Friday, June 18, 2010

Jobless claims extension defeated in the Senate

Extension of jobless benefits was defeated again in the Senate late Thursday night by a filibuster.

Accordingly, about 900K claimants will lose their eligibility by the end of this week, which is now upon us. This means that next week's EUC 2008 number will be drastically lower, as we mentioned earlier on Thursday morning. It could also mean lower consumption by the ones that were receiving those benefits. With consumption already not very inspiring, this will likely further cut into consumer spending.

This is exactly what the economy does not need. Its a perfect example of a drug addict facing difficulty in first quitting the drug use and then actually recovering from the addiction, if possible. The government made the economy dependent on these stimuli and now the economy is begging for more and more. Although the equity market has had a rally the last few days (driven by technical indicators as we mentioned before), it may begin sweating in the future, nearly as much as the economy has already begun to. Maybe the economy should attend some SA (Stimuli Anonymous) meetings.

Thursday, June 17, 2010

The Philadelphia Fed Survey says ...

A bit late, but we thought to say a few things about the Philadelphia Federal Reserve survey, which is viewed as an indicator of the health of the manufacturing industry in that region.  It was released this morning and came in significantly below estimates. It was 8.0 for the month June versus May's 21.4 and analyst estimates of 22.0. 

What stood out was the number of employees and average employee workweek indices, both of which declined into negative territories, suggesting contraction in June. 

In terms of how those manufacturers view everything six months from now, they remain hopeful. The future index increased from 37.0 to 40.2. We must note that the number of employees index declined to 19.5 from 30.1, indicating the manufacturers' unwillingness to increase headcount. Of course they are more than willing to squeeze as much work out of their employees as they can, indicated by the average employee workweek for the next six months going up to 25.2 from 14.6. Lastly, capex will not be growing during the next six months as much as the manufacturers had indicated in May. The capex index for the next six months declined to 3.0 from 7.0. 

The possibility of a slower, weaker and potentially contracting 2H '10 is increasing.

Initial and continuing jobless claims disappoint

It appears that the employment situation is not really improving.  Initial jobless claims for the week of June 12 came in much higher than expected. The 472K figure was above the average estimate of 450K. Seasonally adjusted continuing claims for week of June 5 were also higher, up 88K to 4.57MM.

We touched on the EUC 2008 and extended benefits figures in our earlier post. Extended benefits (provided by state/Federal 50/50) increased slightly. However, we saw a big dip (-191,103) in EUC 2008. This is not an indication of jobs found by those claimants. You see, the government has not passed an extension to the EUC 2008 program, so that number will continue to decrease as many reach their limits and are basically no longer included in that figure. The last week for the EUC 2008 program was May 22.  This program was initially intended to be temporary, but the state of the economy and political incentives forced our law makers to extend it for a long time.  The economy has not realized any return on this, but those politicians certainly have ... for now.

CPI was in line with expectations, supporting the PPI and capacity utilization stats and, for now, quelling fears of higher inflation.

Wednesday, June 16, 2010

Housing starts, building permits and FDX outlook disappoint

As we mentioned, capacity utilization came in better than expected, but did not indicate rising inflation.

Housing numbers disappointed big-time, with housing starts of 593K falling short of the 655K consensus. Building permits came in at 574K, below the 631K expectation. 

Although we did not mention PPI in our previous post, we note that it did not decline as much as many had expected with -0.3% for May being a bit less than the -0.5% average estimate. Core PPI (PPI excl. food & energy) did increase by 0.2%, which was more than the 0.1% consensus. Rising PPI, however, when combined with the capacity utilization data, does not indicate inflation rising too much. We'll see if the CPI data supports this tomorrow. 

On another note, FedEx (FDX) a bellwether, disappointed with its annual guidance. We'll see if anyone will pay attention to this as fundamentals appear to have been pushed aside for a long time.

Give Props to the Technicians ...

Well, S&P 500 did not break below the 1,050 level, and in turn, literally burst through the 200-day average of 1,108.25, which as displayed by the market, convinced technicians to make that 180 degree turn from bearish to bullish ... at least for the day. As we mentioned last week, continuance of the latest downturn or correction would take place if S&P 500 had gone below 1,050, which of course did not occur. At the same time, the latest downturn short-term partial recovery did strengthen the 1,050 base level.

