Weekly Update: I'm going to keep visiting Beverly Hills until I see Brad Pitt
Romney’s selection of Paul Ryan as his running mate gave the markets something to talk about in an otherwise very sleepy month. The choice of the seven-term House member from Wisconsin is notable because Ryan is more clearly associated with specific policy stances than most prior vice presidential candidates, and the fiscal policy issues for which he is known are key issues in the campaign. While achieving goals in very different ways, what is remarkable about both his and President Obama’s proposals are how modest the savings are from Medicare and Social Security—two programs critical to the longer-term fiscal outlook. The differences in projected spending in both proposals are minor. Renaissance Macro says Ryan solidifies the expectation that if Romney wins, front-loaded spending cuts and tax reform will be the order of the day. Ryan’s choice adds to Republican enthusiasm, which is near record levels of 2004 and 2010. The reverse is true for Democrats. Gallup recently showed that Democrats' enthusiasm for this election is at half the level of 2008 and 2004. Obama had a 39% approval rating with independent voters last week; no president has won reelection with an approval rating below 50%.
The equity market continues to rally on ridiculously low volume, with the pain trade to the upside. Dudack Research believes a test of the 2012 market highs of late April seems likely, with technical indicators remaining solidly bullish. A new all-time high materialized in the cumulative NYSE advance-decline line this week, even though the market has done nothing for the past two weeks. We haven’t had an intra-day trading range above 0.90% since Aug. 3, and the VIX is at its lowest level in over a year. The market is likely to do nothing until the first week of September, which will feature Fed Chairman Bernanke and European Central Bank President Mario Draghi at the Fed’s annual Jackson Hole, Wyo., confab, European finance ministers meeting to discuss Greece and Spain, manufacturing PMIs and the jobs report for August. Speaking of Greece, there are reports that its prime minister, Antonis Samaras, will seek two more years for his country to implement its austerity package, spreading planned spending cuts out over the next four years to 2016! (LOL, as my children say, or in the vernacular of my generation, Ha-ha!)
It is difficult to envision any market-moving events anytime soon. Earnings season is over. There are no significant economic reports until next month, and what we have gotten so far has been blah (more below). Some see no real catalysts until the first presidential debate on Oct. 3 (I doubt it). Well, you know, in Europe, they take off the whole month of August. Unfortunately, here in the United States, we’re lucky if we can string two weeks together for vacation. Speaking of vacay, I’m back from a wonderful two weeks and the company has immediately sent me back on the road. This week, I traveled to Southern California, where even as the rest of the country has suffered from a dramatic heat wave, the weather is perfect. In the name of duty, I dined on the terrace of a lovely restaurant near the ocean, where it was sunny, cool, with soft breezes and jazz in the background. And I spent a lot of time in Beverly Hills, constantly looking for Brad Pitt (no luck). But I did have dinner with a man who is related to Reese Witherspoon (not bad, but not Brad!) Did you know that residents of California don’t have (or need) air conditioning? My A/C broke from working too hard to cool our Pittsburgh home in 100-degree weather! Well, if you must come back to work and pay for that vacation, what better way than to visit the beautiful West Coast and enjoy the hospitality of the people in California!
Positives
July retail sales a good omen for Q3 GDP … The unexpected 0.8% increase, the biggest since February, surprised to the upside, reversed much of June’s decline and reflected broad-based improvement. Year-over-year, 26 of the last 30 months have generated above-average monthly gains in retail sales. Momentum into August got a lift from the University of Michigan’s initial read on consumer sentiment, which unexpectedly rose to its highest level since May. For capital markets, the retail sales report is the second most significant economic report after nonfarm jobs.
So is housing July permits hit a four-year high, while starts remained up 22% year-over-year despite pulling back a tad from June’s strong showing. Separately, August builder sentiment surprised, rising a third straight month to its highest level since February 2007, and the National Association of Realtors said house prices are increasing in 75% of towns across the country as supplies dwindle.
Job market improves The latest four-week moving average of unemployment claims fell to just 1,000 above the post-crisis low recorded during the week of March 31, corroborating July’s acceleration in nonfarm payroll growth. Otherwise disappointing reports from small businesses and New York manufacturers (more below) also reflected relatively positive news in their employment components, although job gains continue to be modest and nowhere near enough to do much to lower the unemployment rate before the election—a problem for Obama.
Negatives
Philly, New York hint at manufacturing slowdown The Philly Fed manufacturing survey surprised to the downside in August with its fourth consecutive month of negative readings. Similar to the New York Empire survey, which also fell more than expected to its lowest level since October 2011, Philly’s six-month outlook declined, though it remained above the current-conditions component, indicating that businesses still feel modestly confident in an improving medium-term environment The Philly and New York reports took the shine off July’s stronger-than-expected increase in industrial production, which was driven largely by two temporary factors—a surge in electrical production because of the hot weather and shorter-than-normal auto plant shutdowns.
Small businesses still in sour mood The NFIB’s monthly optimism index dipped in July and has remained at recession levels since November 2007. The index’s decline was due mainly to a sharp drop in those expecting positive earnings trends. Given that small businesses account for an estimated half of new jobs, it’s difficult to envision significant improvement in the job market or economy until they buy in to the recovery.
It’s too early to worry about inflation but … There were signs higher food and gas prices may soon begin to bite. Led by a 20.5% weather-related jump in corn prices, the largest month-over-month gain since October 2006, July’s core producer prices rose 0.4% despite a decline in energy prices, which have moved up substantially in the intervening weeks. Consumer prices came in much softer than expected, with headline CPI unchanged for a second straight month and year-over-year consumer inflation decelerating to 1.4%. But King Securities says it’s odd that energy prices fell because of electricity prices given that it was the hottest July on record. ISI Global expects headline CPI will likely accelerate significantly this month and next as a result of higher food and gasoline prices. The bottom line is July’s report likely didn’t give the Fed as much room as some may think to go forward with QE3.
What else
Gulp! Two of my children are in college and a third is on her way College tuition continues to soar due to reduced state funding. The average increase at public colleges during the 2011-2012 school year was 8.3%, as these institutions saw a 7.5% reduction in state funding on average. For in-state residents at four-year public schools, tuition and fees are up 25.1% from the 2008-2009 academic year; over the same time period, tuition and fees at private universities rose 13.2%.
Rough seas Germanys shipping industry faces a wave of bankruptcies over coming months as funding dries up and economic weakness leads to contraction in container volumes. Over 100 German ship funds have already shut down and a further 800 are under threat. Meanwhile, Britain’s oldest shipowner, dating back to 1730, went into liquidation last week. Interestingly, Greek shipping companies are buying up vessels in the secondary market.
In which generation are you? One network-news show in Japan recently described people in their 60s and 70s as ‘the generation that got away’ before Japan's next wave of problems. Those in their 40s and 50s were ‘the generation desperate to get away.’ Those in their 20s and 30s: ‘The generation that can't get away.’ Good thing we’re not in Japan, right?
