"Stock indexes turn positive after choppy morning," ran the
headline. It feels like it's been that way for sometime, what with
the market up seven of the last eight days. And after all, is there
any more bullish fundamental for the economy and the market than
the monthly turning of the calendar? Having made it this far, it's
nearly a cinch we'll cruise into Friday with another weekly gain.
So long as the jobs report doesn't lay an egg, look out 1400. It's
only a little more than two percent away.
We understand the set-up - with bonds overbought, Europe shaky,
China slowing down, cash returning nothing, where else are you
going to go? We get the big herd move into U.S. equities.
We also get that it doesn't matter - at least for a little while
- if the crowd is right or not. Whatever the real value of that
object up on the auction stand, when everybody in the room needs to
buy something and there isn't much else to spend it on, the price
of the object is going to go up. Buyer's remorse is for another
We also get the common notion that if only everyone would all
feel a little more confident, then you know, things really could
get better. There's a will to believe out there that's perfectly
But at the risk of boring you with our repetitiveness, though,
we'll say it again - things are not as good as the headline factory
is saying. Earnings growth is slower than a year ago. Economic
growth is slower than a year ago. The ECRI
was chiming in last week
saying much the same thing we've been saying, only more so. We
compare the current rate of change with that of a year ago and say,
this quarter isn't really as good as the first quarter of 2011. The
ECRI is gloomier.
They have a point - year-on-year real disposable personal income
has been negative for months. Year-on-year real spending, or PCE,
has been declining for four months. Perhaps we're due for a bounce,
yet we haven't really seen it in the data yet. We gave considerable
heed to the
last week, partly because the company is so close to the ground on
spending habits, partly because management stuck with its 2% GDP
call last year at this time when the Street was running half-drunk
with 4% predictions. For them, the "bi-furcated" recovery
continues: the upper income consumer is fine, while all else
We've also spent a deal of time looking at industrial ordering,
and while there is no doubt that it's up at the moment, the
increase is smaller than a year ago - no doubt due in part to the
changes in accelerated depreciation - and there is no indication
from recent historical ordering patterns that suggest that this is
anything but another restocking pulse.
The market has climbed higher on what has been called a
"stream-of-anecdotes" news flow. The economic data is being judged
on comparison with Street estimates rather than on its own. That
game works for a time, but not a very long one. Nearly absent from
mainstream reporting is the fact that all of these economic
"surprises" reflect growth patterns weaker than a year ago.
Oil prices are soaring, turning into the latest
can't-miss-parlay. First, the Mideast: trouble in Syria, trouble in
Iran, they won't sell oil to France. The fact that the EU already
voted in an Iran embargo months ago is conveniently forgotten.
Besides, maybe Iran will fire some shots in the Gulf, that ought to
be good for five bucks a barrel. Or Israel tries to take out Iran
nuclear production facilities: ten to fifteen bucks a barrel.
Second, if growth really is accelerating around the globe, then
the demand story is good for a trade. If in fact it's slowing down,
as the EU, IMF, China and the World Bank say is the case, why then
there will be more quantitative easing, more central bank money
pumped out and so you have to buy commodities.
Third, short covering in the euro means weaker dollar, weaker
dollar means buy more oil. Last but not least, the casino just
increased everyone's credit line at the tables: the CME cut margin
requirements for oil contracts. Against all logic, oil prices shot
up faster afterwards. We're sure there's no connection.
The usual suspects are making the usual arguments for why "this
time will be different" for surging oil prices: we'll use natural
gas instead (tell that to the airlines, trucking, chemical and
delivery companies); Americans don't really care if gas is $4 a
gallon (that must be why consumption is falling); it's a reflection
of strong emerging-market growth (as PT Barnum said, there's a
sucker born every minute).
We heard the pending home sales data on Monday celebrated like
it was the second coming. This is odd, given that the meager 2%
gain suggests that home sales will be either flat or down for the
month. Closings run below contracts for a variety of reasons, most
importantly financing and appraisal issues.
Pending home sales are supposed to lead existing home sales by a
month or two. The index rose 10.4% for October 2011 and 7.3% for
November, and fell 3.5% in December. Existing home sales gains for
those months were 1% in October, 1.8% in November and were nearly
flat in December.
The index goes up anyway, though. And while announcers
breathlessly informed us that it was 8% higher than a year ago,
they neglected to mention that the existing home sales rate is up a
barely noticeable 0.7% year-on-year. Maybe not even that much - the
January number gets a heavy dose of seasonal adjustment, and the
January 2011 existing home sales rate was the highest reported
number for the rest of the year, not surpassed until - drum roll -
If housing is picking up, then someone one needs to explain how
the median price and the average price fell for existing home sales
in January, while the year-on-year price changes for median and
average were, like new home sales, in the negative single digits.
