Weekly Update: Purple is one of my favorite colors
In his acceptance speech, President Obama suggested “we are greater than the sum of our individual ambitions and we remain more than a collection of red states and blue states. We are and forever will be the United States of America.” We will need this attitude to be reflected going forward because of the many challenges our leaders will face in these next four years, starting with the imminent fiscal cliff. Election night saw record tweets for a political event. One of my favorites: “Congratulations to Obama, and good luck, because he inherited a mess from the previous president.” If something about Obama’s speech seemed familiar, it may have been because in his 2008 victory speech, he said: “Americans [who] sent a message to the world that we have never been just a collection of red states and blue states. We are, and always will be, the United States of America.” Hmm. The biggest surprise of the election was the low turnout, 13 million fewer votes than four years ago. Obama received 14% fewer votes. By comparison, Jimmy Carter’s vote total dropped 13% in 1980 vs. 1976. Obama got fewer votes in both Ohio and Virginia than McCain did in 2008. This year also marked the first time a president was reelected with a smaller margin than his initial election.
Year-end election rallies have been common, especially if the incumbent party has won. From Election Day to the end of the year, the Dow has climbed a median of 1.9% when the incumbent party has won. Of course, there wasn’t much sign of a rally the past two days. The S&P 500 had its worst 2-day performance in 2012 through Thursday’s close—it finished firmly below the 200-day moving average with all sectors finishing in the red. And Wednesday was the fifth-worst post election performance in the last 112 years. Only the financial crisis of 2008 (and Obama’s first election), the Great Depression of ’32, the beginning of the Cold War in ’48 and WWII in ’42 had worst post election returns. JP Morgan believes the sell-off was more due to disappointment with the election outcome vs. fiscal cliff. Why? Investment-grade and high-yield bonds should be selling off if this is a fiscal-cliff issue, similar to 2011’s weakness. Encima Research’s proprietary sentiment poll has fallen into extreme pessimism zone, suggesting that at least some of the fiscal cliff concerns are priced into the market. Assuming the fiscal cliff is resolved, the year-end rally remains on the table. But the market’s not nearly as oversold as it was in May/June. Back in June, we also saw only marginal breaches of the 200-day moving averages by the S&P, Russell 2000 and the Dow; the Nasdaq didn’t even breach its respective average. Thursday saw all four firmly below their 200-day moving averages, even as the latest AAII poll put bulls at their highest level late August and the VIX actually fell. All this supports the idea that the correction is not over. The next key support is 1,350 on the S&P.
Both sides pledge to work together after every election—for those who lose, to do otherwise is to reject the will of the voters. But the GOP rank-and-file will strongly oppose voting for a tax increase for nothing in return. That’s why the GOP leadership will want a deal on the outlines of a grand bargain in December, probably too big a lift in such a short time. A short-term deal could be reached if Obama compromises on the $250,000 threshold for the Bush tax cuts, as that would fracture GOP opposition—ISI says this is key. Of the many tax rates set to rise at year-end, the top marginal rate has the most growth impact and hits a high percentage of the income earned in small businesses. Perhaps most worrisome for the long term: economically stressed voters didn’t react negatively toward the White House and political incumbents, as history might have suggested. Instead, they narrowly sided with those who would preserve the U.S. safety net. Despite exit polls showing that 2/3 of voters rejected the notion of raising taxes near term, this suggests the inevitability of higher marginal tax rates and a bigger government, and that there may be reduced prospect for meaningful tax and entitlement reform. That is, unless the president moves to the political center in search of compromise, a viable but uncertain possibility. We need purple now. As Clint Eastwood said in one of his most famous lines (not directed at an empty chair) … “Do you feel lucky, punk?”
The biggest positive may be the global easing cycle Over the past 14 months, there has been approximately one easing move per business day. History suggests it takes about one year for monetary stimulus to start to work—global short rates peaked about one year ago. This helps explain why the global manufacturing PMI for October rose despite the eurozone’s woes, abetted by increases in the U.S., China and Brazil. Also in China, power output grew at the fastest rate in seven months and daily oil processing stayed near a record high; factory output and retail sales exceeded forecasts; inflation unexpectedly cooled to the slowest pace in 33 months, signaling the government is boosting growth without driving a rebound in prices; and both industrial production and passenger vehicle sales rose more than expected. China’s ability to avoid recession is important to the U.S. to avoid one as well.
