Sunday, November 9, 2014

Weekly Market/Economic Update

"The 12 months following mid-term elections have been up the last 17 times in a row"

"The third year of a presidential term is usually a good year"

"The market gains with a democrat in the Whitehouse while republicans control Congress"

That's a small sampling of the arguments the bulls were making last week for why you want to own stocks going forward. While I have no problem with Tuesday's results, in my opinion those market extrapolations are all a bunch of, well, bull. Not that the data aren't real, it's just that they're not useful. Tell me the whys, relate them to politics, then show me how they're lined up the same this time around---then maybe (but probably not) I'll produce a chart and send it out to my clients. But the thing is the whys (unless you can change my mind) in my view have little, if anything, to do with those characters who were cagey enough to promise more stuff to the right group of voters than did their competition. So, please, disregard any notion you may have that the outcome of Tuesday's election in any way assures green arrows for your portfolio going forward. In fact, I can think of nothing more frightening than the notion that our investment success lies in the hands of professional glad-handers, regardless of the side of the aisle they hail from (yeah, I know, there will be a few winners [friends of the winners] and losers resulting from any change in "power"). But we never invest based on our politics. We invest on fundamentals. Yes! I am the worst cynic when it comes to politics.

So, about the market: As I've reported, and as you've noticed, the major averages (but not all sectors [energy]) have come roaring back after the recent almost correction. Apparently the market isn't ready to deliver the real thing, be it a 10-20% correction or a 20%+ bear market. I can speculate as to why. I can cite the missing retail investor (they typically pour in at the very end, and they---at this point---remain mostly absent), seasonality (November and December have been positive historically), very good earnings and earnings growth, under-performing professional investors playing catch up, lower energy prices, no U.S. recession in sight, accommodative central banks, coming share buy-backs, the "rule of 20" (20 minus the inflation rate equals fair value) has the S&P anywhere from 9% to 20% (depending on the inflation metric you use and whether you're talking 2014 or 2015 projected earnings) undervalued---as does the discounted cash flow method (10% by my calculation), etc. But I can turn all that on its head and couch low oil prices as a signal that the global economy is weakening by the minute, and that, therefore, the assumed earnings growth rates embedded in all those valuation calculations will not be achieved. I can tell you that this market has been so Fed-dependent that it won't know what to do with itself when, at last, the Fed starts pushing up on short-term rates. That while Warren Buffett says he likes the market here, the valuation indicator he once said is by far the most legitimate (total market cap to GDP) reads scarily high, etc. Bottom line---save for a little logical (well-supported) sector/regional rotation every now and then---never invest your long-term money based on anyone's short-term guess.

So, about the (U.S.) economy: As you'll notice in the highlights below, last week was a mixed bag for economic indicators. While the general trend remains positive (particularly for employment), recent stats suggest a mild deceleration in the overall rate of growth. We may see the coming GDP revisions for Q3 come slightly off that 3.5% preliminary read. In terms of third-quarter earnings, as I type, 447 of the S&P 500 companies have reported and (according to Bloomberg) 80% beat analysts' estimates, with the earnings growth rate coming in at 9.43%. That's a very good showing! In terms of revenue, 60% beat estimates with a growth rate of 4%. That's just okay. The contrast between earnings and revenue growth speaks to an abundance of share buybacks (companies buying up their own shares, which reduces shares outstanding and, therefore, boosts per share earnings) and productivity---but mostly share buybacks of late.

So, about economies outside the U.S.: While, in terms of trend, the U.S. remains the place to be in the global economy---after two years (assuming no huge non-U.S. out-performance over the next two months) of our non-US exposure hurting our relative (to U.S. indices) performance---I'm seeing some encouraging signs beneath the scary headlines: For example, the Bank of International Settlements reports that the period between end-December 2013 and end-March 2014 (its reports come with a bit of a time lag) saw the first substantial increase in quarterly cross-border money flow since late 2011 (that's a bullish sign). Particularly to emerging markets, and particularly to China. Even the euro area saw an increase in cross-border lending, ending a streak of seven consecutive quarterly declines. Plus, the Baltic Dry Index (tracks the cost of shipping raw materials over the seas) has spiked 50% higher over the past few weeks. This makes one think seriously about emerging markets and materials going forward. Oh, and not to mention, valuations in many foreign markets are reminiscent (some even cheaper) of U.S. stocks at the beginning of 2013...

There's always more to report, but in the interest of your time, me keeping your attention, and me having something else to write about next week, I'll leave you for now with the (U.S.) highlights from last week's economic journal:


NOVEMBER 3, 2014

MOTOR VEHICLE SALES barely budged in October. Econoday:

Sales of cars and light trucks firmed very slightly in October, to a 16.5 million annual pace vs 16.4 million in September. Sales of North American-made vehicles led October, rising to a 13.3 million rate from September's 13.2 million. Foreign-made sales slowed slightly to 3.2 million. These results point to little change for the motor vehicle component of the October retail sales report.

