Weekly Update: Five is a good number
Whenever I describe our outlook during my travels, I say the two things to worry about now are China and the requirement for U.S. corporate sales to grow. We got some good news on both fronts this week. China’s exports rose 5.1% year-over-year in July and imports jumped 10.9%—both beating the consensus and much improved from June’s weak numbers. With nearly 90% of this earnings season over, nearly half of the revenue releases beat estimates, putting revenue growth on track to be up nearly 5% year-over-year. Five is a good number. We are watching sales particularly because about 70% of the year-to-date advance in the market has been P/E multiples. With margins unlikely to widen further, we need revenues to go up. The recent move to new high ground has been confirmed by most technical indicators. The NYSE cumulative advance/decline line made a new high July 23, confirming the new market highs. Sentiment indicators are favorable with AAII sentiment showing only 36% bullishness. Perhaps the best news is that domestic equity mutual funds had their third consecutive week of substantial inflows, the best since January. The S&P 500 year-to-date gain through July was 18.2%, the best first seven months of the year since 1997 and the 11th best since 1929. After gains of at least 15% through July, the S&P rose only 42% of the time in post-war August, with the median loss of 0.4%. However, after relieving the overbought condition (there are signs of such currently), the S&P has risen 83% of the time to the end of the year by a median of 3.3%, and the median gain was 13.7% one year later. It is still risky to be bearish.
A near-term pullback wouldn’t be surprising. The Institutional Strategist notes the S&P divided by the VIX is at the same level it was in 2007, just prior to the equity markets unraveling. We don’t see that, but this reading signals that near term, risks may be rising for equities. On Sept. 18, the FOMC will meet and probably start tapering QE, notwithstanding its somewhat dovish statement following its July 30-31 meeting. On Oct. 1, round two of the sequester kicks in and more of Obamacare is scheduled to be implemented. Finally, there are mounting risks of congressional gridlock over spending appropriations for fiscal 2014, which also starts Oct 1, and the debt ceiling, which also will have to be addressed. There already is chatter about a government shutdown. Deutsche Bank thinks the risk of this happening is overdone. It notes inflation-adjusted federal spending is falling at a rapid pace. After peaking in 2010’s third quarter, real federal expenditures as measured in the GDP accounts have fallen at a 3.4% annualized pace—the largest 11-quarter spending decline since 1995. Second, the past three debt-ceiling showdowns—February 2011, August 2011 and January 2013—progressively went in the Democrats’ favor. Why would Republican leadership want to go down this (dead end) road yet again? Third, the rapidly falling budget deficit is estimated to come in below $600 billion this year to about 3.5% of GDP, down from 10% just a few years ago, and to reach 2.5% next year. The urgency of budget cuts is simply not there.
I had an absolutely fabulous time on a riverboat cruise through northern Europe’s beer country during my vacation the past few weeks. The mister liked it even more—I can’t remember the last time my husband was in such a good mood for such a long time. One of our stops was in Prague, where the strong dollar went a long way. There, among a makeshift outdoor market of craft kiosks, was a beer stand that the mister said had the best beer of the trip. On the second beer, he said, “Let’s move here.’’ I was lucky that my first week back on the job included a visit to Minneapolis, where it was sunny, in the 70s and just delightful. At our dinner in the wine room of a fancy steak house, we had a great time even though we each only had one glass of wine (of course, Scotty, the waiter, kept topping it off). Scotty was an unusual waiter who kept interrupting my speech with his own views on the market. Still, I liked him a lot as he told the group you should listen to her—she’s a “firecracker” (wow, second time this trip I’d been called that. What can I say; it’s a gift). During dinner, one man knocked over his glass of red wine, which nearly spilled onto the white blouse of the woman opposite him. Eventually, another glass of wine was spilled followed shortly by a gentleman whose bowl of lobster bisque fell into a most unfortunate place. I am going to blame poor lighting for the fact that by dinner’s end, our tablecloth looked as if there’d been a Mafia confrontation. A good time was had by all. With each visit to Minneapolis, I got my requisite picture with the statue of Mary Tyler Moore. Five is a good number … we’re going to make it after all.
