Enter your email address:
Delivered by FeedBurner
The economic data last week was mixed and the market managed to give back all the gains of the week before and yet for some reason it feels like last week was a pretty good week. Why in the world would I say such a thing? Well, because the markets that aren’t stocks had some interesting movements that leads me to believe that we might be making some kind of bottom here. Of course, that doesn’t mean a damn thing until we actually do make a bottom and head higher but I think there were a few early warning signs last week.
First, let’s look at the economic data which continues to paint a picture of a softening recovery. The week started with the retail reports from Goldman and Redbook which were a bit contradictory. Redbook showed a gain year over year while the Goldman data showed a continued softening. Which is correct? Hell, I don’t know and I’ve said repeatedly it really doesn’t matter. We won’t be establishing a sustained recovery from consumption; that only comes from investment. All you Keynesians out there need to repeat this over and over - consumption is the result of production not the cause. And production is driven by investment for the simple reason that most of the stuff we make in the US these days is capital equipment. Unless the dollar crashes - not out of the question but hardly something we should be rooting for - we won’t be competitive making consumer goods ever again.
We also had more data to confirm the slow down in housing. Existing home sales and new home sales were both off the charts lousy and not unexpected I might add. Heck, homebuilder stocks actually rallied Wednesday when the new home sales were reported at a punk 300k. I guess the idea is that things can’t get any worse and that seems about right to me. The home buyer’s tax credit pulled sales forward but the rate of construction now is so low that it almost can’t help but go up. We’ve got mortgage rates at record lows though so buying a house is about as cheap as it’s been in a long time. My guess is that this will play out similar to the cash for clunkers program. Sales will be lousy for a couple of months and then return to normal.
The most positive report of the week came with the industrial production numbers which showed a decline of 1.1%. Yeah the headline wasn’t anything to write home about but the drop was entirely due to a drop in aircraft orders. And even so new orders were up 14.9% year over year. Meanwhile ex transportation orders were up 0.9% and the important capital spending component - non defense capital goods ex aircraft - was up 2.1%. That number feeds into the GDP report so it’s good news for the second quarter number. As has been the case since the beginning of the recovery, manufacturing is leading the way.
Friday brought another revision to 1st quarter GDP down to 2.7% but frankly it was old news and not particularly relevant to what is going on right now. And while the corporate profits report was also about the past, the jump of 45.9% was still pretty impressive. If you had any questions about why stocks went up last year that should answer them. It wasn’t about conspiracy theories and the plunge protection team; it was about what a rising stock market is always about - rising profits.
And last, while I don’t pay much attention to the consumer sentiment surveys - they aren’t particularly predictive for the market or the economy - it is indeed interesting that regardless of the increasingly dour professional forecasting crew, the public’s mood is improving pretty consistently. My guess is that this is due to the beginning of improvement in the jobs market even if we don’t have data to back that up yet. We’ll see but the jobless claims report Thursday showed a pretty big drop and while I’m not ready yet to say the downtrend has resumed, the Labor Department wasn’t as cautious. They pointed out that there were some problems with the Memorial Day seasonal adjustments - although why that would happen is a bit of a mystery since we have Memorial Day every year - and seemed very upbeat about the report.
Stocks gave back their gains of the previous week with the S&P 500 dropping 3.5% but as I said above, it didn’t seem like that bad of a week. That may be because of action in other markets pointed toward potentially better days ahead. For one thing the dollar index declined on the week and is now sitting on support. It appears the demand for risk assets, regardless of the action in US stocks, is returning. Copper had a good week as did the commodity indices. In US stocks it is comforting that the Russell 2000 small cap index managed to stay above the 200 day MA. Another comforting factor over the last few weeks has been the action in corporate bonds which have not followed, or more importantly led, stocks lower. If we were really headed for a double dip I would expect to see not only a change in spreads but an actual drop in corporate bond prices. The fact is we haven’t and that has kept me confident, so far, that this is just a correction and not something worse.
With the G-20 meeting this weekend and the Obama administration begging the world to spend, spend, spend just like they want before the election, it should be noted widely that the British pound has rallied smartly off its lows since a new government was installed and announced an actual plan for addressing their deficits. This idea that economies and markets will react badly to doing what is obviously the right thing just flies in the face of common sense. I also don’t think it is coincidence that the Euro is trying to put in a bottom as well. There are probably more problems to come in Europe but the economies there are proving resilient in the face of “austerity”. I suspect ours would as well.
One last item to note is the action in the gold market. Gold is pushing to new highs measured in dollars and as long as it is, the conclusion should be that we have adopted the wrong economic policies. Contrary to popular lore, people don’t buy gold as an inflation hedge. The buy gold to hedge against bad government because they know if things really go south, gold will be money as it always has. In other words, people buy gold to preserve wealth not grow it. When people are more worried about preserving wealth than creating more that says a lot about how they view the policies of the government in power. The fact is the administration has zero credibility on the economy and no wonder since their preferred policies have yet to accomplish anything except to pile up more debt. When the administration adopts pro growth policies and addresses the deficit seriously, the price of gold will drop and you will know we are on the right track. Until then, caution is warranted.
If you'd like to receive this free weekly commentary by email, click here.
Weekly Chart Review, click here.
Name (required)
Mail (will not be published) (required)
Website
XHTML: You can use these tags: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>
« Weekly Chart Review Hayek Says Make A U Turn »
Contrarian Musings is © 2008 Alhambra Investment Partners LLC. All rights reserved. Please read our Terms of Use and Privacy Policy.
Read Full Article »