If the market turned upward and excluding significant downward movements, the 200-day average is likely to trend further upwards and maintain such a trend. This is mainly due to the fact that the market experienced a big upturn, 18%+, since late August '09 until late April '10. The turn of the 200-day average could drive similar change of direction in the 50-day average at least through the next 2-3 weeks, which do include the April highs. So, at least in the short term, from a technical standpoint, the market appears to be leaning more towards the bullish side.

So technicians may be looking for the 10-day to cross the 200-day on the upside, or the 200-day crossing the 50-day on the upside. The downturn and/or bearish mentality may conquer the market again, if the faster declining 50-day crosses the flat 200-day.

As usual, we believe the fundamentals tell a different story. With many upcoming key economic indicators, the battle is now between technicians and the other more fundamental-based traders, meaning volatility may be around the corner.

For the rest of this week, some potentially disappointing economic indicators include May housing starts and building permits (due out tomorrow morning).  The end of the latest home buying incentives has very likely driven down demand for not only buyers but also the builders.

Capacity utilization will likely be positive or better than expected, but not at a level demonstrating strong expansion or instigating inflation fears.

We look for initial claims to be in-line with the 450k current estimate. In addition, although the total continuing claims may be lower (likely around 4.5MM), we recommend for everyone to view the Extended Benefits and the EUC 2008 (Emergency Unemployment Compensation) figures in the weekly initial claims report. The decline in continuing claims, we believe, is more likely due to the 26-week expiration of benefits for many unemployed. Yes, a small, very small portion may be due to some job findings, but after the 26 weeks are over and the initial continuing benefits run out, those unemployed are no longer included in the continuing claims figure. For this reason, again, we believe many should view the Extended Benefits and EUC 2008 numbers, which together, will likely be higher than the prior week. All in all, the current burst in government hiring may have helped to slightly, only slightly, ease the lingering unemployment fears. But once the Census project is finalized, we don’t expect the majority of Census workers to find FT jobs.

Lastly, the Leading Indicators figure could be in-line or worse than expectations, negatively impacted mainly by the 9%+ drop in stock market values during the month of May.

Friday, June 11, 2010

Our thoughts on some of today's economic indicators

It appears that consumers were not consuming as much as the government and/or economists had expected. The May retail sales monthly decline of 1.2% was below the consensus of a 0.2% monthly gain. This was a bit surprising as we thought consumers may still have some of their tax refunds to spend in May. This is the largest monthly decline in eight months.

Consumer confidence, on the other hand, is increasing as indicated by today's Reuters/University of Michigan Consumer Sentiment Index. It came in at 75.5, higher than the 74.5 consensus, and 1.9 points higher than the previous month. Then again, this index had also increased by 1.4 points in May, a month in which retail sales actually declined big. So, we'll see if consumers will actually put their money where their mouths are.

Both the index of expectations and of current conditions rose. According to the report, there is less fear regarding unemployment. We must note that although there has been some improvement in the employment picture, its mostly from the Census temp jobs. Let's hope that all of those Census workers will be able to find a FT job after the government is done with them.

Let's combine the smiling consumer sentiment data with the not so happy ECRI's Weekly Leading Index (WLI). The latest figure of 123.2 was lower than last week's 124.0, making this the fifth straight weekly decline. Its also the lowest level since the last week of July '09. We're not saying that this indicates the end of the world, but it does say that this economy is still not in good shape and that things are not improving as well or as quickly as many think. All of this may say that the market at these levels just may be expecting too much.

We still believe this recovery is losing steam. We wonder just how much more money the government can throw at this. With Bernanke in charge and his 'mothership' (this is what Dan Patrick calls his ex-employer, ESPN), Goldman Sachs, facing what at least on the surface appear to be some serious charges, we think everything will be thrown at this economy, even the Fed's kitchen sink, to at least make it look like its recovering and to keep that consumer confidence rising. Hopefully then consumption will get going, people will start working, government will begin generating huge tax revenues and will start paying off its debt. Be positive, think positively, have high hopes and good things will happen.

