Weekly Update: Still no Brad Pitt
LA’s fine; the sun shines most of the time, except when I visit. So after several meetings there, we headed off to Beverly Hills, as I continue to look out for Brad. We lunched at the Villa Blanca (as seen on “The Real Housewives of Beverly Hills”) with La Toya Jackson (!), although she wasn’t very talkative to me. A reader of my weekly asked me if my wondering whether we should sell in March, given important government deadlines, still holds. As I have said, the pain trade is to the upside, and seasonally, March and April historically have seen above-average returns. I have also said the market can only focus on one thing at a time, and now that is D.C. and the important events of March. We had the sequester kick in, and the market focused on the fact it represents only 2% of government spending, even though the Congressional Budget Office estimated that, if held for the year, it will cut six-tenths of a point off already anemic growth forecasts for this year. (Federated is projecting below-consensus 1.7% GDP growth in 2013, in part because it does not expect the sequester cuts to be rescinded.) Then the House this week passed a bill to fund the government through Sept. 30, thereby avoiding a shutdown March 27. So, now our leaders have once again kicked the can down the road with the budget. Therefore, it appears that the market can carry on its upward move without worrying about D.C. until the fall.
It took 5.4 years for the Dow to return to its old high. By comparison, it took 9.8 years to return to the Dow’s 1973 high and 25 years to return to its 1929 high! Ned Davis says the Fed can be thanked for the short turnaround, as one of the stated goals of QE is to push investors into stocks. But, adjusted for inflation, the Dow is still 11% below its Jan. 14, 2000 high, and despite the recent gains, stocks aren’t loved. JP Morgan says most buyers are only reluctantly participating, “forced” in by performance anxiety and/or resigned to the fact that central bank “manipulation” requires equity exposure (i.e., there aren’t many “true” believers). For those who believe “everyone” is bullish, look no further than the equity-only put/call ratio, which currently stands near the levels seen during the angst of December’s fiscal cliff. On the other hand, Miller Tabak also notes the latest NYSE Margin Balance (as of January, reported on a one-month lag) shows that margin debt is at the highest level since July 2007, with January posting the biggest month-over-month increase since May 2007. Sentiment is good enough to take us to new highs—the latest AAII gauge of individual investor sentiment shows a mere 31% of individual investors are bullish, while 39% are bearish (the retail investor has historically been late to the party)—but the concern is credit more than anything else. Renaissance Macro notes yields on 2- and 10-year Treasuries have failed to move higher with equities, a rather strange and troublesome event over the last few years. Of the 23 cyclical bull markets since 1900, only seven have produced a larger cumulative gain than the current bull, and only seven have lasted longer than this run’s four years.
The dinner President Obama had Wednesday night with a dozen Republican senators sparked optimistic-sounding headlines about the president seeking a grand bargain. Count us skeptical this will occur. McBee Strategic Insight says the president’s new offer, meant to break the logjam over the budget and sequestration, was a rehash of proposals made in his last formal budget request a year ago and in fiscal cliff offers to House Speaker Boehner in December that were rejected by the GOP. One important near-term test of Obama’s willingness to shift his position on entitlement cuts is his upcoming budget. It is expected to be released nearly two months late, during the Easter recess when Congress is out of town. Not a good sign. Nonetheless, Senate Republicans thus far have expressed appreciation for Obama’s outreach, which they view as sincere; a Bloomberg reporter said he hasn’t seen this “charm offense’’ since he began covering this administration. Maybe Obama has been listening more to his friends in Hollywood, where it’s easy to get caught up in the feel-good environment. I completed this week’s California travels in Newport Beach, where I wrote at my hotel room desk, overlooking a fabulous golf course, marina and the ocean. Oh yes, LA’s fine, but it ain’t home … Pittsburgh’s home, where as I was writing this, my car had six inches of fresh snow fall on it! Am I star struck? Not until I see Brad!!
February’s jobs report was good … February’s 236,000 increase in payroll jobs surprised, with major sectors all contributing to job growth and the vast majority posting higher job gains versus January. The leading components were solid, too, as both household and temporary employment rebounded. The gains dropped the unemployment rate to 7.7%, its lowest level since 2008.
ISMs suggest economy gaining momentum February’s nonmanufacturing index surprised, rising to its highest level in a year on jumps in orders (export orders were their highest since May 2007) and order backlogs. Respondents’ comments mostly reflected “growing optimism about the trend of the economy and overall business conditions.’’ The services reading followed last Friday’s better-than-expected manufacturing report, which rose to a 20-month high on big increases in new orders, backlogs and production. However, both ISMs reflected a slowdown in employment, which is worth keeping an eye on given rising inventories (more below).
Auto sales remain in higher gear February light vehicle sales rose to a 15.3 million annual sales rate, the fourth straight month above 15 million. On a 12-month average basis, sales are their highest since August 2008, continuing to track better than average at this stage of the cycle, on pent-up demand, new models, more credit availability—and the willingness of consumers to use it. January consumer credit outstanding jumped the most in five months on increases in non-revolving debt such as auto loans, and in 2012’s fourth quarter, household borrowing rose at its fastest annualized pace in five years and household net worth rose to its highest level since the end of 2007.
… but not all of the February jobs report was good Downward revisions dropped the three-month average rate of payroll growth to 191,000, slightly below the 200,000 rate after the January report. The labor force also declined, dropping the labor force participation rate down to 63.5%. And though the unemployment rate fell, the median duration of unemployment rose. Moreover, if sequestration that started March 1 stays in place, monthly full-time payroll employment growth could be weighed down by 50,000 to 75,000 a month, with three-quarters of the cuts coming in government. Private-sector job growth also could come under pressure in coming months on a buildup in factory and wholesale inventories. Both rose above expectations in January, suggesting they could go from a drag to a contributor to GDP. But the inventory build comes on softer-than-expected sales, which could detract from employment gains in coming months as businesses work off inventories.
Whiffs of a potential pickup in inflation? Fourth-quarter 2012 nonfarm productivity was revised up slightly to a still negative 1.9%, the biggest decline in four years. Meanwhile, the dollar continues to strengthen, January’s trade gap widened more than expected on a rebound in oil imports, and fourth-quarter unit labor costs rose 4.6%, with manufacturing labor costs up 2.3% year-over-year, the most since 2009’s second quarter.
Retirement savings at risk More Americans are raiding 401(k)’s to pay the bills. NBC News reported one in four Americans is raiding their meager retirement savings to pay their monthly bills, according to a new study. The withdrawals add up to more than $70 billion annually. Globally, the U.S. is ranked 19th in the world, below Western Europe, Canada and Japan, in retirement security, according to the Natixis Global Retirement Index. Norway is at the top of the list, ahead of Switzerland, Luxembourg, Sweden, Austria, Finland, the Netherlands, Denmark, Germany and France. Britain is in 20th place.
What a correction might look like Oppenheimer says a “symmetrically’’ and “proportionately perfect’’ correction starting right now would last 43 days and shave 111 points, or 7.2%, off the S&P 500.
The rich get richer A record 1,426 people have made the Forbes annual tally of billionaires, up 16% from last year. The world’s youngest billionaires are Facebook founders.
I resemble these remarks Female brains are much more efficient than men's, according to a UCLA study. We need fewer brain cells to do any test. We can multitask. Our memories are better. And we are better at keeping track of changing situations.