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The gloom lifted last week long enough for the stock market to stage an impressive 5% sprint higher even in the absence of significant positive economic news. As usual the data was mixed with some good stuff and some not so good stuff indicating that basically nothing has changed. The economy is slowing - has slowed? - but the recovery is intact - so far. So what changed last week that brought the stock buyers out of the woodwork? Maybe it was President Obama naming 18 business leaders to his new Presidential Advisory Board on exports. I know it made me feel like exporting something almost immediately. We may not reach Obama’s goal of tripling exports but we’ve got the market in Presidential advisory boards cornered (and by the way, why is it better to sell stuff to foreigners than to Americans? Does their money spend better or something?). Or heck maybe it was all those investors who read my update last week about how cheap stocks were. Who knew I had such market moving power? Whatever it was, it was surely welcome.
It was a light week for economic data and what there was probably did nothing to change anyone’s mind about the economy. Bears still think we’re headed for Armageddon and the bulls still see blue skies ahead. I guess I fall in more with the blue skies crowd because the claims of the bears are getting into ridiculous land. Bob Prechter, who is apparently abusing his medical marijuana prescription, is predicting Dow 1000 sometime in the near future. I guess he’s short stocks and long pork and beans, ammo and bottled water. What’s that you say? He’s not short stocks? Huh? He was bearish from 1987 to 2009? What? If Bob Prechter is right we’ll have a lot more to worry about than Dow 1000 and if he’s wrong I don’t want to be around a group of people that negative. Life is too damn short. Besides, I’m a terrible shot and I don’t like pork and beans.
The data got started Tuesday with the non manufacturing version of the ISM report. Manufacturing has been leading the recovery and the non manufacturing side, which unfortunately represents the bigger portion, has been rather punk. This report surely did nothing to change that perception. The overall reading was down to 53.6 less than the expectations of 55 and last month’s 55.4. New orders were down almost 3 points to 54.4, activity fell to 58.1 the lowest since February, employment fell back below 50 to 49.7, backlogs slowed, exports and imports contracted and even inventory gains slowed. The good news is that the major components except for employment are all still comfortably over the 50 line that divides growth from contraction, but there is no doubt that momentum has slowed.
The recent trend in mortgage applications continued with purchase apps falling and refinance apps rising again. Record low rates haven’t been enough to coax buyers now that the tax credit has expired but existing home owners - or at least the ones with equity - are taking advantage. They aren’t taking cash out (consumer debt is still falling) but they are finding money to go to the mall from somewhere. The Goldman and Redbook retail sales reports both improved with month to month gains of 1% in the Goldman report and year over year gains in the range of 3 to 4%. By contrast, chain store sales released Thursday morning were more mixed. Stores reported weak traffic and sales in line with May which means that sales appear to have peaked in April. We’re still seeing some growth but make no mistake, the peak is past.
Probably the most encouraging report of the week was the unemployment claims report for a change. New claims dropped 21,000 to 454,000. Continuing claims also fell but at least some of that was due to expiring benefits since Congress didn’t extend them again. The debate over jobless benefits is a tough one; if you know someone who has been looking for work - and I mean really looking - and not finding anything, it is hard to support cutting off their lifeline. On the other hand, the economic research is pretty clear in that longer benefits mean longer periods of unemployment. I’m not sure what the right answer is but we have apparently reached the limit of what is politically feasible. Anyway, one week doesn’t make a trend but maybe this is the beginning of a renewal of the downtrend in new claims. That would be good news for those falling off the rolls and for the economy as a whole. As I’ve said repeatedly, I won’t feel nearly comfortable until new claims get under 400k.
Another somewhat encouraging report was the wholesale trade report on Friday which showed a rise in inventories. Well, actually it might be a case of good news/bad news. Inventory to sales ratios have recently been setting record lows so even as production ramped up to build inventories, sales were rising faster. Sales dipped a little last month though so it appears that production has now caught up. Unless sales start to rise again soon, that isn’t good news for future hiring. Rising inventories are good news for GDP though and indicate a certain degree of confidence on the part of businesses who generally aren’t willing to add to inventory without some confidence that sales will rise enough to justify the investment.
