WEEKLY UPDATE
October 29, 2009Stocks Rebound: U.S. stocks had a strong day ending near their highs for the session on news that our economy grew more than expected during the third quarter. Released GDP data revealed a 3.5% growth rate, while analysts expected something closer to 3% growth. Although this rise was partly anticipated because of the "cash for clunkers" and first-time home buyers incentive program, today's numbers certainly surprised the market, coming off the heels of yesterday's losses when Goldman Sachs spread a "whisper number" of 2.7% GDP.
The S&P 500 bounced above near-term support levels that it broke through yesterday and now sits just under resistance levels it set this past Monday. Today's strong rally brings us just a bit below the levels we were at on Monday.
Unemployment claims came in higher than expected showing that job losses continue to exceed 500,000 each week, but the disappointing labor news was overshadowed by the good news of the GDP release.
Tomorrow will be significant for traders. Most are watchful to see if today was a one day short-covering rally before resumption of the down-trend, or if the markets will be able to extend the rally to perhaps levels we were at a week ago before this down-trend began.
I will post another update sometime this weekend to recap the week as a whole and what to look forward to next week.
Take care,
Greg
October 28, 2009
Stocks fall, Bonds Rise: Today the Dow fell 119 points on a stronger dollar, marking the third +100 point LOSS of the past four trading sessions. While the Dow remains slightly above supporting trend-lines, the broader S&P 500 has not. The S&P 500 stock index fell 20 points today to close decidedly below its support line - this is important for those awaiting the start of a significant stock market correction.
In contrast to the stock market, Treasury bond prices rallied nicely today. Yesterday the auction of the two-year Treasury note went very well as investors flocked to the short-term treasury. It appears that institutional investors still have an appetite for the safety of treasury bonds.
Since we are under-weighted in equities and over-weighted in bond funds, we benefit from this recent behavior of the stock, bond, and currency markets.
Extension and expansion of buyer incentives: After the markets closed today, the Senate announced that they have agreed to extend the tax credit for first-time home buyers to the end of April 2010. The current tax credit was scheduled to expire at the end of next month. Today's deal would also be expanded to those who have lived in their home for five consecutive years. I expect that this news will have a positive effect on housing stock prices tomorrow morning.
3rd Quarter GDP results are due out tomorrow: Most are expecting that tomorrow's release of GDP data will show that the U.S. economy grew at 3% annually in the third quarter. Surprisingly, investment giant Goldman Sachs announced today that they are reducing their estimate of tomorrow's number from 3% to 2.7%, which also contributed to today's stock market setback. We will have to wait and see if Goldman's "whisper number" is correct.
New home sales fall: The rate of new home sales fell 3.6% in September. Most analysts expected sales would rise, so this also had a negative impact on today's stock market.
Looking ahead: Tomorrow will be a pretty important day for the markets. All eyes will be on the release of the GDP numbers and how the stock market reacts to this and to the extension of the home-buyer's credit. If the support in the market is sufficient to bring the S&P 500 Index above near term support, then the market may be able to close out the week at these levels; otherwise this correction will likely accelerate.
Take care,
Greg
October 25, 2009
Many expect the government will report that the recession is over! Really? Third-quarter results of the Gross Domestic Product (GDP) are due to be released and many economists expect the number to show an increase, suggesting that the greatest recession in the past 80 years is behind us. Others aren't so sure. Others believe that the combination of "cash for clunkers" and first-time home buyers programs may have stopped the economic slide, but a recovery will not come around until companies are in a position to re-hire some of the 7 million workers displaced since this recession began.
On our October 3, 2009 update (see below) I included a chart showing the difference between today's official unemployment rate and what the unemployment rate would be if it were calculated in the pre-1990 manner (back then it included folks who dropped off the unemployment roles without a job). The chart showed just how many folks are out of work today. This week I wanted to include some points made by the Federal Reserve Bank of Atlanta about a jobless recovery. Much has been written about a jobless recovery, but I think the words from the FED itself speak well to the point of whether we are expecting a typically strong economic recovery or whether we should expect a flat, more vulnerable recovery in the coming months. The following is from the Atlanta FED.
The growing case for a jobless recovery
The Wall Street Journal repeats the unhappy news:
"Companies across the economy are holding off on hiring even as the profit outlook improves, amid economic uncertainty and their own success at raising productivity in rough waters.
Hiring always lags behind in economic recoveries, but the outlook this time is worse, many economists say. Most forecasters now expect a prolonged period of high unemployment, even though the government is expected to report next week that the economy grew in the third quarter, after four quarters of contraction."
I'd like to be able to contradict what most forecasters expect, but we at the Atlanta Fed have been building the case for a similar outcome on macroblog. Here are few salient points from previous posts.
Job opportunities are scarce. (Oct. 14, 2009)
"At the end of August there were estimated to be fewer than 2.4 million job openings, equal to only 1.8 percent of the total filled and unfilled positions-a new record low."
