Sunday, October 19, 2014

You may have a problem... And an economic update...

Last week was the definition of volatile, not only for the stock market but---as you'll see below---for economic data as well. Despite relatively weak retail numbers, consumer sentiment readings improved. I'm thinking optimism for the coming retail season is warranted, given the improving jobs picture and dramatically lower energy prices.

As for the stock market, as I reported last week, the recent downward spikes probably had as much to do with technicals (major averages breaking through previously established support levels and, thus, triggering large sell programs) and mandatory selling (margin calls and fund liquidations)---stuff that shouldn't matter to investors (as opposed to traders)---as they did with fears over plunging oil prices, weakness in Europe and Ebola.

Falling energy prices, at this juncture (in my view) are a net positive for the economy and, therefore, for the overall market. The concern with regard to the Euro Zone is whether or not the U.S. economy can continue to improve amid such poor results among major trading partners. Time will tell---but, so far so good.

I'm sticking with my position that the huge gains we realized last year were largely the result of the market accurately discounting this year's pick up in the U.S. economy. And for stocks to move substantially higher from here, that pick up will have to gain momentum and result in earnings catching up to share prices. I.e., today's price of your average share of stock more fully reflects its true value than it did at the start of last year. Should earnings accelerate amid a slower rise in share prices (perhaps global worries will constrain price appreciation), we could find our U.S. equity exposure looking very attractive once again---from a pure valuation standpoint. Of course another path to that place is through a decline in share prices. While I'm not nearly ready to declare U.S. stocks as attractive as I saw them in January '13, they've moved a bit in that direction over the past few weeks.

In full disclosure, while I was reporting that I thought stocks were historically cheap at the beginning of last year, I was not forecasting last year's huge gains.

As for our non-US exposure, there's where---from purely a valuation standpoint---it kinda feels like January '13 did for US equities. However, it's difficult to make much of an economic case, particularly for Europe, going into 2015. Of course the best time to take a position is when few others want it. Longer-term I fully expect that international diversification---and patience---will pay off handsomely.

As for the recent pullback, another 2%, give or take, and we'll find our long lost 10% correction---in the major averages that is. When we're talking small caps, energy, Europe and a few other pockets, we got it---and some. Whether the bounce we saw late last week signals the bottom remains to be seen. And, unless you find such things entertaining (in which case you may have a problem that needs attention), turn down the volume when your chosen cable news network parades out the pundits who'll offer up every chart known to man showing the dips and curves that justifies his call that the recent lows will be tested twelve more times on an intraday basis, or that the bottom's in and the S&P's heading to 2,200 by year-end, or that we'll blow through recent support on our way to a thousand. While---in my efforts to shed a little light on maybe why the Dow dropped 200 points in 10 minutes on a Monday afternoon---I might reference such things, for investors they are truly the most useless noise.

Frankly, while I'm clueless as to where the market's heading come Monday morning, it wouldn't bother me in the least if it did a little---or a lot---more purging from here. In fact, after such a long-run without any semblance of consolidation, I would welcome it. Of course the market'll do what it'll do whether I welcome it or not.

Here are last week's highlights from my economic journal, edited for your reading (WoW, MoM and YoY mean week over week, month over month and year over year respectively):

OCTOBER 13, 2014

OCTOBER 14, 2014
RAIL COMPANY CSX POSTED STRONG EARNINGS AND REVENUE FOR THE FOURTH QUARTER. Supporting the evidence that the U.S. is indeed picking. Here's the first paragraph from CNBC's report:

CSX, the third largest U.S. railroad, reported a rise in third-quarter profit on Tuesday, beating forecasts and predicting double-digit growth for 2015 as it moved more freight on its network due to a growing U.S. economy.

THE NFIB SMALL BUSINESS OPTIMISM INDEX came in at 95.3, down from its 96.1 reading in August. What's interesting is the decline in the employment and capex components. Both of which are showing marked improvements in other indicators. What contradicts the capex reading is the optimism with regard to now being "a good time to expand". Here's the first paragraph from their press release:

September’s optimism index gave up 0.8 points, falling to 95.3. At 95.3, the Index is now 5 points below the pre-recession average (from 1973 to 2007). Four Index components improved, six declined. Two declined by 10 points total, accounting for the entire decline in the Index score. Unfortunately, the two that fell drastically were job openings and planned capital outlays, which are directly relevant to GDP growth and hiring.