GALLUP CONSUMER SPENDING averaged $89/day in October vs $87 in September. While about the same as last October, the Gallup number remains well above the lower levels of the current expansion.

THE MARKIT PMI MANUFACTURING INDEX reads soft for October, with an overall reading at 55.9 vs 57.5 for September. New business ran at its slowest pace since January. Backlog orders were the slowest since January as well. Production the same. Jobs, however, remain the consistent positive indicator across virtually all of these surveys.  The report cites "robust job growth" in jobs...

THE ISM MANUFACTURING INDEX came in at a surprisingly (given related October surveys) outstanding 59.0 vs 56.6 in September. The new orders component came in at a huge 65.8. This denotes increasing business across the supply chain going forward.  Backlog orders were up as well. The production component came in very strong at 64.8, while inventories rose slightly. Prices moderated. Here's what the survey's respondents are saying:

"Holiday orders are exceeding seasonal forecasts. Customers are demanding additional quantities above prior orders. Fuel costs and other positive signals appear to be creating demand above normal." (Food, Beverage & Tobacco Products)

"Weakness in commodity prices very positive on our business." (Fabricated Metal Products)

"We continue to see strong demand across multiple sectors." (Transportation Equipment)

"Business steady and strong." (Furniture & Related Products)

"Another strong month in terms of business growth." (Computer & Electronic Products)

"Most business segments are seeing an upward trend in orders — mostly from existing customers, but also some new customers. Transportation continues to be a major issue." (Chemical Products)

"Conditions are still basically flat." (Printing & Related Support Activities)

"Production is oversupplying demand, and prices have softened." (Wood Products)

"Outer body material changes in the auto industry means new equipment and manufacturing growth." (Machinery)

"Business conditions are good; sales and production volumes are generally increasing." (Miscellaneous Manufacturing)

CONSTRUCTION SPENDING came down in September for public outlays and private nonresidential. Private residential was up for the month. Overall construction spending declined .4%, vs a 6% estimate. Year-over-year spending was up 2.9% vs 4.4% in September.

NOVEMBER 4, 2014

ICSC SAME-STORE SALES, much to my surprise, were off 1.6% last week. Year-over-year up 2.8% (traditionally run +3.5 to 4.0% during expansions). I am expecting a noticeable pick up in these numbers going forward. The report blames unseasonably warm weather holding back sales, as folks would normally be stocking up on fall/winter apparel right about now. The report sees sales picking up as the weather cools off. I'm expecting the much-improved jobs market, lower gas prices and recent reads on consumer optimism to translate to a very good retail season.

Consumer sentiment is indeed looking up. Per the following re: THE GALLUP US ECONOMIC CONFIDENCE INDEX from Econoday:

Gallup's October Economic Confidence Index jumped to a monthly reading of minus 12 in October -- the most positive score since the minus 12 of July 2013. However it was lower than the record high of minus 7 in May 2013. The three-point increase from September is the largest monthly improvement seen this year so far.

In October, 22 percent said the economy is "excellent" or "good," while 32 percent said it is poor. This resulted in a current conditions dimension score of minus 10, the highest current conditions score since February 2008. Meanwhile, 41 percent of Americans said the economy is getting better, while 54 percent said it is getting worse. This resulted in an economic outlook score of minus 13 -- the best outlook score since January.

The confidence of both upper-income Americans (plus 2) and middle- and lower-income Americans (minus 14) reached levels in October that have not been seen since July 2013. Upper-income Americans had a particularly large climb in confidence, gaining eight index points from the previous month and reaching positive territory.

While the TRADE DEFICIT never bothers me in the least, the data can be telling in terms of global demand. The gap expanded in September as exports declined and imports were unchanged.

THE JOHNSON REDBOOK read on retail slowed, along with ICSC's, last week. The report notes Halloween falling on a Friday as a diversion away from shopping on items non-Halloween related. The year-over-year growth came in at 3.9%, vs 4.4% the prior week. Still showing a range that denotes economic expansion.

The manufacturing sector has gotten tougher to gauge of late when considering the contrast between anecdotal samples such as yesterday's ISM (very strong) and Markit's PMI (softening) and the very mixed reads from the regional surveys themselves vs. the hard data such as FACTORY ORDERS which came in -.6%. It'll be interesting to see in the months to come if the hard data squares with the optimism shown in some of the surveys. The jobs component of the surveys has accurately foretold of better jobs numbers of late. This Friday's number will be very interesting...

NOVEMBER 5, 2014

THE ADP EMPLOYMENT REPORT showed the expected 230,000 new jobs. Which makes perfect sense given the indications coming from various surveys.

MORTGAGE NEW PURCHASE APPS finally rose a bit last week, +3%. Refinances have been strong since the recent drop in rates, but new purchases have been stubborn. I expect to see a better trend going forward given recent trends in jobs growth and consumer sentiment.