This development could, of course, turn around as business activity picks up, but there is more than a little evidence that some structural impediments are afoot.
Job losses have been disproportionately concentrated in small businesses. (Oct. 6, 2009)
As Melinda Pitts pointed out a few weeks back, businesses with fewer than 50 employees account for about one third of net employment gains in expansions. They have accounted for about 45 percent of job losses since the beginning of this recession. Given that these are the types of businesses most likely to be dependent on bank lending-and given that bank lending does not appear poised for a rapid return to being robust-the prognosis for an employment recovery in these businesses is a question mark.
The share of workers reporting that they have been involuntarily cut back to part-time is at a recorded high. (Aug. 14, 2009)
"… the increase in people reporting that they are involuntarily working part-time rather than full-time is considerably higher in this recession than in past recessions. Although the increase in these workers has moderated some since the spring of this year, the number of people in the category of working part-time for economic reasons remains at 8.8 million, well above the level of past contractions in both absolute and relative terms."
One potential implication of this fact is that firms probably have the capacity to expand production without hiring new workers (or increasing worker productivity). All these firms have to do is give more hours to existing workers, who have indicated they would be plenty eager to have them. Good for them-and good for GDP growth-but not much help on the employment front.
Here is one additional concern that we have not previously emphasized.
The percentage of employee separations labeled permanent is at a recorded high.
Underneath the usual total unemployment numbers are the reasons an individual is unemployed: You are on temporary layoff; you quit your job; you have reentered the labor market and have yet to find a job; or you are entering the job market for the first time and have yet to find a job. Or, finally, you have been permanently separated from your previous employer, who has no expectation of hiring you back.
The last category is the dominant reason for unemployment at this time. That might not seem surprising, but it actually is. Never, in the six recessions preceding the latest one, did permanent separations account for more than 45 percent of the unemployed. The current percentage stands at 56 percent as of September and appears to be still climbing:
Of course, none of this is proof positive that we are in for a "jobless recovery," but, to me, the odds appear to be increasing.
By David Altig, senior vice president and research director at the Atlanta Fed
My thoughts on the subject. Regardless of whether the government reports a positive GDP number on Thursday or not, we in this country will not be experiencing the kind of economic growth we have grown used to until banks begin to loosen up credit to small and medium-sized businesses and until businesses stop laying off their workers. While it is true that the FED completely missed the collapse of the markets last year, they have been consistently warning us of late that we should not expect a robust recovery and that this recovery will be anemic and vulnerable. I think they are most likely right.
The stock market stalls out. The stock market failed to hold onto last week's gains even as many companies beat the analyst estimates. Here are the statistics:
So far, 199 of the Standard and Poor's 500 Index have reported their earnings. Of those that reported, 81% have beaten analyst expectations (that's great). The bad news is that the growth rate of earnings this quarter was -18.2% (that's bad). So it appears that while companies are losing less money this quarter than feared, they are still losing money.
The outlook for this week. This week we expect to see more volatility in stocks and bonds as companies report their earnings, the Treasury Department auctions off over $100 Billion in new debt and the government reports the health of the economy on Thursday. Eyes will also be focused on the U.S. dollar to see if it can continue to gain strength and build on the bounce it had late last week.
Take care,
Greg
October 16, 2009
The stock market struggled to close the week following the release of worse-than-expected news on the corporate and economic fronts. This plays well with our view that the economic recovery here in the U.S. is weaker than Wall Street had hoped for, setting up a possible start to the long-awaited correction in stock prices.
Corporate earnings suggest that U.S. consumers are still reluctant to buy - Bank of America released their earnings today revealing a $1 billion LOSS in the third quarter, compared to a $1.2 billion profit from a year earlier. Losses continued to mount in the consumer banking side as credit card users and home owners are still suffering from the credit crunch that began a year ago. This is a stark difference from the results of JP Morgan and Goldman Sachs whose profits earlier in the week propelled the market higher. It simply illustrates the difference between investment banks that have benefited from the bailout and those banks that have a real exposure to the U.S. consumer.
General Electric woes hurt the market as well - GE reported losses today across all sectors of their company. Hurting most from losses in the GE credit division, GE is now trying to spin-off NBC in an effort to shore up its balance sheet.
Consumer sentiment falls in October - The University of Michigan released their preliminary report on consumer sentiment in the month of October and showed a notable drop in consumer optimism. Economists had been expecting a modest decrease from the September reading of 73.5 but instead received a much larger decline to a reading of 69.4. The stock market dropped on the news that American consumers remain hesitant to spend.
Commercial property loan losses mount - Today the industry voice for the Commercial Property Owners Association went to Washington to request a bailout for their members. The industry association estimates that we will be facing $300 billion in commercial loans maturing in EACH of the next five years; unless credit conditions improve, this will prove disastrous to the industry and the economy.
