Weekly Update: Do you feel comfortable buying green bananas?
I heard the above a lot from the fun people of Naples-Marco Island, Fla., where I spent most of this week. The joke is they are so old they wonder if they will survive long enough for the bananas to ripen. This may sound morbid, but these retirees think it’s too funny. And in fact, when in several of my talks I spoke about how expensive we, the baby boomers, will become, several members of the audience corrected me. “We’re not boomers, we’ve already boomed!” There are a lot of well-to-do people down here, a lot of retirees who have a lot of time to check their portfolios—a lot. More than one adviser reported of clients warning, “Don’t lose my money or you’ll lose my account’’—I hear this a lot in my travels. Deutsche Bank says it’s still an incredibly fragile developed world economy, one that’s unable to stand on its own two feet without previously unimaginable intervention, both monetary and fiscal. As such, Deutsche still thinks the road is full of large problems and heavy intervention for years to come. There will be waves of liquidity-fueled euphoria, but also periods of fear and large risk-off. An investor can’t really afford to miss the liquidity rallies, but he or she has to acknowledge that there’s a long way to go before the developed world has a self-financing and sustainable economic system and financial markets.
Such a policy-driven market is hard to negotiate—no asset class takes hold until we are through it—and it looks like it’s going to be a policy-driven market for some time. Just when it seemed that things were quieting down over in Europe, the Italians decided to have an election for a new parliament that is so dysfunctional they may need to have another election. “The winner is: Ingovernability” ran the headline in Rome newspaper Il Messaggero. The odds of sworn enemies working together to form a government are low. Everyone agrees that the election was a massive rejection of the austerity policies promoted by Prime Minister Mario Monti. They seem to have forgotten that ECB President Mario Draghi’s pledge to “do whatever it takes” to defend the euro was conditional. He insisted that debt-challenged governments must ask the ECB for help, which would be provided only after they had implemented credible fiscal restraints and economic reforms. Back home, Fed minutes had policymakers discussing exit strategies from unprecedented easing, only to have Chairman Ben Bernanke tell Congress an exit strategy can be delayed—and potentially put off altogether by allowing bonds to roll off its balance sheet as they mature. Then there’s the sequester. With the across-the-board cuts starting to take effect today, the question now turns to duration. Our sources don’t think the cuts will remain in place for the remainder of the fiscal year, though just how quickly they are replaced depends on how acutely the impact is felt. A sequester of this magnitude has never gone into effect before, so the answer to that question is largely unknown, but the first opportunity to address the policy will be the debate over the continuing resolution funding the government, which expires on March 27.
One adviser I met this week suggested, tongue-in-cheek, that it’s no coincidence the same week sequestration is taking effect, they were laying off the pope. Another told a story about a charitable foundation he was on the board of in the 1970s. During the week of the peak in the market, the charity received a large donation in the form of stock. It is customary for charities to immediately sell the stock for cash. But two nuns raised their hands and said that they heard the stock was going up, so why not wait to sell and get more money for the security? Advisers waiting to get that 2% to 5% correction—we were just below 3% early this week before bouncing back—are tripping over the timing. Do you buy now? February, after all, is the worst seasonal month, and it is behind us. Then again, technical indicators suggest we’re nearing a top—ISI says the S&P 500 and the Russell 2000 indices are as extended as they were in late 2007; Oppenheimer observes steep, uncorrected advances of the past year and a half gave way to declines of 11% and 9%, respectively; and Miller Tabak notes the 20-day moving average is now declining for most indices. We haven’t seen that situation since mid-October of last year, prior to a further correction. So what do you think? Do you feel comfortable buying green bananas?
Positives
Manufacturing picking up February’s ISM gauge rose to a better-than-expected 54.2, its highest level since June 2011, led by a jump in new orders, which is encouraging because this is the most forward-looking component of the report. It also gibes with what we saw in yesterday’s Chicago PMI (which rose to its highest since last March) and hints that purchasing managers are looking past the recent Washington budget debate to increase production and output. New export and import orders also rose smartly, providing further anecdotal evidence that the global economy is mending. Elsewhere, while January’s headline durable goods orders plunged on a 34% drop-off in volatile non-defense aircraft orders, core capital-goods orders—non-defense ex-aircraft—unexpectedly surged 6.3% (the consensus was for no change). An outsized 13.5% gain in machinery orders led the way. This also bodes well for future production and for capital spending, which had lagged in last year’s second half.