THE ISM NON-MANUFACTURING INDEX shows continued solid expansion in service industries, although the month-over-month pace slowed in October. However, the employment component once again showed strength, delivering its third highest read over the survey's 17-year history. Here's what the respondents are saying:

"Business is steady with new product launches." (Information)

"The general business outlook is favorable. Approaching 2015 with cautious optimism." (Finance & Insurance)

"Healthcare market continues to see challenges and uncertainty." (Health Care & Social Assistance)

"Economy appears to be slowing. Fears of ISIS, Ebola, etc." (Professional, Scientific & Technical Services)

"It appears that customers are beginning to engage which is producing sales. Not where we want to be, but continuing to see improvement." (Retail Trade)

"Sales very sporadic. It’s up and down weekly." (Accommodation & Food Services)

"Business activity remains robust here." (Utilities)

"The past few months have been record months for us in terms of sales, but we are seeing margin pressure." (Wholesale Trade)

CRUDE OIL INVENTORIES saw a slower build last week, .5 million barrels, as refineries are picking up production after their maintenance season.

NOVEMBER 6, 2014

CHAIN STORE SALES went the fate of other retail indicators in October. The report showed slowing in year over year sales growth. Warm weather hurting the sale of fall goods gets the blame... I'm fully expecting to see retail rebound in the coming weeks based on lower gas prices, an improving jobs picture and growing consumer optimism.

THE CHALLENGER JOB CUTS REPORT for October went against the grain of the majority of job related stats of late, showing a layoff count substantially higher than September's (51,183 vs 30,477)... Although September's number did represent a 14-year low.

WEEKLY JOBLESS CLAIMS came in below expectations at 278,000. The 4-week moving average of 279,000 marks a 14-year low and speaks volumes about the improving jobs market.

PRODUCTIVITY grew in Q3 at an annualized 2.0% rate. That's roughly the long-term average for the U.S. Year-over-year productivity grew .9%...

UNIT LABOR COSTS rose .3%, as hourly compensation came in at +2.3% against productivity growth of 2%... I suspect we'll see wages continue to trend higher going forward.

THE BLOOMBERG CONSUMER COMFORT INDEX rose last week to its second-highest level in the past 6 years... 38.1. Which, taken with the improved jobs and wages market, and lower gas prices, speaks to my optimism toward consumer discretionary stocks going forward.

NAT GAS STORAGE rose 91 bcf last week. Higher inventory builds translate to lower pricing...

NOVEMBER 7, 2014

THE BLS NON-FARM PAYROLLS REPORT showed an increase of 214k, vs estimates of 231k... I would've had the number higher as well, but, nevertheless, north of 200k is a good number... the unemployment rate dropped to 5.8%... From the report:

Total nonfarm payroll employment increased by 214,000 in October, in line with the average monthly gain of 222,000 over the prior 12 months. In October, job growth occurred in food services and drinking places, retail trade, and health care.

Food services and drinking places added 42,000 jobs in October, compared with an average gain of 26,000 jobs per month over the prior 12 months.

Employment in retail trade rose by 27,000 in October. Within the industry, employment grew in general merchandise stores (+12,000) and automobile dealers (+4,000). Retail trade has added 249,000 jobs over the past year.

Health care added 25,000 jobs in October, about in line with the prior 12-monthaverage gain of 21,000 jobs per month. In October, employment rose in ambulatory health care services (+19,000).

Employment in professional and business services continued to trend up over the month (+37,000).  Over the prior 12 months, job gains averaged 56,000 per month. In October, employment continued to trend up in temporary help services (+15,000) and in computer systems design and related services (+7,000).

In October, manufacturing employment continued on an upward trend (+15,000). Within the industry, job gains occurred in machinery (+5,000), furniture and related products (+4,000), and semiconductors and electronic components (+2,000). Over the year, manufacturing has added 170,000 jobs, largely in durable goods.

Employment also continued to trend up in transportation and warehousing (+13,000) and construction (+12,000).

Employment in other major industries, including mining and logging, wholesale trade, information, financial activities, and government, showed little change over the month.

In October, the average workweek for all employees on private nonfarm payrolls edged up by 0.1 hour to 34.6 hours. The manufacturing workweek was unchanged at 40.8 hours, and factory overtime edged down by 0.1 hour to 3.4 hours. The average workweek for production and nonsupervisory employees on private nonfarm payrolls edged up by 0.1 hour to 33.8 hours. (See tables B-2 and B-7.)

Average hourly earnings for all employees on private nonfarm payrolls rose by 3 cents to $24.57 in October. Over the year, average hourly earnings have risen by 2.0 percent. In October, average hourly earnings of private-sector production and nonsupervisory employees increased by 4 cents to $20.70. (See tables B-3 and B-8.)

The change in total nonfarm payroll employment for August was revised from +180,000 to +203,000, and the change for September was revised from +248,000 to +256,000. With these revisions, employment gains in August and September combined were 31,000 more than previously reported.

CONSUMER CREDIT rose $15.9 billion in October. However it's skewed to non-revolving credit ($14.5 billion). That's not the best news for the retail sector in the near-term. It'll be interesting to see how this plays out over the next couple of months. I'm firmly in the camp that expects a very good retail season nonetheless...

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