Weekly Update: Pardon me, boy, the U.S. is on the verge of greatness again
I traveled this week to Chattanooga, Louisville and Columbus. At each stop, people were saying, “It’s about the Fed, right?’’ or were asking me, “Who do you think they’ll pick for the next Fed chairman?” Everywhere I go and everything I read, it’s all taper, taper, taper and Yellen-Summers, Yellen-Summers, Yellen-Summers. Blah, blah, blah. So much talk, so little action (market volumes are even lower than in 2008!) Speaking of Chattanooga, I have now visited three times, and have complained each time that I want to see the Chattanooga Choo Choo (the nickname for a Civil War-era steam locomotive known as “The General’’ and also the subject of a catchy song). Well, guess what? It is not here. In the 1970s, it was removed supposedly in the darkness of the night by the state of Georgia, which, according to my Chattanooga host, feared it would lose the lawsuit to win the property. So, possession being 9/10 of the law, the Choo Choo is not here!
Wednesday’s sell-off seemed to be a sign tapering and FOMC chairman transition concerns continue to be an overhang. Nothing in the minutes should have encouraged selling as consensus seems to be for a September reduction in the Fed’s monthly bond purchases of $10 billion to $15 billion. Focusing too much on the Fed and the potential for a policy error could be a mistake. It is way too early to say they have “lost control of the message” as data is clearly better globally and that could be a big part of the reason we have seen the move higher in rates. One news feed analyzing the minutes immediately following their 2 p.m. release suggested they contained a dovish slant. This lifted the S&P 500 by almost 1% before later interpretations of the minutes (and stubbornly high Brent crude oil prices) took over. With seasonality still a headwind for much of the next six weeks (September historically is the worst month and October is home to its biggest crashes), the S&P is in a bit of no man’s land as it seeks to stabilize in the 1,620-1,640 support range. Next month will bring more uncertainty on a number of issues beyond just tapering and the announcement of a new Fed chair. There are the German elections on Sept. 22; the continuing budget resolution due Oct. 1; a new round of sequestration cuts and the new health-care exchanges (there could be some significant headline risk here; notice UPS’ announcement this week that it’s dropping spousal coverage for 15,000 employees), both also starting Oct. 1; and the looming debt ceiling. It occurs to me that at least a few of these could go wrong, suggesting a continuation of the correction in September but a still bullish run into year-end.
I met some interesting advisors in Chattanooga. Quite a number were 30- to 40-year veterans in the business. They obviously love it—one told me that all his neighbors who retired were dead five years later. Another told me his friend who retired now uses tweezers to pull weeds in his yard. Hmm. All were also very bullish about the U.S. One said that he believes America is on the verge of greatness again. His partner chimed in, “Yes, in spite of ourselves.” The other partner does his own study of the economy, which he believes is stronger than many appreciate. He uses the “homeless man indicator.” He notices that the homeless shopping carts are fuller now than ever before, some even have two carts. “Everybody’s getting more stuff,” he observes. Granted, this was just the view in this picturesque southeastern corner of Tennessee. But reports this week suggested growth throughout the country is poised to accelerate (more below) and is picking up in Europe and China, too. Despite this, investors are getting more defensive. ISI’s proprietary hedge fund survey just dropped to the lowest level since December 2012, which was ahead of a potential fiscal-cliff disaster. When the fiscal cliff was averted, the market took off. This time around, we have seen a massive move into cash from bonds at same time sentiment has gotten much more negative on stocks. What happens if we avert the Fed cliff in September? Hmm, hmm, hmm.
Many signs that stronger growth looms July’s leading indicators rose a broad-based 0.6%, and there has been a clear downside breakout in jobless claims to a six-year low. The claims’ drop-off suggests real growth is ready to expand at 4%, a pace also indicated by July’s composite PMI. With investment/durables spending at 60-year lows at a time the age of capital stock is near record highs, JP Morgan sees strong pent-up demand. Also, Ned Davis Research’s proprietary credit conditions gauge remains near a record high for consumers and a six-year high for businesses, while construction backlogs are at levels typically associated with a pending strong upswing in activity. All this fits with our “stronger growth is coming’’ thesis.
