Friday, June 18, 2010
Four of the five data points that can help determine if we are headed for a 'double dip" recession have now been released. Last week retail sales fell 1%. On Wednesday, Housing Permits fell over 35,000. Meanwhile last week saw May's final M1 and M2 numbers improve. With the exception of Congressional action to help out the states (which is looking distressingly unlikely), today saw the last of the other pieces of data.
The monthly data released this week showed that Leading Indicators for May were up 0.4%, as bond yields, M2, and an increased manufacturing workweek counterbalanced declines in the stock market and housing permits. Industrial Production and Capacity Utilization also were both strongly positive, up +1.2% and +1.0% respectively. Housing permits and starts both dropped, -36k and -66k. Commodity, Producer, and Consumer Prices all were in deflation. -2.8%, -0.3%, and -0.2%.
Turning to the weekly indicators:
The ICSC reported that year over year sales were up 2.9% from last year for the week ending June 12, but off -0.7% from the previous week. Shoppertrak reported that sales increased 5.5% YoY for the week ending June 12, but fell 2.8%compared with the previous week that included the Memorial Day weekend.
The price of Gas declined again to $2.70. Gas is now off $.20 from its high of $2.90 in April. The 4 week average of usage last week remains very slightly down from last year, again suggesting that the price of Oil did begin to "bite" and suggesting a slowdown. The price of a barrel of Oil is less than 10% higher than last year at ~$76/barrel. It is somewhat disconcerting that, despite the EUro remaining near its multiyear lows, Oil has nevertheless made up about 50% of its decline from nearly $90/barrel.
The BLS reported 472,000 new jobless claims this week. This was a bad number. As I have said before, while we have no way of knowing from what sector this continued elevated level of layoffs is coming from, the monthly jobs reports make me suspect that it consists of construction jobs post expiration of the housing credit, and state and municipal workers. I strongly suspect that laid off Census workers are now also contributing to this total.
Since housing is so important, especially now, I am adding the MBA mortgage indexes to my weekly reports. For the week ending June 11, the Composite Index increased a seasonally adjusted 17.7%. The Refinance Index increased 21.1% over the previous week, while the Purchase Index increased 7.3%, the first increase since it went into a five week week tailspin. The four week moving average for the Market Index was up 3.8%, and up 5.5% for Refinancings, but still down 1.7% for Purchases.
The American Staffing Association did not publish a weekly index of temporary employment this week.
Railfax showed an improvement in cyclical loads this week, mainainting the advance compared with last year, but not improving on that.
Weekly M2 was up slightly; weekly M1 declined slightly. M1 is still over up 3% YoY in real terms, and "real" M2 has also turned positive, but not enough to signal that we are out of the woods.
But I have saved the best for last. Twelve days into June, the Daily Treasury Statement shows $89.8B in withholding taxes collected compared with $82.0B last year, a gain of $7.8B, or 9.5% YoY! For the last 20 reporting days, withholding taxes for 2010 are $123.4B vs. $120.6B a year ago, a gain of 2.3%. Remember that the last two weeks of May were positively awful, pulling in less than May of 2009. That situation has completely reversed. If this keeps up even one more week, it will strongly suggest a big upside surprise in June nonfarm payrolls (perhaps as employers who hesitated to hire in May due to the situation in Europe, pulled the trigger in June).
We have enough "juice" to give us a decent Q2 GDP, and the coincident indicators ex-retail sales look strong. The deflationary pulse and the strong decline in housing, together with the surprising resilience of Oil prices are of concern about Q3.
Layoffs continue at a rate not consistent with a recovering jobs market. Initial claims rose 12,000 in the June 12 week to 472,000 with the prior week revised 4,000 higher to 460,000. The four-week average slipped slightly to 463,500 but is still about 10,000 higher than this time last month which points to another disappointing monthly employment report.
Here's the chart of data:
This number has been moving sideways for most of 2010. This is not a good chart -- any improvement has long-since stalled.