Growth firms The U.S. OECD composite leading indicator rose in June for the 11th straight month and by the most in 1 1/2 years to its highest level since January 2008. The six month annualized rate of change rose by the most since March 2011, and remains consistent with continued economic expansion in Q3. It comes on the heels of last week’s blowout ISM reading, which had the largest monthly increase in 17 years (and beat EVERY estimate)! But it was even better than that. Importantly, inflationary pressures eased alongside such a massive increase in growth prospects—an unusual but welcome development as non-inflationary growth usually translates into multiple expansion for the markets, which has been the story of 2013 thus far. July’s ISM nonmanufacturing index also surprised with its biggest gain since February 2008 and the fifth biggest increase on record. The current level of the index is historically consistent with above-trend economic expansion. The latest readings of the manufacturing and nonmanufacturing ISMs correspond to a 3.3% annual growth rate of real GDP.
Business lending on the rise The Fed’s latest Senior Loan Officer Opinion Survey found banks eased their lending policies for business loans as demand strengthened due to increased competition and a better economic environment. Demand for commercial real estate loans quickened at the fastest pace on record. This survey has been a good leading indicator of credit conditions with a two-quarter lag, with easing lending standards have typically been positive for future job growth, particularly for small businesses, where capital market access is tough. This is quite bullish as all roads lead to jobs.
This will add to Q2 GDP’s revision June’s trade deficit shrank to $34.2 billion, the smallest gap since October 2009 and far lower than expectations for a smaller reduction to $43.5 billion. Exports rose by the most in nine months (real merchandise exports jumped 3.2% to a record high $1.4 trillion) and imports dropped a broad-based 2.5%, although other merchandise plunged by the most since January 1989 and the fourth biggest decline on record. The report suggests the global economy is picking up and that exports will be revised higher and could push Q2 GDP—which came in at a better-than-expected but still sluggish 1.7% in the flash estimate (more below)—up by as much as 1 percentage point. In recent days, there has been mounting evidence that the global economy is picking up.
All roads lead to jobs While the initial jobless claims four-week moving average fell to a fresh cycle low this week, consistent with a low rate of firing, actual job growth remains a problem. July’s smaller-than-expected increase in nonfarm payrolls and downward revisions to the prior two months reflected a labor market still struggling to gain momentum. The Labor Department’s quarterly study of employment turnover also continued to show a reduction in U.S. labor dynamism because of the weak recovery and the difficult health insurance situation. The July 30 report showed that gross job gains in the fourth quarter of 2012 were 7.1 million versus an average 7.9 million quarterly gain from 1992-2007. Gross job losses in the fourth quarter were 6.4 million, well below the average losses of 7.5 million per quarter. Adding the two, labor mobility is 13% below average.
Housing’s headwinds While year-over-year sales continue to rise and prices are at pre-recession levels, not all is rosy with housing. The affordability index fell in June to its lowest level since July 2010, due to higher mortgage rates and median home prices. June’s pending home sales also declined in June, in part because of tight supplies. Neither changes the view that the housing market will continue to improve through the rest of this year and into 2014, but it does reflect the need for job and income growth to pick up.
Consumers appear hesitant as back-to-school season nears Consumer credit grew by $13.8 billion in June, softer than expectations for a $15 billion increase, and May credit growth was revised down to $17.5 billion from $19.6 billion. Looking at the details, non-revolving debt drove the headline increase, rising by $16.5 billion and likely reflecting rising auto sales even though light vehicle sales slipped in July. As above, job and income growth appear to be the biggest factors hindering more spending.
It’s the culture, stupid! The five most followed people on Twitter: Justin Bieber 42.5 million; Katy Perry 40.2 million; Lady Gaga, 39.4 million; Barack Obama, 34.7 million; Taylor Swift, 31.7 million.
Is it work if you’re reading your emails with a glass of wine in your hand? Bloomberg/BusinessWeek says research reveals that 64% of men and 57% of women work on vacation.
Raise the Jolly Roger! Isn’t fascinating that while baseball fans are fixated on A-Rod, a little team in Pittsburgh with a total payroll that’s only 2.5 times A-Rod’s annual salary is in first place with the best record in baseball. Let’s go Bucs.