Is that Santa I see? University of Michigan consumer sentiment unexpectedly rose in early November to its highest level since July 2007—suggesting momentum going into the holiday sales season. The Rasmussen survey of U.S. consumer confidence also rose again in early November; the Discover Spending Monitor surged in October to a record high; and total consumer credit rose more than expected in September. Scrooge may be lurking, however. Sandy’s expected to trim sales in key markets (more below), and ISI notes there’s a high correlation between holiday sales and fourth-quarter stock market performance which for now is negative.
Q3 GDP likely to be revised up The trade deficit narrowed more than expected in September and the August deficit was revised lower. Although the trend in export growth has continued to moderate, exports have held up much better than the manufacturing ISM export orders index. The deficit was quite a bit narrower than factored into the advance estimate of third-quarter GDP, so that real GDP growth for the quarter is tracking close to 2.9%, well up from the initially reported 2% pace. Also, this morning’s report showed wholesale inventories rising much more than expected in September, adding to Barclay’s GDP tracking estimate, which now stands at 3.2%.
Sandy won’t be good for near-term jobs It hit at a vulnerable time, just as the U.S. economy appeared to be emerging from its 2012 growth problem. Now, judging by Katrina, unemployment claims could surge by more than 100,000 over the next few weeks—a problem for a labor market struggling to pull out of its subpar funk. Despite ticking up in October, the Conference Board’s Employment Trends Index has been range-bound for most of this year, indicating lackluster expectations for jobs growth. Various studies also suggest fourth-quarter GDP could be trimmed by 0.5 points or so, with the positive rebuild impact not kicking in until early spring.
Eurozone woes dragging down Germany German factory orders fell much more than expected in September, driven by plunging foreign orders from its EU neighbors. Industrial production also fell the same month by the most in five months, as every major category but consumer goods slumped. And the Ifo index for October fell to its lowest level since February 2010. On the plus side, retail sales have continued to rise—the GfK Consumer Climate Index for November rose to its highest level since October 2007. Germany is likely headed for a mild recession as the weakness in manufacturing is partly offset by the relative strength in consumers.
This is a huge problem Ned Davis says the most disturbing statistic from October’s jobs report was the decline in the year-over-year change of average hourly earnings for production and nonsupervisory employees. They hit their lowest levels in the data series’ 50-year history. The lack of real wage growth relative to other workers increases income inequality, reduces consumption, and constrains both the strength and possible duration of this expansion. Real average hourly earnings growth has never been lower at this point in a recovery.
Unintended consequences The Wall Street Journal raised another risk for the economy resulting from Obama’s victory: “Some low-wage employers are moving toward hiring part-time workers instead of full-time ones to mitigate the health-care overhaul's requirement that large companies provide health insurance for full-time workers or pay a fee. Several restaurants, hotels and retailers have started or are preparing to limit schedules of hourly workers to below 30 hours a week. That is the threshold at which large employers in 2014 would have to offer workers a minimum level of insurance or pay a penalty starting at $2,000 for each worker.”
Putting Greece, and Apple, in perspective Reuters reports that Samsung’s Galaxy S3 has displaced Apple’s iPhone as the world’s best-selling smartphone. Apple’s market capitalization has fallen 23% since peaking eight weeks ago—a decline worth $155 billion, or 3.8 times what Greece is hoping to get from its next bailout tranche!
I’m depressed; let’s eat 13D Research says manufacturing via 3D printers is set to play a significant role in the economy in coming years, but this one may take the cake—or make that burrito. The Burritobot claims to be “the first 3D Tex-Mex printer” that lets users create their own burritos by entering what they’d like in it through a smartphone app and then sit back while a printer-robot oozes beans, cheese and other customizable extrusions of Mexican ingredients onto a pre-made tortilla. M’m, m’m, m’m.