Markets last week did stage an impressive rally - or did they? Up 5% is not an ordinary occurrence and it certainly felt a lot better than the down weeks we’ve been having lately, but that bounce off the bottom doesn’t mean all that much yet if you ask me. Yes, as I said last week, stocks are cheap and I am nibbling at some blue chips but is this the resumption of the bull run or just a pause in an ongoing secular bear market? I don’t know and I’m no technician but it doesn’t seem very impressive when you realize that we didn’t even manage to break the short term downtrend line last week and that the S&P 500 still trades below both the 50 and 200 day Moving averages. And that the 50 day is now below the 200 day. By the way, there is nothing special about the 50 day and 200 day averages; they’ve just become convention and so many people use them now that they are a bit of a self fulfilling prophecy.
What does make me think this rally has more to go is that sentiment, even in the midst of last week’s rally, didn’t improve. Bulls aren’t as scarce as unicorns but they aren’t exactly ubiquitous either. Bears broached the 50% level in the AAII poll last week, something that falls into the anti gun control Democrat or pro gay marriage Republican category of rare. The volatility index remains elevated which indicates a willingness to pay up for downside protection; it has fallen from the mid 30s levels of the last few weeks to the mid 20s but that still isn’t exactly complacent.
I do think the crowd is still too pessimistic about the economic prospects and especially the outlook for corporate profits but I find it hard to get overly bullish without a change in economic policy. There has recently been some rumbling from the Fed indicating a willingness to do more on the monetary side but the regional presidents seem unlikely to support such a move absent an actual tightening on the fiscal side. Promises of future prudential management of the budget by as yet unelected Congresses and Presidents is not sufficient to produce a more expansive Fed. And frankly, I don’t think it is what we need anyway. Maybe someone can explain to me how looser monetary policy now is sufficiently different from what we tried in the 70s to expect better results. Over regulation, high taxes and government directed investment (think synfuels and more recent fiascos like Solyndra or Abengoa) along with expansive monetary policy produced, among other things, disco, inflation and economic stagnation. Alright, maybe we can’t blame disco on government economic policy but the Carter administration has to take the rap for bad punk rock.
Monetary policy isn’t the answer or at least not the whole answer to our problems. We need a policy for growth and we need to relieve the uncertainty that has the S&P 500 sitting on record amounts of cash rather than investing. One thing I’m sure of is that President Obama and his administration are poorly suited to the role of national venture capitalist for the simple reason that none of them have ever been capitalists. Using taxpayer dollars to fund politically favored industries and companies will create jobs only for those with priveleged access. The net effect will be to reduce the total number of jobs as more promising companies and ideas without political sponsors are left to suffocate from a lack of capital. It is easy for President Obama to tour the companies his administration has funded through loan guarantees and grants and point to the obvious jobs he has “created”. But it isn’t a growth strategy to presume as this administration does that it knows best how to allocate scarce capital. That has always best been accomplished by individuals risking their own capital not politicians risking taxpayer’s.
So until we get a change in policy that allows more competent allocators of capital to invest without worrying that the government will either tax away any gains or fund the competition with tax dollars, I don’t think we can get a sustained move higher in stock prices. Until the administration stops making it more expensive to hire, companies will hold off hiring. Until the administration stops threatening to raise the cost of capital, investment is on hold. The market is cheap but it is cheap for good reason. The administration’s top down policies are not working and until a more pro market approach is adopted - by this administration or a future one - stocks will stay cheap and there is the danger that they will become cheaper still. Not Bob Prechter, social anarchy, head for the hills cheap but certainly cheaper than they are now. So, yes it’s okay to nibble on some of these cheap blue chips but if you do be prepared to be patient and be prepared to buy more if they get cheaper still.
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[...] Weekly Economic and Market Review | Contrarian Musings alhambrainvestments.com/blog/2010/07/10/weekly-economic-and-market-review-17/ – view page – cached The gloom lifted last week long enough for the stock market to stage an impressive 5% sprint higher even in the absence of significant positive economic news. Tweets about this link [...]
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