Or why Case-Shiller data continue to show declines.
There hasn't been strength in new home sales, either. New home
sales came out on Friday, and the details were illuminating. The
latest run rate of 321,000 is still anemic, and while December did
get an upward boost, its rate of 324,000 is hardly different.
December and January are of course low-water marks for building
activity during the year, and perhaps not the best indicators. Even
so, a look at year-ago activity suggests that there has been no
real change in the industry, with the exception that it continues
to slowly get rid of old inventory and come into balance.
Unit sales were up from a year ago, but a look at the underlying
unadjusted data tells you that all of the increase came from a
small bump up in the South, from 11k to 13k. If one had said in
November that one of the mildest winters in the last century would
produce an increase of exactly 2k starts in the South (and a
decline of 1k for the rest of the country), would anyone have been
impressed? The median price fell sharply year-on-year, from
$240,100 to $217,100, suggesting both a mix shift and probably some
price-cutting to get rid of unwanted inventory. The average price
also fell, from about $276k to $261k.
We're not saying housing is getting any worse; it's hard to see
how it could. Supply-demand conditions are the most favorable
they've been in ages, and new construction is running well below
the household formation rate. But financing is still
extraordinarily tight and buyers still fearful of falling prices.
Some economists think it may take a generation for attitudes
towards home purchase to fix itself, à la Great Depression. We hope
not, but the news is setting up markets around the globe for
Contrary to pending home sales, durable goods sales took a sharp
tumble in January, falling 4.0% while business investment spending
fell 4.5%. Pay no attention to that man behind the curtain,
thundered the bulls, and indeed the
Wall Street Journal
rushed a "doesn't count" explanation
Don't get us wrong - we think that the durable goods number was
a bit off ourselves. We've already made the point that the expiring
accelerated-depreciation credit pulled some spending into December.
It wouldn't be a surprise either to see the latest number get
revised back upwards next month. But January is still the month of
new budgets, and a drop is still a drop. We've also made the point
that the inventory replenishment episode that began in Q4 2011
probably ends in Q1 2012. January's number is in line with that
thesis, and revision or not, will not present a good start for
first quarter GDP.
The Chicago Fed's National Activity Index ((
)) was released last week. It's made up of 85 monthly indicators
and, like the Philadelphia Fed's coincident and leading U.S.
indicators, seems to us to paint a better picture of overall
economic activity than some of the reports more celebrated by the
market, such as the ISM surveys or the jobs report.
The NAI reported a value of +0.22, down from +0.54 in December,
but "positive for the second straight month for the first time in a
year." Aye, and there's the rub, at least from our perspective.
The NAI in January 2011: +0.27, against the current +0.22. The
current three-month moving average: +0.14, versus January 2011's
reading of +0.15. In short, it seems to us that the economy is
doing very much the same thing it did a year ago, which is to say
getting a boost from new budgets and the inventory replenishment,
but not a huge boost and one that will ebb again.
Consumer sentiment as measured by the University of Michigan
rose a bit to 75.3, consumer confidence as measured by the
Conference Board rose to 70.3, the highest reading since oh,
February 2011, the last time the stock market was on a six-month
run. It's all retracing the same pattern of a year ago. The stock
market headlines and "better-than-expected," weather-boosted data
are giving a false impression about how well things are going,
obscuring the fact that this quarter's pickup is actually not as
strong as it was this time a year ago. We're also about to hit a
harder speed bump in the form of soaring oil prices, and no
Virginia, it isn't different this time.
The February jobs report comes out Friday. Our sense is that the
headline number is going to benefit once again from the weather and
adjustment factors. We are adding jobs, which is good, but adding
them at a below-par rate whose underlying trend rate hasn't really
changed, despite a couple of months here and there that exaggerate
gains and losses. It raises the final disappointment potential for
the current momentum trade.
Apart from weekly claims, we aren't seeing any economic data at
all that says this year's first-quarter growth is better than it
was a year ago. Given the exceptionally mild weather, one would
have had to expect improvement in claims and hiring, but we fear
that the seasonal factors will create an appearance of reversal as
we get into spring. On the other hand, it's created margin problems
for retailers this quarter.
Personal income and spending data come out Thursday, and given
that financial sector bonuses are down considerably from last year,
we think that the year-on-year data there isn't going to add up to
The only real improvement of late has been in stock prices
, which are also retracing last year's pattern, not to mention last
year's early hype. Believe it at your own peril.
I have no positions in any stocks mentioned, and no plans to
initiate any positions within the next 72 hours.
Economic Data And Earnings Season: The Week