I realize that today's news seems bleak, but it really works in our favor. We have been looking for a more reasonable assessment of the economic strength of our recovery to show up in the equity markets and today's news reinforces our ongoing evaluation. Next week will prove to be an important week for equity investors as the bulk of earnings results will be released and we will be left with a clearer indication of value in today's stock and bond markets.
Take care,
Greg
October 14, 2009
Stocks are up on strong earnings from JP Morgan & Intel. Stocks started to rally on last night's news that Intel reported third-quarter earnings were above second quarter's results (but 7% below a year ago). JP Morgan also reported earnings before the bell this morning that propelled the entire banking sector higher. Intel's good news spills over to others in the technology sector suggesting that demand for computers and semiconductors outside the U.S. is stable (meanwhile, U.S. sales were down).
Goldman Sachs reports earnings tomorrow morning and these are expected to be strong like JP Morgan's, but these two investment banks may be setting a high bar for other banks to reach. Banks that don't have investment banking services are not expected to do well. Credit conditions remain tight and loan write-offs continue to grow, so it remains a tale of two cities (i.e. Wall Street banks prospering from the bailout and the poor regional banks left to survive on their own).
Earnings season is in its infancy. So far earnings have been better than expected but we won't get a clear sign of the state of corporate America until next week as more and more companies report their results. For now the results from the stars have been good and I expect another cheery report from Goldman Sachs tomorrow. Still it is good to note that many expect earnings to average 25% lower than a year ago so the stock market remains very high on a valuation basis and is way overdue for a pullback.
A weaker dollar pumps up stocks. Despite big headlines that the dollar continues to fall we should note that it is only down to levels it was at 14 months ago before the banking crises hit full speed. When the banking crisis hit, the dollar was driven up as demand for the dollar for a safe haven was sought by investors worldwide, now as the crisis is abating so too is demand for the dollar. As the dollar weakens, U.S. investments get cheaper for foreign investors so right now stocks are on sale to foreign investors. Every day the dollar weakens the stock market rises, but the dollar is overdue for a correction (rise to the upside). If that happens I would expect foreign equity traders will be selling stocks here in the U.S. and taking their profits off the table.
The FED speaks. The Federal Reserve released the minutes from their September meeting. The minutes showed that they continue to be concerned that the recovery is fragile. They noted that the recovery is weaker than they anticipated and that there was no appetite for hiking interest rates at this time. This relieved concerns among many bond traders that some more recent "hawkish talk" from FED members would translate to higher interest rates. Nevertheless, since August 1 treasury prices have been rallying as strong as the overall stock market. The chart below compares the Barclays 20+ year Treasury ETF with the Standard and Poor's 500 Stock Index. I noted before how unusual it is for treasuries to rally so strongly when at the same time stock prices are rallying. Once again it reveals two different outlooks, equity investors seem much more positive about the future while bond investors apparently believe that there is a better risk/return relationship in treasuries.
Today the Dow pushed above 10,000 which is a milestone. It will be interesting to see if it can stay at these levels as the rest of corporate America releases their results. The market is trading at record valuations right now so if earnings begin to disappoint it will prove to be tough sledding in the days ahead.
Take care,
Greg
October 12, 2009
The next few weeks are important for investors. After disappointing economic activity in September, folks are hoping that third-quarter earnings and a series of economic reports will offer proof that the recovery remains intact.
Momentum lost? August was a good month for retailers as sales grew nearly 3%; unfortunately, retail sales figures for September are due this Wednesday and are expected to show a 2.3% decline. Some argue that back-to-school shopping alone boosted sales in August, therefore sluggish activity can be expected to resume in September. First time unemployment claims came in better than expected, but with the weekly claims still exceeding 500,000 the economy is still shedding more jobs than it is creating. I included a chart in our report last week showing the rise in unemployment, and this trend continues. Hopefully our nation's employers will soon turn the corner, but it will depend on several factors that are out of their control, namely consumer credit availability (which shrank another $10 billion+ last month), consumer confidence, and consumer spending.
Next week we expect retail sales results, weekly unemployment claims, industrial production results and consumer sentiment figures. These figures and more are expected to shed some light on the short-term outlook of our economy.
California Out of Money Again: Just 10 weeks after passing the budget, California is already more than $1 billion in the red - the reason is declining tax revenue. California is not alone; Reuters reported that as the economy creeps toward a recovery after the worst recession since the Great Depression, many states see no end in sight for their diving tax revenues. California has sold more than $22 billion in new debt since April. A most recent bond offering scheduled to mature in 2039 yielded a whopping 7.23% interest rate. This rate (3% higher than a 30 year U.S. Treasury bond) indicates that California's budget mess is so bad that they have to resort to offering junk bond rates to attract investors. Safety-conscious investors should consider this if they hold municipal bonds.