"The index points to continued, though slower, U.S. growth for the rest of this year," says Bart van Ark, chief economist of The Conference Board. "Public debt and deficits weigh heavily on growth prospects on both sides of the Atlantic. We project a serious slowdown in European growth in 2011, which could further weaken the U.S. outlook."
"The LEI for the United States has been rising since April 2009, and though its growth rate has slowed in 2010, it is well above its most recent peak in December 2006," says Ataman Ozyildirim, economist at The Conference Board. "Correspondingly, current economic conditions, as measured by The Conference Board Coincident Economic Index® (CEI) for the United States, have been improving steadily since November 2009, thanks to gains in payroll employment and industrial production."
Let's look at the data:
First, note that last month's decline was revised to .0%. In addition, note the coincident indicators are increasing. Both of these are important developments. However,
In the above chart, I've placed a square around the good points and left the bad points unmarked. Note there some major bad things that occurred; it's just that the good points outweighed the bad. This is not a good development -- that there are drops in five of these indicators. In addition, there are some important drops -- especially those in building permits and manufacturers new orders of non-defense capital goods. The point is that while the overall index went up, there is renewed issues of concern about some of the numbers.
However, there are fundamental reasons why there are weightings to some of these indicators -- some points are obviously more important than others. Hence, the fundamental reason why the index increased last month despite the drops in some important issues.
As NDD points out below, the drop in building permits is very troubling. New construction is very important for economic activity. In addition, I would add that I am deeply concerned with the initial claims numbers -- that number has been flashing for a while now.
Let's start with the importance of tech. Notice that prices of the QQQQ are now above the 50 day EMA and key resistance (a) which is now technical support. Also note that tech has advanced above the 50 day EMA (b) using the 50 day EMA as technical support. This is the farthest that any of the key averages have advanced. As such, tech is "leading the way" higher. Keep your eye on NASDAQ.
Unlike the QQQQs, the SPYs have found resistance at the 50 day EMA (b). In other words, the SPYs still have a technical hump to overcome, which explains the importance of the QQQQs to the overall market.
From a daily perspective, the SPYs opened yesterday by gapping higher (a) but then falling. They then spent most of the day in "barbed wire" -- the situation that occurs when prices are entangled with the EMAs and the EMAs are in a very tight configuration. However, note that prices had a late day rally (c) on increasing volume -- always a good development.
On the longer chart (10 days) notice the SPYs had a double bottom (b) followed by a strong raly (b). In that context, yesterday's prices were a sideways move (c).
One of the key markets I've been watching is the long-end of the Treasury curve. This part of the market has benefited from a flight to safety -- as traders became concerned about the EU situation they purchased US Treasuries because of their perceived safety. We've now seen tow false tops -- the island reversal and now the triangle. Prices for the IEFs and TLTs moved higher yesterday, indicating the flight from safety will last at least another few days. This means the current stock rally still has issues for some traders.
The technicals of the Treasury market do show weakness, however. The MACD is declining and has given a sell signal (a). The A/D line shows money in general is flowing out and (b). The CMF is weak as well, although it has just turned positive.
Finally we have industrial metals. While this area of the market has been in a rally for the last week or so (a and b), it is now selling off in a standard correction.
Thursday, June 17, 2010
Production in the U.S. rose by the most since August and builders broke ground on fewer homes than projected, showing manufacturing is sustaining the recovery as the housing market retreats following the expiration of a government tax credit.
Output at factories, mines and utilities increased 1.2 percent last month after a 0.7 percent gain in April, a Federal Reserve report in Washington showed today. Housing starts fell 10 percent, the biggest decline since March 2009, according to figures from the Commerce Department.
Companies are rebuilding inventories and investing in new equipment as rising overseas demand drives profits at manufacturers including Deere & Co. Another report today showed producer prices fell last month, giving the Fed scope to keep interest rates near zero to sustain the recovery as less government spending and the European debt crisis hurt growth.
This is something we've been discussing for a long time.
Republicans and a dozen Democratic defectors in the Senate dealt a defeat to President Barack Obama Wednesday, just days after he pressed Congress to renew pieces of last year's economic stimulus bill.