Thursday, June 10, 2010

Will the latest market correction continue?

S&P500 is down 4.5% since we labeled Bernanke as the official silencer of bad economic news. It appears that these days, no matter what Bernanke throws out there, the market has realized that a much quicker and stronger recovery was already priced in.

As we’ve mentioned a few times before, the second half of this year could be tougher than what we’ve experienced the last 12 months. Year-over-year comparisons will be much more difficult for many companies during the last six months of 2010. There are no indications of any steady top-line growth for companies across most industries. Most companies have cut their expenses to the bone, resulting in impressive margin expansion. However, we continue to believe that this cannot continue.

With the topic of sovereign debt now on the front pages worldwide, it appears that the government will find it slightly more difficult to continue its so-called stimulus programs. Thanks to those Europeans, our lawmakers may finally begin to take into consideration the long-term negative impact(s) of their programs. Maybe they can think of something better than programs that are to stimulate the economy just long enough (between 2 and 4 years) so they can re-elected.

The employment picture doesn’t look that great either. Yes, the government is hiring but all of this hiring is temporary. Well, maybe the government is hoping that with some extra money earned by the temp Census employees, consumption would increase enough to convince small businesses to hire again. Unfortunately, this just may not work out for the government, as most consumers and small businesses no longer trust the government or the overall system. ‘Conspiracy theorists’ are no longer the ‘few’, they are becoming the majority; and that’s for very good reasons.

We’re glad to see the consumer revolving credit not increasing significantly. In fact, it declined by $8.5bil in April (last reported month). Declining revolving credit certainly doesn’t indicate any significant or steady comeback in retail sales growth. Of course, thanks to the government’s free money programs, the non-revolving credit balance appears to be increasing. But again, for how long can the government pay us to consume? Wow, I just said that the government is paying us to consume! Socialism, welcome back!

Consumers have continued to deleverage their balance sheets, which has lowered their debt payments. Consumption remained flat in April (last month reported) compared with March, but was up Y/Y at a meager 4.6%. This figure is not impressive as April ’09 was also a weak consumption month. The May figure may be slightly better as our consumers may have put their tax refunds to good use. Unfortunately, we believe a better use would be savings, which was again at a low 3.6% rate in April. Overall, the economy would benefit more from higher savings in the long-run. But the government is doing everything it can to prevent the hard working families from saving.

Housing is not looking good either. This week, even with rates remaining at their lowest levels, refinancing declined. Of course, no surprise as the purchase index declined for the fifth consecutive week; again while rates have remained at low levels. This is another example of how well these government programs work, only for the short-term. Let’s hope the home builders didn’t think that this government-induced ‘high’ would last longer. If they do, we can expect another jump in inventory levels during the next few months. The optimists or green sh*ters may point to the latest decline in foreclosure (from the latest RealtyTrac report) rates as an indication of a turnaround. Well, sorry to tell you ‘greenies’ but such decline is accompanied by huge jump in the number of homes that banks have begun to repossess. You see, the banks, for the time being, are ignoring the late-payers in order to take away the properties of the truly non-payers. Banks had been wishing that over time, many of their foreclosures would work out, but unfortunately they haven’t. At this time, banks have no choice but to try and control home inventories. It appears that the best way to do so is to forget about the new foreclosures and try and tackle the old ones. We wish the banks and other lenders a lot of luck.

With all of this said (and we do have a lot more to say as we basically omitted discussion of the latest oil disaster), the market (S&P500) has entered its correction phase, down more than 13% from its high in late April. We continue to believe there is more room for the market to decline. In addition to some things mentioned above, from a technical standpoint, if S&P steadily breaks the 1,050 level, the 1,000 level is doable. If the market dips below 1,000 on heavy volume, then the 950 – 975 level would be realistic.

Hopefully if the market behaves the way that we are anticipating, because then we will likely begin to publish our thoughts on specific soon-to-be under-valued companies. Until then, we remain bullish on gold. As mentioned in our previous note, hopefully our simple strategy will be successful so that we can begin vacationing in the now much more affordable Greek islands for a long, long time.