Weekly Update: Minus 0.1%? Oh, my!
I traveled to Houston this week in search of warmer weather and got it—sunny and 82. But my buddies back home said it reached 68 degrees, a record high for Pittsburgh. While in Houston, I met with some feisty Texans, who before I even got started with my presentation were complaining that everyone said we were going to pull back at the beginning of the year, yet here we are making five-year highs. In a second meeting, an adviser said his client was sitting on a lot of cash and very worried about what to do given talk of retrenchment is still rampant. I’ve been saying for some time that the pain trade is to the upside; that you don’t want to get in the way of the seasonally strong months of November, December and January; that you don’t want to fight Fed, where policymakers this week maintained full-bore easing. Now we are entering February, a seasonally weaker month. The market has been pleased with the earnings season, which so far has surprised to the upside though off really beaten-down estimates. And, since the market can only pay attention to one thing at a time, it’s about to turn to Washington and the pending $1.2 trillion sequester and continuing budget resolution on March’s legislative agenda.
At a third meeting in Houston, at a wonderful French cafe (no fabulous Texas barbeque this trip), a British-born colleague with a Texas accent was intrigued with my thesis about economic malaise and how you get paid in such an environment. Malaise came up after the report on fourth-quarter GDP, which came in at -0.1%. (When I first heard the number but didn’t know any details, I said, “Oh, my!”) To how many audiences have I said, who cares if GDP grows by one point, a half point, or a tenth of a point, or shrinks by a tenth of a point, or half point? It’s all malaise. And how many times have I said there are worse things than this? What is the answer when you’re stuck in malaise? I want a portfolio manager who watches dividends, because if there is a recession, I don’t care because I’m getting paid. By the way, I also learned a wonderful new acronym on my trip—SWAN, for sleep well at night. I think that goes perfectly with the dividend-oriented portfolio!
It was a shocking negative number on GDP, although many analysts were quick to note consumer spending, business investment and other key components suggested underlying strength. They blamed the negative print on one-off factors (more below). Even the Fed hewed to the better-than-the-headline view, saying in its statement that a December pause in activity was due to such transitory factors as Hurricane Sandy and that several sectors of the economy appeared to be strengthening. The best comment I read all week quoted CNBC’s economic expert Steve Leisman: “GDP soared if you exclude all the negative components.” LOL! Many on Wall Street believe there may even be an upside to GDP growth this quarter, which the consensus currently puts at around 1.6%. And so I love to say to people, this is what we’ve become. We become excited when we think we may have to raise a 1.6% GDP estimate a half point or more. This is the picture you get when you go the dictionary and look up “malaise.’’ It’s all malaise, malaise, malaise … oops, I’m nodding off as I write this. But that’s OK, because it’s almost bedtime and I’m preparing to SWAN.
Positives
Manufacturing perks up January’s ISM Manufacturing Index surprised, jumping to its highest level since last April on big increases in new orders and employment. The final Market U.S. PMI slipped but was still strongly positive and above consensus. The reports were in line with the Chicago PMI, which also was much better than expected and led by the biggest jump in nearly five years in its employment component. In addition, December’s durable goods orders rose well above forecasts on a surge in aircraft and defense orders as contractors rushed to beat the potential sequester. But the overall gains were broad-based, with core capex orders rising at a 21% annual rate in the fourth quarter, almost reversing the third-quarter’s 24% decline. The latest reports suggest negative readings out of New York, Philly and Richmond reflected the one-off impact of Hurricane Sandy.
Markets like job revisions January’s moderate 157,000 increase in payrolls was slightly below forecasts, but it was the upward revisions to 2012 that caught the eyes of traders, who sent stocks jumping this morning after closing the book on the best January for equities since 1989. Nonfarm payrolls were revised up by 127,000 the final two months of the year, pushing total employment gains for 2012 to 2.2 million, above 2011’s 2.1 million increase. Notably, private-sector employment is now estimated to have expanded by 675,000 in the fourth quarter, making it the second-strongest quarter of the recovery for private payroll growth. Dudack Research says the revisions put establishment job growth at 1.78% year-over-year vs. a long-term average of 1.76%, while household employment is now expanding 1.2% year-over-year vs. a long-term average of 1.5%. This still sufficiently lackluster picture should keep the Fed on a steady easing path, an outcome the markets like.
We like dividends Personal income surged well above expectations in December and November was upwardly revised. The latest 2.6% increase was the biggest since December 2004, when Microsoft distributed a special dividend. Disposable personal income jumped 2.7%, the most since May 2008. These figures were helped by accelerated and special dividend payments and accelerated bonuses ahead of 2013's anticipated increase in income taxes. Personal consumption expenditures rose slightly, as expected, and the personal saving rate jumped to 6.5%, the highest since May 2009 and historically consistent with below-trend economic growth.
Negatives
Even if one-time factors are to blame, Q4 GDP was disappointing The unexpected 0.1% decline was driven by a 15% plunge in federal government spending, the biggest drop since 1973, as defense spending plummeted 22% after jumping 13% the prior quarter. This alone reduced GDP by 1.3 points. Inventory investment also slowed sharply after a third-quarter surge. Still, King Securities was surprised at the contraction, even with Sandy’s effect, because corporations tried to book as many profits and bonuses as possible in the quarter to avoid 2013’s higher taxes. While this year’s new tax increases are expected to cut into growth, our Wall Street sources say the need for firms to rebuild inventory will likely offset that impact, and put upside risks to the currently low Q1 GDP estimates.
Another sign how low inventories could slow housing’s recovery December’s pending home sales were weaker than expected despite the year-end tax increase and favorable weather. The National Association of Realtors says low inventory levels are starting to pinch as buyers, particularly first-timers, have fewer properties from which to choose. Still, the pending sales index, a good leading indicator of existing home sales, is running 7% ahead of year-ago levels and, perhaps more noteworthy, home prices are continuing to climb. Home prices overall rose 13% on average in 2012, moving 1.3 million homes from negative to positive equity, the Institutional Strategist notes, and the next 5% improvement should move another 2 million homes from negative to positive equity. This greatly improves consumer balance sheets, which portends for improved consumer spending.
Looks like consumers noticed the payroll tax hike The Conference Board’s confidence gauge plummeted in January, with both the expectations and assessments of the present situation components deteriorating sharply. The drop-off likely reflected households’ growing appreciation for the impact of the payroll tax hikes on their incomes as the net reading on income expectations over the next six months plunged to its lowest level since April 2009, when the economy was still in recession. The University of Michigan’s sentiment gauge unexpectedly ticked up in the final January reading but was still hovering near a one-year low as higher payroll taxes weighed on moods.
What else
It’s too early to worry about declining margins ISI observes that in each of the past three cycles, wage growth has accelerated when unemployment rates have been at or below 6%. Profit margins are the key driver of earnings per-share, and margins rise at the expense of workers. With the current unemployment rate at 7.9%, it seems too early to call the peak in the margin cycle.
Ick! A recent poll by Public Policy Poling found that Congress had an approval rating of only 9%, with voters viewing head lice, cockroaches and root canals in a more favorable light than their elected representatives.
I’m a Steelers fan … won’t be watching The “Super Bowl Indicator” suggests that if the winning team of the Super Bowl can trace its roots back to the original pre-1970 NFL, it should be a bullish year for the stock market. If the winning team comes from the original AFL, stocks should decline for the year. It is widely accepted that this rule has been accurate around 80% of the time since 1970. The good news, Miller Tabak observes, is that both the San Francisco 49ers and the Baltimore Ravens are considered original NFL teams.