A catchall measure combining jobless aid for the long-term unemployed, aid to cash-strapped state governments and the renewal of dozens of popular tax breaks for businesses and individuals failed to muster even a majority in a test vote, much less the 60 votes that would be required to defeat a GOP filibuster.
Now, Obama's Democratic allies have been forced back to the drawing board in their efforts to pass the measure, which also would protect doctors from a looming cut in Medicare payments and raise taxes on investment fund managers. A new, scaled back version of the measure is likely to be revealed Wednesday afternoon.
Just on Saturday, Obama made a plea for the measure, including $24 billion in aid to cash-strapped state governments to help avoid tens of thousands of layoffs and ensure the economy doesn't slip back into a recession.
To try to revive the bill, top Democrats are expected to roll back last year's $25 a week increase in unemployment checks and give doctors just a short reprieve from scheduled cuts in their Medicare payments instead of relief until the end of next year. Democratic leaders promise to restore the $24 billion in state aid that was struck by Wednesday's vote.
It's just like 1937 all over again.
Last week I wrote that "If we are going to have a double-dip, I would expect permits to follow the MBA index to new lows. On the other hand, if the consensus estimate of 655k permits issued in May turns out to be correct, and there is a rebound in housing permits this month, then the odds of a double-dip become very low."
Like retail sales last week, yesterday's news on housing starts was decidedly not good. Housing Permits continued to decline sharply from their March high of 685,000, to 574,000 in May on an annualized basis (The all time low was 522k in March 2009).
The silver lining is that, after declining 6.7% last week, the MBA purchase index increased 7.2% this week. I don't have an updated graph of the MBA purchase index, this one is from two weeks ago:
With yesterday's data, the MBA purchase index is slightly above the last point on this graph.
As Bonddad has pointed out, the Industrial Production and Capacity Utilization numbers yesterday were excellent -- manufacturing's V-shaped recovery continues. But they are coincident, not leading, indicators.
The good news is, I strongly suspect the post-$8000 collapse in housing permits is near or at bottom. This is supported by the rebound in the MBA index, even if it is only one week's data. The more important question is whether there is a quick, significant rebound up above 600,000 building permits, or whether we languish in the 500,000s for a number of months. I am inclined to believe there will be a rebound, and although Calculated Risk has cautioned me that permits and the MBA purchase index only have a loose relationship, continuing to track that index is going to be our most timely indicator.
Bottom line: yesterday's housing permits number increases substantially the likelihood of a complete stall, if not a double-dip, in the economy in the third quarter.
With the QQQQs, IWCs and IWMs, notice we have the same basic technical situation. All prices have broken key resistance levels (a). In addition, prices are above the 200 day EMA and the 10 day EMA has turned higher (b). Momentum has given a buy signal (c) and with the esception of the IWMs, none of these averages saw a mass exodus even during the sell-off (d and e).
We're still waiting for the IEFs and TLT to give us a signal about whether or not they are going to break higher or lower. But we should know in the next few days what they are going to do.
Agricultural prices may have broken key support yesterday (c).
On the daily chart, notice that prices have broken through technical resistance and the EMAs (a) and that the 10 day EMA is crossing over the 20 (b). While the MACD has given a buy signal (c) note how weak volume is (d and e). Simply put, there is not a great deal of enthusiasm for this particular security.
Wednesday, June 16, 2010
Although this morning's earlier housing starts report disappointed, industrial production certainly did not-coming in hotter than expected. Overall industrial production in May surged 1.2 percent, following a 0.7 percent boost the month before. The latest number was stronger than the consensus forecast for 1.0 percent.
Manufacturing has been robust over the last three months with this component gaining 0.9 percent in the two latest months and jumping 1.2 percent in March. For other sectors in May, utilities output was up 4.8 percent and mining slipped 0.2 percent.
A jump in motor vehicle production added significantly to May's overall production boost. Motor vehicle production jumped 5.5 percent, following a 1.4 percent dip in April. Nonetheless, gains were widespread in other industries.
On a year-on-year basis, industrial production improved to 7.6 percent from 5.2 percent in April.
