The market has now fallen for five weeks in a row, so the "sell
in May and go away" crowd seems to have a lot of bragging rights,
but the five-week decline is only 4.65% and there is good reason to
believe that the market's mini-correction since May 1 has been a
"pause that refreshes" and not a premature end of the bull market.
We may just be in the "half-time break" of a bull market in which
the economy is growing (albeit more slowly than in 2010) while
earnings keep rising at a double-digit rate.
New Spirit of Negativism Dominates the News
I have to say that I was taken aback by all the negative news on
CNBC last week. On the first day of June, the talking heads on CNBC
felt compelled to remind us that June is usually a negative market
month, but they forgot to mention that in the third year of a
Presidential election cycle, June has usually been a rising month.
CNBC also announced the start of hurricane season on June 1, but as
a Florida resident, I can tell you that hurricanes are fairly rare
in June and July. I guess fear and terror still sell!
While the financial media tries to scare you with everything and
anything that could go wrong, they will likely forget all about
earnings during the "dead season" from mid-May to mid-July.
However, the S&P 500 reported record earnings last quarter. All
10 S&P sectors exceeded analysts' consensus estimates!
Turning to the economy, the news media posted a laundry list of
all the negative economic news released last week, including a
weaker-than-expected ADP report, a sharp decline in the ISM
manufacturing index, a big drop in the Conference Board's consumer
confidence number and the dismal May payroll report.
Here's a capsule summary of the bad news that dominated the Web,
TV and printed news last week:
On Tuesday, the folks at Standard & Poor's/Case-Shiller
reported that their 20-city home price index fell to its lowest
level since 2002, falling for the eighth month in a row. Clearly,
any rebound in housing cannot occur while 11% of all U.S. homes
remain unoccupied and the banking industry owns 872,000 homes that
must eventually be sold in foreclosure.
Also on Tuesday, the Conference Board announced that its
consumer confidence index declined to 60.8 in May, down from a
revised 66 in April. This was truly shocking, since economists had
expected a rise to 67.5. Consumer confidence and expectations are
now at six month lows.
On Wednesday, the Institute for Supply Management (ISM)
announced that its manufacturing index fell to 53.5 in May, down
from 60.4 in April, marking the third straight monthly decline and
the biggest one-month drop since 1984! Economists had expected a
smaller decline to 57.1. The good news is that any reading over 50
means that the manufacturing sector is still growing.
Overall, it was obvious last week that most economists could not
hit the broad side of the barn with their statistical estimates.
The bulk of the evidence is that we are in the midst of a "summer
swoon." Whether this economic stutter step is the "pause that
refreshes" or the dreaded "double-dip" remains to be seen. I don't
want to sugar coat any of these numbers, since they certainly
reflect a slower-than-average economic recovery, but the fact of
the matter is that we can all run around like Chicken Little and
say that the "sky is falling," or we can look at specific companies
and the overall growth in corporate earnings.
Mixed News on the Jobs Front
As if all the other negative news listed above weren't bad
enough, the Labor Department's announced on Friday that May's
non-farm payrolls grew by only 54,000 jobs. That was consistent
with Wednesday's ADP report that only 39,000 private sector jobs
were created in May. Economists expected 125,000 new payroll jobs
in May. Not surprisingly, the unemployment rate rose to 9.1% in
May, up from 9% in April.
Another piece of bad news is that the Labor Department revised
its payroll growth for March and April down by 39,000 jobs to
194,000 and 232,000, respectively. Even more fascinating, Morgan
Stanley estimated that
) recent hiring spree accounted for 25,000 to 30,000 of April's new
There was also some good news last week: On Thursday, 24
retailers tracked by Thomson Reuters posted 4.9% same-store sales
growth in May, proving that consumers are still spending. For
) reported a 20% jump in same-store sale due it its big spring
) reported a 13% same-store sales gain (or 7%, excluding gasoline
) posted a better-than-expected 7.4% same-store sales gain. Michael
Exstein, retail analyst at Credit Suisse, said that "the high end
has done a better job of controlling inventories, leading to
further momentum in full-price selling," lifting both sales and
The same trend is apparent in vehicle sales. The low-end
bargains and high-end luxury sales are rising, while the mid-level
or "normal" products are not moving so well. To get a feeling for
the car market, I called one of my clients, who operates 10
dealerships in multiple states. He told me that the low-end (Korean
imports) and high-end (Mercedes and Porsche) are doing well, but
the middle is struggling, especially pickup trucks and SUVs with V8
engines. This is a clear sign that high gasoline prices are
impacting sales of Detroit's most profitable vehicles.