Existing home sales jump Even though the average 30-year rate jumped a full point from mid-May through mid-June, July existing home sales rose 6.5%, nearly five times consensus, to their highest in nearly three years (sales were based on contracts that closed precisely as rates were spiking). Median home prices also continued to rise and were up a record 11% from a year ago. New-home sales, on the other hand, haven’t been as resilient (more below). Still, the recent rate back-up doesn’t appear to have shaken consumers, with the proportion of consumers not buying a house because of higher rates actually falling in this month’s initial Michigan sentiment reading.
A bullish sign As a result of the Russell 2000 holding up well while the Dow struggles, the ratio of the small-cap index to the Dow has broken out to fresh highs not seen since 1994. What does this mean for the broad market? Miller Tabak notes that the recent correlation has been when small-caps outperform, risk appetite grows and the broad market in general seems to do well. Therefore, despite the cautionary signals we may be getting elsewhere, if this ratio continues to breakout, the benefit of the doubt would have to favor the bulls for the medium-term. For now, it seems to be quite an impressive move.
Housing rebound’s warts Higher mortgage rates and other factors, notably tight supply, do appear to be taking a bite out of new-home sales, which unexpectedly plunged 13% in July to their lowest level since last October. Sales for the prior months also were revised down, undermining the outlook for future construction as the weaker sales meant the inventory of unsold homes relative to sales actually rose, lessening supply constraints. And while sales jumped for existing homes (see above), there was a shortage of affordably priced homes, as sales of homes under $100,000 were down nearly 9% from a year ago while sales at the upper end were up at least 44%.
Might the deadline for small companies be extended as it has for large ones? A July study by three researchers affiliated with the National Bureau of Economic Research concluded creation of the Affordable Care Act’s individual mandate and its exchanges might prompt as many as 940,000 people to drop out of the workforce. They would quit their jobs because working for employer-provided benefits would no longer be necessary. Also, among the nearly 1 million people whom U.S. employers hired this year, 3 in 4 ended up in part-time jobs, many poorly paid, as many employers cited their desire to avoid the costs of the federal health care law, executives of several staffing firms said.
Trade improvement may be a fluke Q2 GDP is likely to be revised up significantly next week on June’s much-better-than-expected trade deficit, which contracted nearly $10 billion, the third-largest move on record, on very strong export growth and a sharp drop in imports. However, Bank of America cautions that June’s improvement likely was a statistical abnormality. Two percent moves in exports or imports, such as occurred, are infrequent and even more so when they happen simultaneously. In that rare event, they usually move in the same direction, such as in a global recession. The type of move observed in June has only occurred three times since 1992 in the monthly data. In other words, the probability of the trade balance narrowing as much as it did is quite low indeed.
I’m a fabulous public speaker (just saying), fully invested and smart enough to have an advisor An articulate and insightful executive from Nationwide Financial shared an intriguing survey of potential investors over the age of 18 who had at least $100,000 of investable assets. Of those surveyed, 62% are scared of investing in the stock market while 58% fear death and 57% fear public speaking. The survey also found 83% of respondents are afraid of another financial crisis. The executive also shared a separate survey, by JP Morgan, which asked, “What is your No. 1 long-term investment idea?” The answer was cash.
A House divided Strategas Research believes the key to reducing volatility on fiscal policy is whether the House Republicans unify around a plan. Currently, they are divided and when they are divided, volatility usually ensues. Congress will be in session for a total of nine days next month and with the lack of a plan, this all but ensures the headlines will grow negative as the fall approaches. The debt ceiling will need to be raised around Nov. 1.
Made in wherever Because goods assembled with components from many different countries represent a growing share of international trade, tags and advertising slogans proclaiming manufacture in a specific country are fading. And how do you decide what is an import and what is an export when imports are important inputs into many exports, and vice versa? In their new book, “Outsourcing Economics,” William Milberg and Deborah Winkler contend that neither the economics profession nor national trade accounts have caught up to that question.