Capacity utilization continues its upward trend, reaching the 74.7 percent mark in May from 73.7 percent the prior month. May's figure topped analysts' forecasts for 74.5 percent.
Clearly, manufacturing continues to lead the economy despite concern that exports could slow to Europe. Apparently, demand for U.S. goods remains strong domestically and in many overseas markets. On the news, equities futures and interest rates firmed. The earlier news on weak housing starts had weighed on both.
Here's a chart of the data:
The French government on Wednesday unveiled plans to raise the retirement age from 60 to 62 and increase taxes on business and the wealthy to eliminate a gaping hole in France’s pay-as-you-go pension system.These are issues all OECD countries are going to face in the coming years: how do we pay for social programs, especially those that benefit older members of the population at the same time the number of people contributing into the system are declining. These are extremely difficult questions, not only from a moral perspective but from a political perspective.
The overhaul, which includes tax increases worth €3.7bn a year, is intended to return the pension system to balance by 2018, a year in which it is forecast to record a deficit of €42.3bn if not reformed.
However -- is this the time to do it? In an ideal world (in which politicians have an IQ higher than that of the average toaster) spending increasing in a downturn to limit the negative impact of the recession and decreases when the economy gets on track. As the economy expands, the government increases taxes/fees etc... to pay for the expenses incurred during the recession. However, are we far enough in an expansion to warrant these types of moves? My answer would be no -- especially with some EU countries looking at near collapse.
As I noted last week in this post the economy is still too fragile for these types of austerity moves. While the US has seen three quarters of growth, the unemployment rate is still too high and needs to be dealt with. Countries in the EU area are in worse shape from a growth perspective. This is simply not the time to be doing this.
Yesterday I noted the 110 area provided a great deal of technical resistance. Yesterday, prices blew through that level. Also note the 10 and 20 day EMA are increasing and the 10 day EMA is approaching the 20 day EMA.
On yesterday's daily chart, note prices gapped higher at the beginning of the day, then used the 20 minute EMA as technical support for the remainder of trading. Finally, prices closed at their highest level on a nice volume spike. Simply put, this is a textbook rally.
Industrial metals also broke through important technical resistance yesterday (a). Also note that for the last month and a half, prices have been falling on decreasing volume (c). Finally, notice the EMA picture is in the initial states of a turnaround (b) -- the 10 day and 20 day EMAs are rising and the 10 day EMA is about to cross over the 20.
On the daily chart, notice the up (a), consolidation (b) and further up (c) pattern.
However, we are still not seeing a complete end to the flight from safety trade, as the Treasury market is still near technical support, consolidating in a triangle pattern.
Gold looked to be printing a double top (a). However, the recent increase puts a dent in that theory. While there is still a strong uptrend in place (b), the technical indicators indicate a certain amount of weakness -- the MACD is moving sideways (c), the A/D line printed a lower number on the second top and the CMF is also dropping. I should add that I think chart information (price, candles and EMAs) are more important that the lower indicators, but that doesn't mean the indicators don't tell us meaningful information.
Finally we get oil which is clearly in a reversal. After bottoming, prices formed a downward sloping wedge (a) before continuing its upward move. Also note the 10 and 20 day EMAs are increasing and the 10 day EMA is about to move through the 20 (b). Also note the MACD is increasing (c). Ideally we'd like to see the A/D line rise with prices (d), but at least it's not decreasing. Finally, the CMF indicates money is flowing in.
Tuesday, June 15, 2010
From the NY Fed:
The Empire State Manufacturing Survey indicates that conditions for New York manufacturers improved in June. The general business conditions index edged up from its May level to 19.6, extending its string of positive readings to eleven months. The new orders and shipments indexes were also positive and higher than their May levels. The inventories index remained near zero for a second straight month, indicating that inventory levels were little changed. The prices paid index fell 17½ points to 27.2, while the prices received index held steady at 4.9. The index for number of employees was positive, but fell 10 points, while the average workweek index climbed to 8.6. Future indexes were well above zero, but the readings, like last month's, fell short of the relatively high levels recorded earlier this year.
Here's a chart of the data:
Once again, we get good news from the manufacturing sector.
