Weekly Update: It's beginning to look a lot like Christmas
Well, actually not. I haven’t seen snow yet this season, but as I tell my friends in the Deep South, snow is quite overrated. Regardless, the feelings of Christmas are in the air and I am in a holiday mood, as are the clients we visited in Indianapolis, Cincinnati and Lancaster County this week. People don’t seem to be very concerned about the likelihood of going over the fiscal cliff. In fact, some of my most valued resources suggest that both sides are simply playing an act for their constituencies. Will Obama allow us to go over the cliff, thus forcing tax hikes for the wealthy and enabling a quick cut back to today’s rates for the middle class (which the Republicans almost certainly will not prevent)? Yet the Institutional Strategist notes going over the cliff also entails significant spending cuts, which is the last thing the administration wants. U.S. government spending as a percentage of GDP is running at about 24% now, well above the 20% rate of prior years. This administration is intentionally spending at a very high rate in absolute terms and relative to the size of the economy. So in order to continue spending at this rate, they need a deal avoiding going off the cliff, which mandates automatic cuts. So the stock market stays firm as we daily march closer to that cliff.
The market also yawned on the Fed’s move to macro thresholds on unemployment (6.5%) and expected inflation (2.5%), which was a surprise in timing only and was consistent with earlier guidance. Even Chairman Bernanke said nothing really changed on policy; it was just communication. So when can the jobless rate be expected to reach 6.5%? If household employment growth averages 150,000 per month or more, some time in 2014. The Fed’s guidance has been mid-2015, so no real new easing here. What this week’s meeting did was continue the Fed's bold policy shift that began in September. Policymakers have significantly strengthened their commitment to a low-rate environment by embarking on open-ended purchases of Treasuries and agency MBS. RDQ Economics notes no hint of restraint in actions the Fed intends to take next year and beyond. This has complicated the Fed’s eventual exit from ultra-accommodative policy by both increasing the future size of the balance sheet and showing that 3 1/2 years into the recovery, Bernanke et al are not willing to let as inconsequential a program as Operation Twist to expire without replacing it with a higher-octane program.
Buybacks have been driving the bull market. The Fed’s Flow of Funds data show net issuance of corporate equities over the past year through third quarter was -$274 billion. In other words, buybacks well exceeded gross issues. Also, special dividends have been propping up the bull. Over the past four quarters, dividends paid out by S&P 500 companies rose to a record $267 billion, and that doesn’t include the more than 150 companies that have declared special dividends totaling about $20 billion this quarter to avoid anticipated tax increases in 2013. Dividends tend to get reinvested, especially by institutional investors. This week, the S&P recorded its first close above the 50-day moving average since Oct. 18, and is forming a potential inverse head & shoulders pattern. The longer it consolidates without giving back gains, the more it favors the bulls. The September-November stock market decline qualifies as an intermediate correction (losses of 7-12%). Since 1928, the median recovery time to a new cyclical bull market high has been just six weeks. So if the recovery from the latest correction follows historical norm, the S&P would make a new bull market high just before the New Year. (Is that Santa I see?) I just finished speaking in Lancaster before the largest audience of my career (over 700 people). The group of well-informed business leaders was also very hospitable. Their questions evidenced optimism about the future for our country. And it's no wonder—the 2011 Gallup-Healthways Well-Being Index reported that, of 190 Metropolitan Statistical Areas analyzed in the U.S., Lancaster has the highest Well-Being Index. What could be more desired than that? Oh, it's beginning to look a lot like Christmas, everywhere I go.....
Manufacturing gets a post-Sandy bounce Industrial production unexpectedly rose 1.1% in November, well above expectations and the fastest pace in two years. The increase more than offset October’s downwardly revised decline of 0.7%, and was led by a post-Sandy bounce in activity and in increased auto assembly production. Separately, Markit’s flash estimate of manufacturing also jumped the first half of December to 54.2, its highest level since last April, on big increases in new orders and export orders.
Is that Santa I see? While November’s gain in headline retail sales was weaker than expected, core sales surprised to the upside, and the strongest area was building materials, which is likely to be elevated for several months due to post-Sandy reconstruction. Electronics and non-store retailers (which include online sales) also posted large gains. The report was indicative of a consumer willing to spend despite sluggish job and income growth (more below).
It’s too early to worry about inflation Headline consumer and producer prices fell in November, and core rates remained subdued. Meanwhile, import and export prices plunged on broad-based declines that in some ways echoed trade volumes, which fell in October as slowing global growth saw a drop-off in imports and an even larger decline in exports. The overall picture is one of limited price pressures in core goods components such as apparel and electronics, as well as in energy, other commodities and wages.
Is every small-business person a Republican? November’s NFIB optimism index posted its largest decline on record, erasing several years of gains and pushing the index back to levels last seen in early 2010. The majority of the decline was caused by a sharp drop in the percentage of firms expecting the economy to improve—from +2% to a -35%, its lowest level in 30 years. Survey administrators blamed November’s election results. As they have for several years, small businesses continued to place poor sales, taxes and red tape at the top of their list of problems. This poor outlook could harm the tepid pace of small business employment growth as we enter 2013.
Still more signs that employment growth may slow The Conference Board’s Employment Trends Index, which tends to lead employment trends by 2-3 months with an 85% correlation, slipped 0.02% in November while average hourly earnings slowed to a record-low annual increase of just 1.7%. This suggests consumer spending will continue to be a sputtering engine for the economy. Combined with decelerating capital spending (a late-November Deutsche survey found nearly a quarter of CEOs expect to pare capex over the next six months), the onus continues to fall on recovering housing to pick up more of the economic slack. The good news on this front is ISI’s proprietary survey shows homebuilding remains strong; the bad news is despite a 25% jump in housing starts the past year, the construction sector has yet to add workers. Past cycles indicate construction hiring lags starts by about five quarters.
Inventory build may help now but hurt later Wholesale and business inventories rose modestly in October, but weakened demand pushed up the inventory-to-sales ratios—the wholesale ratio hit its highest level since 2009. This inventory build could benefit fourth-quarter GDP if it continues, but at a cost of detracting from growth into the New Year if sales don’t improve.
Dubious record Food stamp use reached another high in September, with 47.7 million participants, an increase of 608,000 from August! One in 6.5 Americans were on food stamps in September; in the 1970s, the ratio was one out of every 50. Since 2001, spending on the program has quadrupled and doubled in the last four years.
I’ve always found mannequins to be creepy An Italian company is rolling out the EyeSee, a mannequin equipped with technology typically used to identify criminals at airports. The high-tech mannequin acts as a spy-cam on customers. The dummies allow retailers to glean demographic data and shopping patterns from customers as they move through stores, much as online merchants do.
On a relative basis, I’ve been a pretty good girl this year Cartoon of a boy sitting on Santa’s lap in a department store: “Naughty or Nice? Compared to whom: Lance Armstrong? Roger Clemens?”