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Weekly Update: The turtle with the fat wallet

As of 05-24-2013

I spent much of this past week in California, focusing on San Francisco and surrounding counties. San Francisco is my favorite city for walking. I did the loop from Union Square through Chinatown, down to Fisherman’s Wharf and down the Embarcadero past Alcatraz and Pier 39. I can report that the spirit of American capitalism is alive and well there. I was approached to buy water, a carriage ride on the back of a bike, a bike rental, and even to buy directions to my hotel. One of the advisors I met there lamented that many of his clients are still on the sidelines. They worry that they may have missed the run. This was before Wednesday’s “outside day,” which occurs when various important indices trade both above and below or “outside” their prior day’s price range. ISI notes this relatively rare event more often than not signals a reversal of trend. Gulp. And King Securities notes the last two times the S&P 500 hit all-time highs and closed down more than 1% from that high were Oct. 1, 2007 and March 24, 2000—events that presaged big declines in stock prices. Gulp. Gulp.

Wednesday’s action was marked by confusion over what Fed poicymakers were actually saying. There were two key phrases that spooked people—Chairman Bernanke’s “in the next few meetings” reference to a start for a potential tapering of QE purchases in his appearance before Congress and the FOMC meeting minutes’ “a number of participants expressed willingness to adjust the flow of purchases downward as early as the June meeting.” The bottom line from both is the Fed is not yet ready to start scaling back the degree of accommodation—it needs more data to confirm a sustainable recovery first. However, the general resilience of the economy (more below) increases the odds of tapering later this year, and market reaction during Bernanke’s testimony highlights the challenges the Fed faces in communicating its intentions. Every red close continues to bring a chorus of “this is it” proclamations, i.e., the start of the inevitable pullback, and technical indicators are pointing to potential consolidation. For example, the S&P’s next resistance is at the upper end of a 6-month and 1-month channel, suggesting a pullback/correction is likely near this month’s option expiry, RBC Capital Markets says. But Dudack Research says the 25-day up/down volume oscillator—a gauge of market breadth—is approaching an extreme overbought reading that usually occurs at the start of a major move. This could be very bullish. So, what’s likely near term? How about a sideways summer?

In a lunch meeting at a Chinese restaurant near wine country, I waxed eloquently about the wisdom of buying stocks. Then a client opened his fortune cookie which read, “You will do better in real estate than in stocks.” (I guess they have typos occasionally at the fortune cookie bakery.) Next, the client’s boss opened her cookie, to read “Something wonderful is about to happen to you.” And just then I began to wax eloquently about the particular wisdom of dividend-paying stocks. Finishing my California trip in sunny, casual Palo Alto, and visiting with a most impressive advisor, we debated the ramifications of the end game for QE. What if there is no end game at all? Should we worry about that which we cannot handicap? And meanwhile, the market climbs its wall of worry. Her analogy: The turtle with the fat wallet. So that’s why the hare runs past the turtle. The wallet, which is filled with dividends, is fat and heavy. And after awhile, the turtle comes upon the hare that is lying on his back from exhaustion. If I may, LOL.

Positives

Housing’s recovery accelerating April new-home sales rose faster than expected and were up 29% year-over year. Existing-home sales didn’t rise as much but were their highest in four years, with activity restrained primarily by continued tight credit and limited inventory, the National Association of Realtors reports. Prices keep climbing, with March’s above-consensus increase putting the FHFA price gauge up 7.2% year over year. April’s median and average new-home prices hit record highs, and existing-home prices were up 11% from a year ago.

Orders point to continued manufacturing growth April durable goods orders rose more than expected, offsetting some of the prior month’s decline, and stripped of the volatile transportation and defense components, core capital orders were up 1.2%, more than double the consensus. March’s core orders were revised up sharply, too. However, April’s core shipments fell 1.5%, a sign business spending is starting off the second quarter on a sour note. Separately, May’s Markit U.S. flash PMI came in at a better-than-expected 51.9, down slightly from April, with declines in output and employment partially offset by an improvement in new orders.

All roads lead to jobs The April 30-May 1 FOMC minutes were a bit more optimistic on the labor market, as “most” participants noted progress in the jobs outlook since QE3 began last September (though “many” thought that was not yet enough to warrant tapering QE). The latest weekly jobless claims fell 23,000, reversing the surprise bump up the week before, and lowering the four-week moving average to 339,000, a level consistent with modest payroll growth and just a tick above the five-year low reached in early May. Mass layoffs also fell to their lowest level since February 2006. 

Negatives

Nikkei plunge disconcerting, but … Thursday’s 7.3% drop was preceded by a 50% increase in the same index year-to-date. In addition, Dudack notes the Nikkei was 47% above its 200-day moving average prior to Thursday’s decline. In other words, while investors might have been spooked by the headlines, Thursday’s plunge was not an unusual decline given the rally that preceded it.

Individual investors still aren’t buying it Last week, as the S&P climbed 2.1% to another new high of 1,668, Bank of America/Merrill Lynch clients returned to being net sellers of U.S. stocks, which has been the case in 11 of the last 13 weeks. Hedge funds, in contrast, have now been net buyers for five consecutive weeks, and are the only client group that has been exhibiting faith in the market rally. (This is a contrary negative for the wall of worry.)

This confirms the shovel-ready infrastructure projects really weren’t The American Society of Civil Engineers, which every four years provides a comprehensive assessment of the nation’s major infrastructure categories, gave the U.S. a D+ this year. Since 1998, grades have averaged a D due to a delayed maintenance and under-investment across most systems. The society estimates $3.6 trillion needs to be spent by 2020 to eliminate deficiencies, $1.6 trillion more than planned.

What else

If demand is declining, will tuition follow? College enrollment is declining as the economy picks up and prospective students choose work over school. Four-year for-profit colleges experienced the biggest decline in enrollment, with 8.7 percent fewer students matriculating.

Really high rents The tallest residential building in the Western Hemisphere, an 84-story tower on Park Avenue, is going up, and buyers are snapping up apartments.

This really is just California dreaming Driving away from Palo Alto, we saw small, cute homes that I said I might like to buy someday so that the Mister and I could walk to University Avenue for dinner and stroll back home. Not going to happen, unfortunately, as Zillow estimates the 1,900 square-foot home’s price today is $2 million.


 
 
 
 
 
 
 
 
 
 
 
Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.
Japan's Nikkei 225 Stock Average is a price-weighted index comprised of Japan's top 225 blue-chip companies on the Tokyo Stock Exchange.
S&P 500 Index: An unmanaged capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. Indexes are unmanaged and investments cannot be made in an index.

The Federal Housing Finance Agency's (FHFA) seasonally adjusted purchase-only price index is a gauge of prices of existing homes.

The Markit U.S. Manufacturing Purchasing Managers’ Index (PMI) is a gauge of manufacturing activity in the United States.
Federated Equity Management Co. of Pennsylvania
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Copyright © 2014 Federated Investors, Inc.

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