1.) Europe: this is the big cause. IIRC, the news swarm started with Greece announcing that their books were cooked in some way, meaning their budget deficit was larger than thought. However, regardless of the reason, Greece started the basic problem. What the market is completely discounting is the European response -- the pledge from the EU and the IMF of nearly $1 trillion in assets to bolster various debt markets. A recent Bloomberg poll said less than a third of respondents had faith this plan would work. That is the real issue here -- despite a logical policy response (their very own Euro-Tarp) the market does not have faith that market participants will make it work. I disagree with that assessment.
2.) Retail sales. US retail sales dropped 1.2% in the latest report. However, this number is in a clear uptrend, meaning last months data was one month of data in an otherwise good series of numbers. Simply put, placing a great deal of weight on one month of data isn't a good idea.
3.) Employment: the latest employment report was terrible. Again, it was one month of data in an otherwise encouraging trend. However, there are important issues here -- initial unemployment claims and the long-term unemployed continue to be issues.
So -- there are two events which are leading to this discussion about a double dip: the lack of conviction on the part of traders regarding the EUs ability to carry out its bail-out and the long-term unemployment situation in the US. I place little credence in the first concern. If the EU wanted to disband, the Greek situation would have been the perfect catalyst. Yet instead they doubled down, indicating a desire to make the union work at extraordinary cost. That tells me the union will do anything it can to make this work, thereby negating the concerns.
The second situation is an issue going forward. However -- as with retail sales -- we had one month of bad data in an otherwise good trend. A I have mentioned on a regular basis, my big concern going forward is initial unemployment claims. This number has moved sideways since the beginning of the year and remains above the 450,000 area. This has to start coming down and soon.
But consider this post on the most recent Beige Book and Flow of Funds report. Most indicators are pointing to an expanding economy. This seriously dents any double dip argument for now.
Simply put, I still don't see a double dip in the cards yet.
The yield curve has inverted one year before deflation only twice in the last 90 years: in 1928 and in 2007 -- which is why I call that indicator the Death Star. But as you can see, the yield curve remained positive relentlessly from the end of 1929 all the way through the Great Depression, the 1938 Recession, and all of the 1940s. Simply put, a positive yield curve appears to have no leading quality during deflation.
Similarly, indicators based on the spread between short and long rates also appear to have little or no validity during deflations. Hence John Hussman has just touted that whenever the spread between short and long rates is less than 3.1%, a recession ensues. That may have been true in most of the post WW2 era, but Mauldin's indicator completely fails during the New Deal expansion of 1933-37 (the fastest YoY GDP growth ever) , and the entire 1940s.
There is only one Bond measure that I know of that appears to function just about infallibly when it comes to deflations. That is the Dow Jones Bond Index. Almost nobody pays attention to it, but it has been around for 100 years, and here in relevant part is its record:
The DJBI peaked at 99.48 in January 1928. It continued to decline relentlessly until June 1932 when it bottomed at 65.78. Thereafter it rose again until December 1936 when it peaked at 106.01. It declined until March 1938 when it bottomed at 83,39. Thereafter it continued to rise at least until the beginning of WW2 (I haven't researched its behavior in the 1940s).
And what has the Dow Jones Bond Index been doing during the last two years? It started 2008 at 207.14 and put in a low near the end of the year at 181.66. It rose throughout 2009, starting at 207.61 and ending at 246.19, having reached at peak of 249.28 in November. By March of this year it had risen to 250.98. It has continued to rise to 257.68, and as of last Friday it stood at 254.15.
On the dollar's daily chart, notice there are three gaps lower (a, b, and d). There is one gap higher (c). Gaps are a bit more common on the dollar chart, as it is often effected by overnight developments. However, three downward gaps is still an interesting technical development.
On the daily chart, prices have broken a key trendline (a). However, the EMAs are still in a bullish posture, although the 10 day EMAs has turned lower.
As a result of the lower dollar, we're seeing an increase in commodities. The DBAs are in a cluear uptrend with consolidation patterns (b) that use the EMAs for technical support.
