Weekly Update: I've been depressed this week
The events in Boston rocked everybody. My daughter, probably my most wide-eyed child, goes to college there and was just one mile away from where all this happened. This is how I started off the week, and I spent the rest of it driving through Ohio and Kentucky (finding out the hard way that Kentucky is much bigger than I appreciated). When you are driving by yourself for that many hours, it gives you a lot of time to think, to listen to the sad stories of the innocent people, to ponder how big is this world—seems it’s taking forever just to get to this next meeting—and to wonder how are they going to find the bad guys? When you’re driving mile after miserable mile, everything seems so s-l-o-o-o-w. Slow describes nicely the economic data that came out this week. Some of the research I read suggests a second-half pick-up. I don’t see it. Things are getting slow. And when it gets slow like that, we have to think what does it mean for investing? Slow equals malaise equals dividends.
Each of the past three years, we had a summer swoon and worried about Europe, China, recession. Europe remains the major weakness and risk. The recession there is deepening—the IMF this week lowered its GDP estimates for France and Italy by 0.4% just since January, and Germany may be headed for contraction. Weak banks have a high and rising cost of funds, making them unstable. And countries in the periphery have been unable to downsize their governments or accomplish labor flexibility, and have reached their limits on taxes and private-sector mandates. Germany’s top central banker warned that Europe’s debt crisis will take as much as a decade to overcome, dismissing the view by some that the worst is over. In China, first-quarter industrial production disappointed and GDP growth slowed. At home, the economic data also pointed to a slowing (more below). At this writing, the markets were trading higher on what still is set to be a down week. Strategas Research notes more than half of S&P 500 stocks already have corrected at least 5% and the number of stocks making new 65-day lows has begun to expand modestly. Bearish sentiment is rising, a contrarian positive, while on the downside, 1,539 appears key for the medium term. That represents a double bottom from earlier this year, and the bulls cannot afford to lose that. Doing so would represent a bit of a change, as the S&P would make a “lower low” for the first time in 2013. JP Morgan asks the question, “If stocks don’t go up, must they necessarily go down?” Cutting out last week’s run-up, the S&P has been churning around 1,550 since the beginning of March and the most likely scenario may be a continuation of that trend. That trend equals slow equals malaise equals dividends.
This driving is taking forever. Slow is the worst. CNBC radio is reporting some bad earnings results through the tech sector. Meanwhile, Bloomberg Radio describes how technology has helped to locate the bad guys. There are more good guys than bad guys. The good guys are very smart and they have technology. I LOVE technology! Many times I’ve mentioned how my hero, Steve Jobs, has created the technology for me to do my work as I travel the country. It was technology that within just a few days, found the bad guys. As I make the final leg of my trip, I’m thankful that my vehicle didn’t encounter the tornadoes and horrible storms that hit just a few states over and that the Kentucky policemen are nowhere near as diligent as they are in Ohio (they’re all over the road today!). It’s been a long week, so the Mister and I are planning a getaway next weekend. I’m going to give my daughter a hug and get myself some chowder in one of America’s great cities. I’m going to Boston.
Fed sees improvement Contrary to other reports suggesting a spring slowdown (see below), April’s Beige Book said the economy expanded at a “moderate” pace in early spring, an improvement from the “modest to moderate” pace seen in March’s rendition. The ongoing recoveries in the housing and auto sectors were the largest cause for optimism, and they provided a boost to other sectors such as manufacturing and finance.
Inflation report = more QE Headline CPI declined 0.2% in March, lowering the year-over-year rate to 1.5%, on falling energy prices and just a slight tick up in food prices. Core CPI also barely rose, putting the year-over-year rate at 1.9%. This is below the Fed’s long-run target, supporting the idea the central bank will continue to buy longer-term Treasuries and agency mortgage-backed securities at the monthly pace of $85 billion at least through the third quarter.
Housing slows March housing starts jumped five times the expected increase but were driven exclusively by multifamily units, which hit a seven-year high. Single-family starts fell, March building permits were below the pace of starts a second straight month, and March builder sentiment dipped a third straight month on a decline in present sales and prospective buyers’ traffic. No one doubts housing will help GDP this year—year-over-year starts, permits and sentiment are up significantly. But it has hit a lull, which some blame on unseasonably cold weather and still-tight lending standards, and will need to pick up to be the growth catalyst many are forecasting.
Leading indicators roll over They fell 0.1% in March, below consensus expectations of a 0.1% increase, on declines in consumer confidence, building permits and ISM new orders. Despite March’s dip, the index remains up 1.7% on a year-over-year basis, signaling continued expansion at a sluggish pace. As has been the case for months, financial indicators were the biggest positive contributors in March, led by interest-rate spreads, stock prices and the leading credit index. Once leading indicators begin to roll, that’s when dividends really start to shine.
Regional indicators disappoint The Philly Fed index unexpectedly slipped to 1.3 in April and the underlying details were even softer as new orders fell into negative territory and both employment and inventories contracted. New York’s Empire index also fell to a worse-than-expected 3.1, with declines in the forward-looking new orders series and shipments. Both indices suggest manufacturing’s expansion is slowing, with inventories shrinking as opposed to the first-quarter’s accelerated restocking, a negative for second-quarter GDP growth.
More slowing indicators Manufacturing activity unexpectedly declined even as overall industrial production rose as utilities cranked out more power to heat homes for a cooler-than-normal March … Production of electronic products and computers, used to estimate equipment and software spending in the GDP accounts, decelerated in the first quarter, indicating capex spending has slowed … Year-to-year growth in commercial bank credit outstanding has fallen from around 6% at the beginning of this year, which was near its recovery high, to just over 4% … Market researcher IDC Corp. reports first-quarter PC shipments fell 14%, nearly twice as much as expected, the steepest quarterly drop since it began tracking the metric in 1994 and the fourth straight quarter of year-to-year decline.
The drag of debt-laden diplomas The Federal Reserve Bank of New York says today's young consumers, increasingly burdened by student debt, are less likely to borrow money to buy houses and vehicles. In the past, people with student debt were more likely to own a home than those without, but the trend has reversed. The same thing has happened with auto loans, as student debt crowds out other kinds of borrowing.
On second thought … A new paper published by University of Massachusetts Amherst economics doctoral student Thomas Herndon and his two professors, Michael Ash and Robert Pollin, concluded countries with debt-to-GDP ratios above 90% experience GDP growth of 2.2% on average. While that’s a percentage point lower than the growth rate seen in countries with lower debt-to-GDP ratios, it’s significantly better than the 0.1% average contraction economists Carmen Reinhart and Ken Rogoff said occurs at the same debt-to-GDP level. The latter’s work, which also said recoveries from recessions caused by a financial crisis and excessive debt are likely to be painfully slow, has been widely cited in arguments pushing for more budget austerity.
The Mister does our taxes The U.S. tax code is currently about 4 million words. The Bible is comprised of only 774,746 words—593,493 in the Old Testament, 181,253 in the New Testament.