Notions of positive economic surprises are spreading. Along with
them go the corollary that if they stop, it won't matter because
then the Fed will act and save equities. The irony is that the
surprises aren't really happening, much like those that happened
(but didn't really) in the first quarter.
Yet the market is trying to trade as if they are real, helped
along by the usual insistences that this time is different, that
the fear in Europe is overdone and concealing great values, that
this time is the same as the bull market during the first four
years of the reign of Julius Caesar, and so on. The U.S. economy is
spun as doing better than expected because the latest results are
beating estimates, even when the same strategist had already
lowered them three times this year.
The global economy is weakening, and it is taking a relatively
stable U.S. economy with it. Unemployment in the periphery European
countries isn't soaring, it has already soared and simply gets
worse every quarter. Bit by bit, the weaker governments are
dragging the stronger ones down, by transmission methods both
direct and indirect. Not only do the struggling countries buy fewer
expensive goods from the stronger countries, they also buy fewer
goods from the cheap Asian exporters, who in turn buy fewer capital
and luxury goods from places like Germany and France.
Governments try to cope with austerity budgets and currencies
that are significantly overvalued for the weaker countries, yet
undervalued for the stronger ones. Despite the trade advantage that
has accrued to countries like Germany, it isn't enough when
customers are feeling a pinch start to bite. The currency may have
provided a significant boost to the exporting members of the EU,
but the offset is eroding. Like many such compensatory factors, it
will only be widely appreciated when it has stopped working.
Coming back to the U.S., consider the "positive surprise" retail
sales report for July 2012. The Commerce Department reported that
sales rose +0.8%, leading the
website to report "major gains sweep the…report," while allowing
that the month benefited from an easy comparison. The consensus
estimate for the sales gain was 0.3%, so we can put this one right
into the plus column for the economic surprise index.
The report didn't line up with the July weekly reports earlier
put out by Redbook or the ICSC, which were reporting mostly slowing
rates of sales. It must have come as a surprise as well to the
management at bellwether retailer
), which reported negative year-on-year comps for the second
quarter. Bad execution by them, perhaps, or losing share to online
vendors such as you-know-who?
The truth is that retail sales did
increase in July. Actual retail sales fell by about one percent.
The seasonal adjustment factors for June and July have widened the
gap this year compared to those two months in 2011; without the
widening, there would have been no surprise. Retail sales used to
from June to July in the first part of the decade, but since 2006
have been falling. As the older years drop out, the weighting of
recent years grows stronger, and the decline from June to July
looks better. But they're still declining where they used to
improve, and GDP and company earnings count real sales dollars, not
seasonally adjusted ones.
The revisions in the Fed's Industrial Production report have
grown large enough that we're going to refrain from commenting on
the current release. However, the New York Fed survey was negative
for the first time in nearly two years. New orders in the survey
registered a second consecutive month of contraction. If the
Philadelphia Fed survey comes in negative again Thursday, we're
going to think that maybe
(BRK.B), Warren Buffett's firm, was right to have sold all of its
Last week's report on wholesale sales and inventories shows a
continuing steady decline in year-on-year growth in wholesale sales
for a year now, a pattern that always precedes a recession (though
it does not always promise one). In short, business order patterns
Despite all this, as
pointed out, the market is rising in a helium-like way that ignores
deteriorating fundamentals. The trading robots take note of the
"positive surprises" and bid on stocks anyway, with the lowest
volume month in nearly five years making for an easy time to move
As the 2006-2007 period clearly showed, the markets are capable
of rising on weak data for extended periods on the theory that it
invites central bank action, the magic elixir that fixes all
economic miseries, large or small. We think that the current rally
has the market in an extended state that will pull back imminently,
even if we take one last stab at 1420 on the S&P 500. That
said, be careful about digging in against the market's
infatuations, for said pullback might not get much traction and it
looks as if the markets will attempt a fall high, so long as Europe
can stay out of the obituary pages.
But don't buy into the new positive data surprise notion either,
because it isn't happening. As we have written elsewhere, the jobs
picture has been fairly steady all year, with the exception of a
brief warm-weather stretch in the middle of the first quarter. The
conversion of the raw data has led to much excitement, but the
unadjusted numbers have shown a remarkably similar pattern of
subdued improvement all year long.
Corporate guidance for the second half has mostly translated
into consistent downside revision. Europe and China are getting
worse, and the U.S. is being gently but steadily pulled down with
We may trade the market, but we are keeping the larger part of
our portfolios in cash. Keep your eyes on real data and real
earnings, and remember the instructions that should come with each
trading wave and fad on the Street - it works until it doesn't.
I am long [[SPLS]].
Analysts Have Given This 15% Yielding Stock A
Strong Buy Rating