With the DBBs we have a leg up (a), followed by a triangle consolidation (b) followed by a third move higher (c).
With the SPYs notice that 110.0 is an important area of technical resistance for the market.
Finally, notice that the transports have already broken through key technical resistance.
Monday, June 14, 2010
In January I said the market probably would peak in the spring, and I recommended selling any remaining positions once the Standard & Poor's 500 crossed above the 1200 level. So far, so good. The big question now is whether the rally off the 2009 low is over or whether this is an interim correction, after which the business expansion and cyclical bull market will continue. Most investment professionals believe this is a temporary correction, declines are buying opportunities and the bull market will continue. I doubt that.
The world is at a major crossroads. Some countries are at the end of a dead-end street. Greece has hit the wall. Spain and Hungary probably will be next. The Greek debt crisis was the beginning of markets refusing to finance irresponsible public-sector indebtedness. It will travel from the periphery to the center in coming years. The common denominator in the housing crisis, the euro crisis and the banking crisis is that industrialized economies carry too much debt. These crises show that we have to rewrite our system. We have been living a fiction for the past 20 years in order to enjoy a greater standard of living. Hard times are ahead, and the steps that Europe has announced to contain its crisis are only the beginning. Governments must cut spending and promises, such as entitlement programs, and raise taxes. At best this means stagnation for some years, but it could be much worse. Deflationary pressures will increase.
We have been talking about the "new normal." It doesn't mean a double dip in the economy or an immediate funk, but slower growth generally. We have seen some relatively strong growth in this year's first half, but the second half will be weaker in the U.S. That's the new normal, unfolding in the next 12 to 24 months.
The foundations for this view are the delevering taking place in the private market, and now in the government sector; re-regulation, which slows private enterprise and forces a more conservative investment tint; and de-globalization, which, simply put, is "every country for itself." As I discussed in January, most of our benefits and many of our problems emanate from the rather sudden trend toward globalization that began in the late 1980s with the fall of the Iron Curtain, the rise of China and the incorporation of two billion potential new workers into the global workforce. The G-10 countries have been trying to fight the forces that stole production from them. They have fought them with debt creation and leverage.
We have had a somewhat non-consensus view that the economy would start the year on a strong note and then decelerate. Recent statistics suggest there has been some deceleration. We expect gross domestic product, or GDP, adjusted for inflation, to be about 3% this year and 2.5% next. Such deceleration isn't unusual. GDP and industrial production perked up a year ago, as inventories had been cut to the bone and companies needed to rebuild them. We also saw a nice pickup in capital expenditures, particularly for technology. Plus, we had the benefit of government stimulus, which could be seen in the housing and auto sectors. Inventories are now back to more normal levels, and the impact of the stimulus is abating. We are looking for signs that the economic recovery is broadening out. The consumer is behaving a little more vigorously, and we look for a broader recovery in real estate.
We are focused mostly on the U.S. market. It will do better than most people think. The problems in Europe's smaller countries aren't really going to affect business in the United States. Business is good here, and will get better. Company earnings and productivity are improving. There are a lot of cheap stocks. I'm not a market prognosticator; I'm a stockpicker. But I have found, over 40 years in the business, that when there are a lot of cheap stocks, the market tends to go up. If China implodes or the European contagion spreads, we'll have problems, but I'm not predicting that. The market indexes might end the year where they started, but it is going to be a stockpicker's market.
The stock market's 80% rally from March 2009 until April 2010 anticipated a lot of good news in the economy. But there isn't a lot of good news. Right now there is a lot of bad news from Europe. China is starting to wobble. Its stock market is down 22% year to date. We are even picking up signs of a slowdown in Chinese spending on cellphones and similar things. Europe's troubles are going to blow back here. It is a big market for U.S. technology, and the U.S. generally. With the dollar up almost 20% against the euro, U.S. companies are going to have a currency-translation problem. The currency is now a headwind.
