargo said it would repay its TARP funds “shortly,” but wanted to do so in a way that would show responsibility to shareholders.  That’s a quaint notion, considering the way it husbanded shareholder capital in buying Wachovia, which company’s past is littered with gunshot wounds to the foot.

According to Bloomberg, an analyst at Friedman Billings Ramsey estimated the value of Freddie Mac and Fannie Mae–combined, separate, or otherwise–as zero, zilch.  Curious then, that–as occasional blog commenter dave pointed out on August 24, here–recently the trading volume of those two comprised, according to Barron’s, 1:10 shares traded on the NYSE.  Here’s an excerpt from the Barron’s story.

Both have done that on a meteoric bulge in volume, replicating Friday’s performance. With nearly 650 million shares of Fannie, and 300 million shares of Freddie, moving in Monday’s trading, the two are a lock to move more than 1 billion shares in the session. With less than 10 billion shares figuring to change hands on this summer Monday, it stands to reason that one out of every 10 shares of stock traded Monday will be either Freddie or Fannie.

The question is: what are those investors – and, arguably, we’re using the term loosely – getting for their enthusiasm? Many analysts believe the equities of the two concerns, which the government placed in receivership last year when they two were collapsing, are worthless. Morningstar set the value of Fannie and Freddie shares at zero, ”barring a ridiculous public policy decision by the government.” While you wouldn’t ever rule such a development out completely – hey, bet against the government to do something lunk-headed? – you wouldn’t rule it in, either. And especially not for the chance to pay twice as much for the privilege as you would have done less than a week ago.

Finally–at least in my estimation–Disney announced it would acquire Marvel Entertainment, introducing Spider Man to Mickey Mouse.

This Week

Unfortunately, your faithful servant will not be able to edify you on this week’s most important release, tomorrow’s monthly Nonfarm Payrolls report for August.  Always subject to change, the consensus of economists is that jc230,000 jobs were lost in August.  That will mark another improvement of sorts for employment, as the chart below shows (click to enlarge).  Initial Jobless Claims released this week (shown at right) didn’t offer much hope either, although the larger, overall trend is going the right way.  The 4-week moving average rose in August.

nfpThis improvement and others are starting to produce–possibly only–hopes that we might shortly see a positive number.   That was suggested in a Credit Suisse First Boston report yesterday.  Alas, the ADP Employment Change index, released yesterday, didn’t give any hope that this would be the month, as it fell by (-)298,000 versus the expectation for a loss of (-)250,000.  Promisingly, however, the human resources/staffing firm of Challenger Gray & Christman released its Challenger Job Cuts report, which reports on mass layoffs, and it had fallen by (-)13.8% from August 2008.

The Chicago Purchasing Managers Index rose to 50.0, from 43.4 in July and above economists estimates of 48.0.  Traditionally, the 50 level has been the demarcation line between expansion and contraction, although some have said the line should be in the high 40s instead.  Milwaukee’s version of the index jumped to 56.0 (45.0 and 48.0, respectively).  The national version of these purchasing managers surveys, ISM Manufacturing, also improved, rising to 52.9 from 48.9 in July and above estimates of 50.5.  The report was broadly positive but raised at least a few points.

  1. The Prices Paid index rose sharply, and that appeared to push Gold  higher over fears of inflation, which seem premature, but Treasury yields barely budged, as evidenced by the chart to the right.10yr
  2. More troublingly, Inventories  expanded only modestly in August.  July . . . August . . . September . . . the three months of quarter three.  This is supposed to be the quarter where we see a positive GDP figure on the strength of inventory rebuilding.  Two-thirds of the quarter is gone, and there is scant evidence of any growth in inventories.
  3. The ISM and Purchasing Managers reports are good indications of sentiment, but they’re only surveys of people.  They are not backed, per se, by data.  That makes them slightly less reliabile.

Speaking of gold, the sharp folks at The Liscio Report put out a timely piece that included comments on the correlation between gold and inflation.  Suffice it to say that, like so many belwhethers, its reputation is more fiction than fact.  The first chart below shows the correlation between gold and the Consumer Price Index, and it’s easy to see that gold should not be considered the inflation canary-in-the-coal-mine many claim.  In fact, Phillippa Dunne points out, in the second chart below, that labor strikes–and their wage inflation implications–are better predictors of inflation.



Housing data was limited this week, with just two reports.  Those included the weekly Mortgage Applications Index, which fell by a modest 2.2%, and Pending Home Sales, which rose by 3.2% from June and 12.9% from July 2008.  The recent caveats about distressed sales probably need to accompany the pending sales release.

Next Week

Tuesday – the change in Consumer Credit is announced, and economists expect it to have contccracted by $3.6 billion, considerably less than June’s $10.3 billion drop.  Contracting consumer credit is not what expanding economies are made of, and the contraction has been significant, as the chart to the right (click to expand) indicates.  In case you don’t see the significance, let me help:  the current episode marks the first net contraction of consumer credit since 1943.  If you want to put on rose-colored glasses, you might see this as borrowing capacity with which to juice the economy once it starts to perk up.  You go right ahead and think that.

Wednesday – where does the time go?  It seems that just last week we were privileged to see the Fed’s Beige Book, the monthly report from all 12 Federal Reserve districts, bereft of fancy graphics, chock full of stuffy prose.  Well, it comes out on this day.

Thursday – July’s Trade Balance figures are released.  They are expected to show a further, albeit modest, tradecontraction in the trade deficit, balance being a misnomer.  It’s a Balance of Payments, the trade deficit balanced out by the capital surplus–but, who cares.  You’re thinking this is great, we’re importing less Chinese stuff.  We’re on our way to Fortress America.  What it means, however, is that there are fewer dollars that need to be recycled into, among other things, those Treasury notes illustrated above.  Thank the Chinese for keeping our interest rates so low, which helped fuel the housing bubbl–oh, never mind.  Without that natural lid on interest rates, we’re likely to see higher rates, and on a projected national debt of ~$20 trillion–not counting Social Security and Medicare–higher rates are anathema.  Intial Jobless Claims will be announced, and given this week’s figures (0 change +4M revision), we’ll look for 574,000, not at all threatening the trend shown above.

FridayImport Price Index is released.  Economists look for a near reversal of July’s (-)0.70% drop with a 1.0% increase.  Wholesale Inventories are expected to have contracted further–economists expect both that and an inventory-led rebound in Q3–by (-)1.0%.  Consumer attitudes are revealed with preliminary figures for the University of Michigan Consumer Confidence.  Economists expect a further improvement, albeit modest.  Finally, the Federal Government’s Monthly Budget Statement should put you in a foul mood for the weekend.  Economists estimate that the budget deficit was (-)$174.0 billion in August.  Annualize that by multiplying by 12, and you get a 2009 budget deficit of $2.09 t r i l l i o n.

Hoping you have a fantastic Labor Day weekend, I remain,

Graig Stettner, CFA, CMT – Vice President & Portfolio Manager – Tower Private Advisors


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