Weekly Update: Let's not be greedy
President Obama’s speech Thursday night in Charlotte, N.C., scarcely reviewed his last three years and offered few clues about what a second term would look like. Republican candidate Mitt Romney also was criticized for being light on details in his acceptance speech a week earlier. Who can blame them? Both know that medicine will be applied next year, and nobody wants to take their medicine. I happened to be traveling in the beautiful Carolinas this week, crisscrossing the states to visit Raleigh, Winston, Charlotte and Charleston. I had the opportunity to address a graduate school business class while at Charleston. It was a week of ups and downs. Ups because we made money this week! Downs because I met an advisor who once was a dating-service matchmaker that told me the toughest group to find a match is the over-50 successful woman. Gulp! Stay well, my mister! Ups as a lady in one of my audiences (not in sales!) was shocked that I have nearly 30 years of experience in the business because she thought I looked 38!! (Nicest thing anyone has ever said to me.) And ups again as I spoke to a large group of very intelligent graduate students. Our future is hopeful.
We heard a lot about hope the past few weeks, from Obama and Romney. There also were some hopeful events in the markets. The European Central Bank said it is committed to “unlimited’’ bond buying, which is what the market wanted. At home, this morning’s weak August jobs report (more below) is likely to prompt more QE from the Fed next week, which is also what the market wanted. (Talk about a silver lining!) Now that ECB has lifted the cloud of uncertainty over the eurozone by clearly stating its plans—thank you, Draghi!—the policy burden shifts to European governments, both the peripheral ones that have to sign memorandums of understanding in order to activate the new ECB program and the core ones that have to authorize the European Financial Stability Facility/European Stability Mechanism purchases (assuming the ESM is cleared by the German constitutional court next week). The potential involvement of the International Monetary Fund might also make the signing of MOUs more complicated.
As I’ve been traveling, I’ve been saying to people all-year long that we’ll probably get to 1,450 on the S&P 500 sometime in the third quarter. At this writing, we are 1% from this target. Once we get there, it may be a good time to regroup. The market could move higher, but there’s very big resistance at 1,500 (and 1,565, remember, was the record high), volume has been declining since mid June, and whoever wins the election will face daunting problems right off the bat, led by a fiscal cliff that will hit hard if nothing is done before the start of the New Year. You also have an economy and labor market stuck just slightly north of neutral, and a political environment that polls suggest will remain very much divided after the Nov. 6 elections no matter who wins. Overseas, while the ECB’s willingness to go “unlimited’’ is helpful, the OECD says a recession is still “taking hold’’ in the eurozone. And the latest data from China suggests its economy may be slowing faster than was thought. The window of opportunity is closing. Let’s not be greedy.
Auto showrooms busy August auto sales surprised, hitting their highest level since February as light-vehicle sales rose 15.3% year-over-year on a selling-days adjusted basis and 14.2% year-to-date. Gains were attributed to pent-up demand, consumer discounts, new models, more favorable credit, low financing and fleet deliveries fueled by government orders. (Hmm.) Profit-hemorrhaging incentives, it appears, weren’t much of a factor, with TrueCar estimating incentives fell 6% year-over-year as many automakers emphasized advertising over rebates. Still, despite the better-than-expected end-of-summer sales, fourth-quarter auto production is scheduled to decline.
Services a modest surprise The August nonmanufacturing ISM surprised slightly on broad-based improvement led by employment growth, which is important because private-sector jobs represent 80% of employment and, as this morning’s jobs report suggests, the labor market could use all the help it can get. Slower deliveries also were indicative of strengthening in service activities, although the new-orders and business-activity components deteriorated. Overall, the report does not appear to signal any change in the modest pace of output growth and, along with a slightly disappointing manufacturing ISM (more below), suggests real GDP a bit below 2%.
Inflation isn’t a problem for policymakers Second-quarter productivity growth was revised higher than expected, though output per hour on a trend basis has moved broadly sideways at a low level since 2011. Unit labor cost growth has rebounded from being in negative territory during the early phases of the recovery, but to levels that should not concern the FOMC next week as its weighs possible QE3 (which seems all but assured after this morning’s jobs report) and a likely further extension into 2015 of the 0% federal funds target rate. (Savers, take note.)
August jobs report discouraging Only 96,000 nonfarm jobs were added to the economy in August, well below consensus and almost half the whisper number that had been moving up on surprisingly robust ADP private payroll gains the day before. The unemployment rate fell to 8.1%, but the decline came mainly because the labor force participation rate dropped to its lowest level in 30 years. June and July gains also were lowered significantly. Over the last 62 years, jobs always recovered to pre-recession levels within four years. Yet we remain 4.7 million jobs short of the last cycle high. And the employment ratio—the proportion of Americans 16 and over who are working—stands at 58.3%, well below its April 2000 peak of 64.7%.
Manufacturing a modest disappointment Activity contracted a third straight month in August by the most in three years. Notably, the monthly ISM production and new orders components declined to new cycle lows while inventories rose, suggesting business conditions will remain weak in the month ahead. Employment also fell to a new cycle low—this morning’s jobs report said manufacturing payrolls fell 15,000 in August—but was still expanding. The separate Markit PMI for August remained in expansion territory, though it came in below expectations. After contributing for much of the recovery, manufacturing may become a drag this fall.
Housing’s improvement not spreading out much yet Despite the improvement in housing starts, construction spending plunged in July on declines across residential and commercial real estate—the sharpest one-month drop since July 2011. Ongoing cuts in state and local government spending also continue to be a drag on construction spending, while the pickup in home sales and building isn’t showing up at do-it-yourself chains—households have actually reduced spending on home improvements.
Hitchcockian Central bankers are suggesting imaginary amounts of juice by using such words and phrases as “unlimited” and “open ended” to describe their quantitative plans. This allows investors minds to imagine substance that is absent. This is pure Hitchcock. When censors deemed the movie “Psycho” too violent, Hitchcock showed them the violent scenes frame by frame. To the censors’ amazement, there was no violence shown, it was all implied. Movie-goers minds could then imagine violence and horror at levels far beyond what actually existed. Now apply that to QE 3. Even as the ECB said “unlimited,” the Bundesbank president reiterated his opposition to unlimited bond buying. This is like a guy bragging that he will watch unlimited football on TV while the wife commands the remote control.
How about just calling it what it is—‘hunger’ Nearly 18 million U.S. households fell short of the amount of food necessary to sustain healthy lives for all family members, according to a Department of Agriculture report. A record 14.9% of households were affected by what it called “food insecurity.”
Back in the day Persistent government deficits are modern-day phenomena. Prior to 1971, balanced budgets were usually the norm outside of wars and crises. We currently have some of the highest collective peace-time deficits in history.