Earnings to the Rescue? Alcoa reported slightly better than expected earnings this past Wednesday. Goldman Sachs releases their earnings on Tuesday followed by additional companies. If earnings don't begin to improve, the market may be headed for a significant correction. The chart below shows just how high the stock market is compared to company earnings. The bottom line is that stocks prices are higher today than nearly any other time in history relative to earnings. The market is clearly overvalued, but as long as stimulus money is readily flowing to Wall Street, prices and momentum will remain bullish. Eventually earnings will need to grow dramatically to support the Dow at 9700, or the market will correct itself. This risk to the downside far exceeds the upside potential; therefore I remain cautious and under-allocated in the stock market.
With so many factors affecting the markets and our short-term outlook this week, I expect to post more comments as the week moves along.
Take care,
Greg
October 6, 2009
Stocks ended higher for the second straight day, clawing its way back to the levels it was at late last week. An upgrade of several large bank stocks by Goldman Sachs before trading yesterday and a weaker dollar are noted as the major causes for the recovery in stocks this week. Also in response to a weaker dollar, gold rallied today to a record high.
Prices among our more favored bond mutual funds have continued to rally the past two days as treasury yields continue to slip. It is important to remember that bond (and bond fund) prices normally rise as interest rates fall.
After the close of trading tomorrow, Alcoa is expected to kick off the third quarter earnings season. Many are waiting intently for a signal from America's companies to see if sales are growing. Last quarter sales were terrible, yet because companies cut their costs so deeply, actual earnings were better than our worst fears. This time around analysts and traders are expecting more - they want to see that customer demand or forecasted demand is rising. We will have to wait and see but so far the nation's largest retailers are lowering their sales forecast for the Christmas buying season. Stock analysts have already made assumptions about higher earnings over the next year so this quarter's results may have a dramatic impact on their outlook and, in turn, the market's direction.
Take care,
Greg
October 3, 2009
For the second straight week the stock market fell and government bond prices rose as disappointing economic numbers provided additional evidence that a W-shaped economic recovery is in our future.
Job losses rocked investor confidence on Friday when the government reported that non-farm payrolls shed 263,000 jobs in September. Analysts expected the number to come in below 200,000. The report also showed that the average weekly hours are also being cut back. The average weekly hours worked was reported to be a RECORD LOW of 33 hours a week; another sign that businesses continue to cut back. Former Federal Reserve Chairman Alan Greenspan said on Sunday that he expects the unemployment rate to climb above 10% and to stay there for an extended period of time, yet he doesn't recommend a second stimulus plan to boost the recovery at this time. The chart below shows the official unemployment rate (U3) as well as the broadest measure of unemployment (U6) which includes workers who no longer receive unemployment benefits but have not found work. The SGS Alternate is a measure from Shawdowstats.com which includes those who have found work but at a much lower pay scale than they were previously receiving. All three measures show the trend for unemployment.
A rally in government bond prices continues. Disappointing news about the economy translates to higher bond prices. Bond prices rose across all maturities this week. Next week, the Treasury is set to auction another $80 Billion in treasury bonds, which is expected to be well-received by investors.
The dollar appears to have bottomed out - at least for now. For the past few weeks, stocks and the dollar have been closely tied together. If the dollar drops, stocks rise; conversely, if the dollar rises, stocks fall. A weaker dollar helps U.S. manufactures export their products but it hurts foreign importers like China. The Group of Seven finance chiefs ended their meeting this Saturday with a focus on currency exchange rates and a pledge to avoid disorderly swings in currencies that could threaten economic growth. Treasury Secretary Timothy Geithner released a statement saying that "it is very important to the United States that we continue to have a strong dollar." These statements give added support to bond investors but may give stock investors another reason to worry that this bear market rally has run out of steam.
The G-7 is working together to rebuild the world's economies. The G-7 said that while there are "encouraging signs" of a recovery, the world economy remains fragile and labor markets have yet to improve. U.S. job losses unexpectedly accelerated last month and the unemployment rate reached the highest level since 1983, the U.S. Labor Department reported two days ago. "There is no room for complacency," the G-7's statement said. "We will keep in place our support measures until recovery is assured." The G-7 said it would deliver on the promises made by the G-20 to strengthen the financial system by prodding banks to improve the quality and quantity of capital they hold and to develop a framework for balanced international growth.
Stock investors look to third quarter earnings. For the past two weeks, stock investors have been rocked by signs that the economy is not recovering as quickly as they had hoped. This next week will begin the third-quarter earnings reporting season and many are concerned that without solid progress on the earnings front, stocks will continue to decline. Technical analysts say we are on the cusp of the long-awaited correction in the bear market rally; we will have to wait and see if this rally can hold or a correction back to the March lows is in store for the future.
Take care,
Greg
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