) retail sales rose 9% in May, but its fleet sales declined by 16%,
so weaker business spending seems to be the big culprit behind GM's
Due to the fact that same-store sales remains relatively strong
(and McDonald's is hiring!), it should be no surprise that the U.S.
services sector is continuing to expand. On Friday, the ISM
services index rose to 54.6 in May, up from 52.8 in April, slightly
beating economists' consensus expectations of a rise to 54. The
service sector accounts for about 75% of all U.S. economic activity
and 80% of all U.S. jobs, so the ISM services sector survey was the
best news last week. Fully 16 of the 18 service sectors tracked by
ISM reported growth, with mining, utilities and arts and
entertainment leading the way. Anthony Nieves, the survey's
director, said "respondents' comments are mostly positive about
overall business conditions!"
U.S. Dollar's Latest Decline Should Boost Stocks
The U.S. dollar remained on a slippery slope last week after the
onslaught of weak economic news caused 10-year Treasury bond yields
to plunge below 3%. This made Treasury securities even less
attractive to foreign investors, depressing the dollar even
further. Then, Moody's said on Thursday that if there is no
imminent progress on the federal debt ceiling legislation,
America's AAA credit rating will soon be cut.
Low interest rates naturally caused money to gravitate to the
stock market. The weak dollar will also help to generate windfall
corporate profits for multi-national companies. Longer term, a weak
U.S. dollar also makes the United States more competitive in the
world and helps to stimulate economic growth. In other words, low
interest rates and a weak U.S. dollar are very bullish developments
for the stock market this summer.
According to a Treasury Department report, China has reduced its
ownership of short-term U.S. Treasury bills by 97%, falling from a
peak of $210.4 billion in May 2009 to only $5.69 billion in March
2011! Additionally, since October 2010, China has also been
divesting its long-term Treasury bonds holdings. Clearly, China
does not like to see an eroding U.S. dollar on top of extremely low
interest rates. This is raising even more speculation about what
will happen when the Fed ends its second round of quantitative
easing (QE2) later this week. Who will buy Treasury bonds after the
Fed ends its bond-buying spree?
Interestingly the euro was super strong last week thanks to
Greece. News broke early last week that Greece was in line for a
new 30 billion euro ($44 billion) bridge loan to meet it funding
gaps in 2012, and possibly into 2013. Then on Friday, the European
Union (EU), the European Central Bank (ECB) and the International
Monetary Fund (IMF), after weeks of reviewing Greece's budget
accounting, issued a statement saying that Greece was making good
progress on its economic reforms! Since Greece received its EU, ECB
and IMF bailout, the country has actually cut its budget deficit by
On a final note, one of President Obama's biggest cheerleaders,
The New York Times
, wrote on Thursday that no U.S. President since Franklin Delano
Roosevelt has won a second term when the unemployment rate exceed
7.2%. Clearly, the Republicans, now led by Mitt Romney, will hammer
President Obama on unemployment, falling home prices, high gasoline
prices and a weak U.S. dollar that sends food prices up. With the
news media (
The New York Times
, CNBC, etc.) focusing on bad news, voter unrest may grow.
Bottom line, the current low-interest-rate environment is a plus
for stocks, since it will push the frustrated fixed-income (bond)
investors back into the stock market in search of higher yields,
especially after the end of QE2 this week. Today's artificially low
yield on long-term bonds has also encouraged corporate America to
issue more new corporate bonds, to fuel their merger mania and
stock buybacks. This has helped set a firm foundation (which could
become a launching pad) under the stock market, especially if
analysts' earnings estimates continue to rise during the June
"earnings pre-announcement" season.