Weekly Update: The market seems to concentrate on one thing at a time
Next up, earnings season … Since October, earnings-per-share (EPS) estimates have been slashed from +9.9% to just +2.8% – the second-worst quarter of the recovery in terms of revisions. Insider buying has collapsed, suggesting a lack of confidence about revenues. Margins are contracting in all cyclical sectors except consumer discretionary, and guidance, particularly in tech, has been strongly negative. All this gloom does open the door to positive surprises. But on the other hand, there were very few preannouncements. The season kicked off Tuesday when shares in bellwether Alcoa rose in after-hours trading after the company reported better-than-expected revenue and a better outlook for aluminum demand, only to give back the gains the next trading day. Credit Suisse cites an 89% correlation between forward-year EPS revisions and the market performance in February. So the rash of downward revisions could be potentially negative for equities next month, which also is in line with the seasonality of monthly S&P 500 returns.
… and then back to D.C. The fiscal-cliff compromise should produce tax increases of about 1.1% of GDP, though Applied Global Macro Research says the drag on growth won’t be anywhere near as much because the hikes are heavily weighted to upper-income households. It puts the likely impact at 0.4% to 0.5% of GDP. Still, this hit to growth comes as the markets in the next two months will have to deal with the sequester, the debt ceiling and the continuing resolution for the fiscal 2013 budget. Bank of America says the resulting austerity is likely to reach 2% of GDP and thus weigh on growth during the first part of the year. Moreover, the risk of political accidents in early March remains. Strategas Research believes nominal GDP is unlikely to expand much more than 4% this year, a level normally been associated with recessions; 2% real GDP growth traditionally been the level needed to produce flat corporate profits.
So far, the market’s performance bodes well for the year. The Wilshire, the broadest measure of U.S. equities, has just made a clear upside breakout and is closer to its 2007 peak than the S&P. The cumulative NYSE advance/decline line has made a multiyear high, while the VIX is nearing its lowest levels since 2007.The Institutional Strategist says positive January performances have been followed by full year gains 90% of the time since 1950. Momentum of the last week has put stocks into the highest overbought state in 13 months (88.6%) – historically, that’s more of a sign of momentum than a danger signal, but near term, we may digest the gains. Credit Suisse believes we’ll see a consolidation of equities globally, perhaps down 5%, before further advances. Dudack Research suggests the market has been stuck in a long flat trading range since the S&P first tested 1,550 in March 2000. This flat cycle is about to begin its 14th year, and flat cycles can last as long as 18-20 years. You know, I’ve been sounding a lot like Dudack in my recent travels. I’m not getting pushback at all and I’m getting a lot of agreement. Have I ever mentioned to you in the past that I favor dividends; how dividends make a lot of sense in this environment? Yeah, l probably have.
All roads lead to jobs The United States is set for the biggest state & local government jobs boost since 2007 as 57% of cities said they were “better able to meet financial needs” in 2012 than in 2011, the first time a majority reported an improvement in that metric since 2007, Bloomberg News reported. Declining state and local jobs have been the biggest drag on nonfarm payrolls the past four years. Separately, the November JOLTS report showed the number of unemployed per job opening remained at its lowest level in more than four years.
Hot rental market could boost home sales The national vacancy rate for apartments fell to a 12-year low of 4.5% in last year’s fourth quarter, helping push the nationwide monthly apartment rent rate to $1,048, a 3.8% year-over-year increase that was the largest since 2007. Rents are expected to continue to climb this year. This could potentially provide another tailwind for single-family housing, where the combination of record-low mortgage rates and adequate supply has lowered the average monthly mortgage rate to $481, a bargain by comparison.
This should help fourth-quarter GDP Wholesale inventories rose more than expected in November, on drugs (which had the biggest jump since July 2008) and higher petroleum prices. But sales soared, pushing the inventory-to-sales ratio to its lowest in six months and the setting the stage for an inventory rebuild.
Small businesses aren’t likely to hire a lot if they aren’t happy The NFIB small business optimism index rose modestly in December but retraced very little of last month’s record drop and is still entrenched at recession levels. The percentage of small businesses reporting government requirements and taxes are the single most important problem is at a record high – even as Obamacare has yet to be implemented and 2013’s tax increases had yet to be adopted. On the plus side, a net 20% of survey respondents plan to increase capital spending, and the percentage citing “poor sales” as their single most important problem is at the lowest level since August 2008.
Big businesses remain gloomy too A slight rise in the Conference Board’s CEO Confidence Index in last year’s fourth quarter wasn’t enough to move it out of negative territory, where it’s been for three consecutive quarters and five of the last six. The quarterly survey and the NFIB’s latest monthly outlook suggest employment gains will remain subpar for some time to come.
This won’t help fourth-quarter GDP November’s much wider-than-anticipated trade deficit reflected a surge in imports led by cell phones (the iPhone 5) and autos, which is indicative of relatively robust consumer and capital spending. Still, the widening gap could shave as much as a half point off fourth-quarter GDP and reflected continued weakness in Europe, where exports fell 2.9% year-over-year, led by an 8.8% plunge in exports to Germany.
Doh! The latest idea to get around the debt ceiling is for the U.S. Treasury to issue a trillion-dollar platinum coin. The idea comes from a broad interpretation of law that gives the Treasury secretary the ability to mint and issue commemorative platinum coins “in such quantity and of such variety as the secretary determines to be appropriate.” The Treasury would deposit this coin at the Fed, which acts as the Treasury’s banker. The Treasury then could draw upon its account to pay for outlays. This may sound so absurd that it could be straight from a comic book – and it has, sort of! In a 1998 episode of The Simpsons, President Truman in 1945 secretly printed a $1 trillion bill with his photo on it to help pay for the post-war reconstruction of Europe. He entrusted Montgomery Burns with the mission of transporting the large denomination to the Europeans. However, the money never arrived, and the FBI suspects Mr. Burns kept the money. When Homer Simpson is caught cheating on his taxes, he is turned into an informant by the FBI to spy on Mr. Burns. Somehow, the bill ends up being stolen by Fidel Castro! Then again, as Steve Colbert observes, minting a $1 trillion coin would fulfill the promise of Obama’s 2008 campaign slogan: “Change.”
MBA grads are getting schooled in supply and demand The Master of Business Administration degree is not delivering the paychecks, or even the jobs, that recent graduates expected. Demand for graduates with MBA degrees has fallen because of the economy, while the cachet of the degree has diminished due to the increase in MBA programs, including part-time and online schools.
The Mister is cranky during tax season The IRS ombudsman told Congress that lawmakers need to overhaul the tax code completely in order to reduce the “significant, even unconscionable, burden” placed on taxpayers just to file a return. Individuals and businesses spend about 6.1 billion hours a year complying with tax-filing requirements. That adds up to the equivalent of more than 3 million full-time workers, or more than the number of jobs on the entire federal government’s payroll.