Housing recovery shows no signs of slowing January new-home sales unexpectedly jumped by the most in six years to their highest level since July 2008, while January pending home sales—a good indicator of future existing home sales—rose more than 10% year-over-year, more than doubling forecasts. The Case-Shiller and FHFA price gauges also accelerated, in part because new-home supplies remained tight at 8-year lows—a potential deterrent to faster sales growth but a catalyst for prices and single-family starts.
Consumers shrug off higher payroll tax, gas prices Conference Board consumer confidence jumped 11.2 points in February, more than tripling consensus, on consumers’ improving assessments of present conditions, the labor market and their outlook. The University of Michigan’s final take on February sentiment also surprised to the upside, reaching its highest level since November. This isn’t to suggest the 2% payroll tax reinstatement didn’t hurt (more below), only that so far, consumer attitudes and spending haven’t been affected much. January consumption remained steady, up 0.2% after the prior month was revised down a tenth to 0.1%.
Negatives
January personal income plunges It fell more than expected and by the most in 20 years, though a range of onetime events were blamed, led by special dividends and bonuses taken in December in anticipation of the New Year’s tax hikes. To wit, dividend income plummeted 34.8% after jumping 32.8% in December. Despite the income falloff, consumer spending rose and is on track to advance at around a 2.3% annual rate in the first quarter, suggesting first-quarter GDP growth of around 2.0%, up from a revised 0.1% increase at the end of last year. The somewhat benign take on this morning’s personal income plunge is dependent on the sequester not hurting too much and on private payrolls continuing to grow enough to lift incomes. It’ll take a few months to see if that view holds.
Speaking of income, disparity is deepening In 1970, the top 1% of income earners took in 8% of total income. Today, that group takes in 17.4% of overall compensation, a level last seen in the 1930s. The Gini coefficient for the U.S., a measure of income inequality, is the highest in the industrialized world. The decline of education in America is a major source of this inequality. America produces progressively fewer graduates with science and engineering degrees, and math and reading scores have dropped for decades. One in four in the U.S. now earns less than $10 per hour, and over one quarter of all jobs pay below poverty level wages for a family of four. And higher education isn’t a cure-all—over 70% of college grads have seen their after-inflation hourly wages decline during the last 10 years.
January construction disappoints It fell 2.1% (although December’s originally reported 0.9% gain was upwardly revised to 1.1%). While construction spending data are lagging indicators, nonresidential construction spending fell sharply in January (also after strong gains in November and December), and unless there is a significant rebound in February and March, this sector is on track to subtract from growth in the first quarter. In contrast, despite January’s flat reading, residential construction looks set to add to growth in the first quarter.
What Else
Cybercrime cuts Face(book) time Apple, Facebook, Twitter, Microsoft and many others have experienced a barrage of online security breaches in recent weeks, compromising company secrets, intellectual property, customer data and personal information related to millions of individuals. The escalating level of cyber attacks is threatening the business models of social media companies. It is estimated that cybercrime is costing global consumers $110 billion per year and affects nearly 1.5 million people per day. Any erosion of trust within social networks will constrain the flow and sharing of information. A recent study found that 27% of U.S. adults were planning to spend less time on Facebook in 2013, while only 3% indicated they would use the service more.
I like having my children around but … The number of people between the ages of 18 to 24 living at home has risen since 2001, according to a Pew Research Center analysis. In 2001, 54% of this group lived at home; in 2011, it rose to 65%. For college graduates, those figures are 31% in 2001 and 45% in 2011.
I do my own cleaning Researchers trying to explain why there is so much more obesity today noted that, in 1965, Americans spent 26 hours a week doing housework. Today, it’s 13 hours … “The Fast and Feast Diet’’ has become all the rage in Britain. For two days a week, dieters get to enjoy only 25% of their normal caloric intact—about 600 calories for men and 500 calories for women. The rest of the week, the dieters can eat all they want. The payoff—after eating so little for two days, most dieters aren’t as hungry and so don’t eat as much the rest of the week.