The April high wasn't confirmed by all the technical indicators, so I turned bearish. We have had a meaningful correction. Now the market is oversold and might rally some. But the correction hasn't run its course. There will be strong resistance at 1170 on the S&P 500, and again at around 1200. The bull market that began in March 2009, when the S&P was at 666, won't resume. The stock market could bottom in October-November, and then the rally will resume, but it might resume from a substantially lower level.
The S&P might drop to around 950. I am bearish about the world. In the second half of the year, data on economic growth and corporate profits will disappoint. At the same time the Federal Reserve is run by a money printer, and a prospective vice chairman, Janet Yellen, who said she would implement negative interest rates if she could. Interest rates, in real terms, will stay at zero forever. Investors will be badly served, in this money-printing environment, by being in cash and U.S. government bonds. The only avenue of growth is assets—that is, equities, real estate or commodities, in particular precious metals.
We are getting a lot of mixed signals. When we talk to the companies in which we are invested, they say their businesses are seeing stable to rising demand. Inventories are still very lean. They want to do some maintenance shutdowns and they are running hard to have the inventory to be able to do that. The market, on the other hand, is manic. It is a good indicator of value over the long run but not the short run. Stocks ran up to a level at which very little was cheap. Then it came down more than 10%, and a bunch of stocks came down even more. We found some interesting things to buy. We're looking at some stocks in the oil-drilling area. We recently bought some Diamond Offshore [DO] at about 57 a share. But we don't have the conviction to load the boat yet. Most of the offshore drillers are good actors. The evidence in the Gulf of Mexico points to BP making mistakes.
I remain constructive on the market, based on the earnings tables published in Barron's. Only one of the 30 Dow industrials—Walt Disney [DIS]—trades for 15 times 2011 estimated earnings. All the rest trade for less, and eight sell for under 10 times earnings, including stocks such as Hewlett-Packard, ExxonMobil [MOB], Bank of America [BAC] and Merck [MRK]. These are quality companies and dividend payers, though the banks don't pay much anymore. Pfizer sells at 6.7 times next year's estimates. If earnings come in close to consensus estimates, the market not only is cheap but maybe as cheap as it ever gets. It's not a bad time to put your toe in the water and invest, but given the way the market has been acting, do it carefully. Don't use leverage, and make sure you have enough cash on the sidelines in case stocks go even lower.
First, the good news: Corporate profits are excellent. Looking across a wide swath of the industrial and consumer economy, the numbers are going up. Capacity utilization is 73.7%, against 69% a year ago. Real GDP is up 3%, against minus 6.4% at the low. Consumer spending, retail-store sales, factory shipments—all are showing positive growth year over year. The stock market isn't reacting to this; it is acting on fear. People are worried about the European contagion, but Asia is doing well. They are worried about slowing growth in China, but we should all have the problem of slowing from 12.9% to 8.5%.
What is the bad news?
In the short term, we have a jobless recovery, and if you don't have employees, you don't have consumers. Only government payrolls are up substantially year over year. The unemployment rate is unacceptable at 9.7%, or 16.6%, counting full unemployment. The public policies of the Obama administration are very disappointing. The president should have launched a jobs program, as Franklin Roosevelt did in 1933 when he inherited a mess from Herbert Hoover. Health care is important, but more government mandates will discourage capital formation and hiring.
The budget deficit is $1.17 trillion, and gross public debt is $13.06 trillion. We're not Greece. We have the right to print money. But we're not going to get away with this forever. The U.S. is spending its way into oblivion. Lastly, there is a lack of credit for small business. In the past 20 years more than 75% of new jobs have been created by small and medium-sized businesses. But only 40% of small companies were able to borrow what they needed in fiscal 2009. I expect the Democrats to take a huge hit in the fall congressional elections because they haven't focused on jobs.
In the short term, the economy will probably grow by 3%, 3.5%. In the old days we would have had a V-shaped bounce off the bottom and grown by 5% or 6%, but as Bill Gross says, it's a new era.
My market view for the rest of the year hasn't changed. In January I thought the U.S. market would end the year up 5%, with a pretty good first half followed by a significant pullback. I thought corporate profits would be terrific, and they are even better than I thought. Companies are watching expenses, and demand has picked up. Every industrial company we talk to continues to do well. The big questions are, how do you create jobs and a more favorable environment for small business. For one thing, we need tort reform, which is unlikely to happen. We also have to divert job creation to the private sector from the public sector.