THE ICSC RETAIL SURVEY dropped .7 percent WoW. While this reading, in my view, is somewhat soft, according to Econoday, the outlook is positive. In your typical expansion retail sales grow by 4+% per year:

Despite weakness in the latest readings, ICSC-Goldman describes store sales as strong and discretionary spending, which is getting a boost from low gas prices, as healthy. ICSC-Goldman's weekly same-store sales rate fell 0.7 percent in the October 11 week with the year-on-year rate down 1 tenth to plus 3.8 percent. For October as a whole, the report sees year-on-year sales coming in at plus 3.5 to 4.5 percent. Redbook will post its weekly results later this morning at 8:55 a.m. ET.

THE JOHNSON REDBOOK RETAIL SURVEY was off as well. However, like ICSC, the commentary is upbeat. From Econoday:

Redbook's same-store year-on-year sales rate slowed sharply in the October 11 week, to plus 3.8 percent from an outsized plus 5.4 percent in the prior week. Despite the slowing, Redbook describes the week's sales as positive led by fall apparel and Halloween shopping. Redbook notes that Halloween falls on a Friday this year which retailers see as a positive for traffic. It also notes that some retailers are displaying Halloween and Christmas merchandise side-by-side in an effort to kick-start holiday sales.

OCTOBER 15, 2014
THE FED BEIGE BOOK WAS BASICALLY POSITIVE per the first two paragraphs of its report:

Reports from the twelve Federal Reserve Districts generally described modest to moderate economic growth at a pace similar to that noted in the previous Beige Book. Moderate growth was reported by the Cleveland, Chicago, St. Louis, Minneapolis, Dallas, and San Francisco Districts, while modest growth was reported by the New York, Philadelphia, Richmond, Atlanta, and Kansas City Districts. In the Boston District, reports from business contacts painted a mixed picture of economic conditions. In addition, several Districts noted that contacts were generally optimistic about future activity.

Most Districts reported overall growth in consumer spending that ranged from slight to moderate, at a pace that was often similar to that reported in the previous Beige Book. However, general merchandise retailers in New York noted that sales were weaker on balance since the previous report. Several District reports indicated that retailers were relatively optimistic about the remainder of the year. Meanwhile, tourism activity remained upbeat in several areas, with some reports of higher occupancy rates and solid advance bookings for travel and lodging.

THE CENSUS BUREAU RETAIL SALES figures came in weak MoM -.3%... September was a soft month across the various retail reads.

Today's EMPIRE STATE MANUFACTURING SURVEY came in way below expectations. This is clearly a surprise and perhaps speaks to an overall September lull (considering the relatively soft retail numbers). Employment, however, did show positively in the survey, which speaks to the consistent improvement I'm seeing across the board.

MORTGAGE APPLICATIONS SURGED WoW for refinances, but declined 1% for new purchases...

BUSINESS INVENTORIES rose .2% MoM... The inventory to sales ratio remains at a comfortable 1.29... Too high inventories can lead to production cuts, while inventory growth does add to the GDP calculation... Aside from the GDP relationship, lower inventories are better...

OCTOBER 16, 2014
A huge 23,000 decline in WEEKLY INITIAL JOBLESS CLAIMS. Estimate was 290k... Here's Econoday's report:

There are no special factors behind a stunning 23,000 decline in initial jobless claims in the October 11 week to a 264,000 level that is not only the lowest of the recovery but is lowest since all the way back in April 2000. The decline pulls the 4-week average down 4,250 to 283,500 which is the lowest since June 2000 and is more than 15,000 below the month-ago trend.

Continuing claims, which are reported with a 1-week lag, rose 8,000 in the October 4 week from the prior week's recovery low to 2.389 million. But the 4-week average continues to make new recovery lows, down 10,000 to 2.404 million while the unemployment rate for insured workers continues to hold at a recovery low of 1.8 percent.

This report offers convincing confirmation of September's decline in the unemployment rate to under 6.0 percent, at 5.9 percent. Next week's report will be especially important as the sample week will match the sample week for the October employment report.

INDUSTRIAL PRODUCTION jumped 1.0% in September... The estimate was only for +.4%... Utilities owned much of the increase, but manufacturing production was very solid with a .5% increase after a .5% decline in August.

CAPACITY UTILIZATION grew to 79.3% VS 78.7% in August. From Econoday's commentary:

Manufacturing appears to have regained some steam for the U.S. economy. The third quarter still appears likely to post moderately healthy growth. Today's jobless claims report adds to that argument.