I was worried about three things at the start of the year: One was Beijing, or China cooling off; I like what the government is doing to end the housing bubble. The second was Bernanke: Does he start reducing monetary stimulation? The third was Barack, as in Obama, and how he handles the fiscal-policy initiative in light of the coming November elections. I'm adding a fourth, Berlin, which refers to the current problems in the European Union. There are also some sidebar issues.
Thanks to all the commenters from last Friday's installment of Weekly Indicators. You raised a variety of good points.
I had hoped to do a Big Overview Tome about Housing but frankly, the weekend called! So let me address one of the points made Friday -- namely, what if the items I am watching for the possibility of a double dip give contradictory signals? We're not totally at sea. At least in the post WW2 era, there was a definite order in when the series turned, which was:
2. Money supply
3. Real Retail sales
Prof. Edward Leamer gave a lengthy presentation on this subject several years ago at Jackson Hole (I'd add the cite to my next installment if I don't have the time to add it here.) Simply put, housing leads.
Here are a couple of graphs to show you the point. These compare housing permits (one of the ten components of the LEI) with real retail sales (multiplied by 5 to better show turning points). First, here is the period from 1960 through the early 1980s:
and here is the period from the mid-1980s to the present:
Housing is what ECRI calls a "long leading indicator" because it frequently peaks in particular well before the economy as a whole does. In fact, in the above series, housing peaked a median 8 months before real retail sales, and troughed 1 month before real retail sales. There is a wide variation in range from +19 months to -3 in peaks, and +14 to -3 in troughs. Since we have only had one month's decline from the recent peak in housing permits, at least in post WW2 terms it suggests no double dip yet.
So why look at the other indicators? Partly because of the variability of housing's lead as discussed above. The other reason is that deflationary pulses can happen quickly, and we have very little helpful data predating WW2 and in particular during the deflationary 1920-1940 era. There are annual figures for "nonfarm housing starts" that were kept during this period, and housing did indeed peak in 1925 -- well before the economy peaked in 1929. It troughed on an annual basis in 1933, but we don't know in what month, so we don't know what month would have been the bottom -- and it possibly could have been in late 1932.
At the moment, the consensus is still that housing permits in May grew compared with April. Needless to say, that consensus could be way off, given the collapse in purchase mortgage applications. but it's fair to say that if the decline was only one month, that would be very strong evidence that no double dip is forthcoming.
Notice that on the long term SPY chart, we have three different rallies. The first rally (a) was from 68-96, for a gain of 41.17%. This rally saw an 8.33% (96-88) correction at the end of its move. The second rally (b) saw a rise from 88-115 for a gain of 30.68% and a correction of 7.62% (115-106). The third rally was from 106-122 for an increase of 15.09%. Then we saw a correction from 122-106 for a decrease of 13.11% Notice that the strength of the rallies is decreasing. Also notice that the last correction wiped out the entire previous rally. Finally, note that according to the A/D line we have not seen a mass exodus from the market.
The market still appears to be forming a double bottom (a). Also note the evenness of the A/D line (b) and the fact that the MACD has given us a buy signal (c).
With today's future's action (at least so far) the IWMs appear poised to move over their trend line.
The micro-caps are approaching their trend line.
The 7-10 year part of the Treasury curve and the long end (20+ years) both have the same chart. Both have formed a triangle at the top of a rally (a). Both show a flight from the security (b and c) and both show a decrease in momentum (d). In other words, both charts appear to be topping. In addition,
take a close loot at the dollar chart. While it has printed higher highs (a and b) the technical indicators are weaker for the second high. The A/D printed a lower number (c) as did the CMF (d) and the MACD (e). Interestingly enough,
We see the exact opposite with the euro, where the A/D line is rising on lower bottoms (b) as is the CMF (c) the MACD (d) (which has also given a buy signal.
Finally, note the industrial metals are still in a downtrend, delineated by lines (a) and (b).