THE BLOOMBERG CONSUMER COMFORT INDEX dropped slightly to 36.2 from 36.8 the prior week. However, expectations soared to a two year high.... apparently due to an improving jobs picture and falling gas prices. From Bloomberg's commentary:

Americans' expectations for the economy in October climbed to the highest level in almost two years as a pickup in hiring, falling gasoline prices, and low borrowing costs heartened households.

A measure tracking the economic outlook climbed to 51 this month, the strongest since November 2012, from 41.5 in September, data from the Bloomberg Consumer Comfort Index showed today. The weekly sentiment index was little changed at 36.2 for the period ended Oct. 12 from 36.8.

The lowest jobless rate since 2008 and the cheapest gasoline costs in a year probably combined to lift household's spirits about the future. The upbeat mood may be difficult to sustain as stocks slump and concern grows that the Ebola virus poses a wider health risk.

THE PHILADELPHIA FED SURVEY results were in positive contrast to the Empire State Survey released yesterday. Higher inventories are couched in terms of being a positive due to strength in orders... Here's Econoday's report:

Unlike yesterday's Empire State report, there's no sudden pause in the Philly Fed's manufacturing sector where the general conditions index held pretty much steady, at a very strong 20.7 vs September's 22.5. The new orders index, which is by far the most important reading in the report, is actually up, to 17.3 vs 15.5. Unfilled orders are also very positive, from 5.0 in September to 11.6 which is very strong for this reading, in fact the strongest reading since July 2004.

Other readings are soft including a 5.0 point dip for shipments to 16.6 and very little change in delivery times at plus 0.6 which does not point to demand-related supply constraints. Employment growth is also down, to 12.1 vs 21.2 while the work week shows its first contraction since February at minus 1.3. Price readings show steady and palpable pressure for inputs and strong price traction for finished goods, up 12.0 points to a 20.8 level that was last matched in April 2011.

Inventories in the region are also up, to 14.8 for an 8.7 point gain, but the build is likely desired given the strength in orders. Another plus is a continued strong reading for the six-month outlook which is down only 1.5 points to 54.5 for the third strongest reading of the year.

This report underscores the strength seen in this morning's industrial production data for September where the manufacturing component bounced back sharply. Next report on manufacturing will be the PMI flash report next Thursday which will offer a national view of October conditions.

THE HOUSING MARKET INDEX offers virtually nothing for the econ bulls. Here's Econoday's report:

The drop this month in interest rates isn't driving up demand for housing, based on weekly mortgage bankers data for purchase applications and now on the housing market index from the nation's home builders which is down 5 points to 54. The key in October's report is the traffic component which is down a full 6 points to 41. Lack of traffic points to lack of interest including lack of interest from the important group of first-time home buyers. The report's two other components are also down with present sales down 6 points to 57 and future sales down 3 points to 64.

All regions show declines in their composite scores especially the Midwest which is down 8 points to 53 and the West which is down 7 points to 54. The South, which is by far the largest region for new homes, continues to lead, at 59 for a 4 point dip in the month. The Northeast is by the smallest region for new homes and trails in this report at 40 for a 2 point dip.
New home builders can't blame high interest rates or high unemployment for the weakness in their sector. Housing starts for September will be posted tomorrow morning at 8:30 a.m. ET.

NATURAL GAS INVENTORIES rose by 94 billion cubic feet last month...

THE EIA PETROLEUM STATUS REPORT showed an increase of 8.9 million barrels of crude inventory. At first blush that seems to speak to huge production and, therefore, the recent huge decline in oil prices. However, the fact that we are in the maintenance season for refineries has to mute any great concern for this and last week's inventory numbers:

OCTOBER 17, 2014
New housing data has been the definition of volatile. Just yesterday the Housing Market Index was anything but encouraging. However today's HOUSING STARTS data showed a rebound in September, following two straight months of declines. Overall, while having bounced back from recession lows, housing has not been the contributor to (leader of) economic growth that it has in previous expansions.

THE UNIVERSITY OF MICHIGAN CONSUMER SENTIMENT INDEX rose to 86.4 in October, up from the previous month and beating the consensus estimate of 84.4. The better jobs market and lower gas prices are, as they should, contributing to optimism among consumers. The expectations component hit its best level since October 2012. The overall reading is its best since July 2007. This bodes well for the coming retail season... today's jump in stock prices (following the release of this index) tells of the relative importance of consumer sentiment...

1 comment:

  1. […] started last weekend’s letter by defining “volatile” as the previous week’s market action and mixed economic […]