Wednesday, May 16, 2012

Update ...

We thought it might be time to discuss some upcoming economic indicators.

Tomorrow, Wed. 5/16/12, the US Census Bureau will release April housing starts and building permits figures.  In addition, the Fed will release industrial production and capacity utilization. 

The housing figures are a bit difficult to get a handle on, mainly due to the mixed signals brought forth by the warmer weather this winter.  For example, in March, housing starts were surprisingly disappointing as many expected construction to begin much earlier due to the warmer weather.  However, building permits and housing completions were encouraging.  Similar to many economists, we believe to see an uptick in housing starts combined with a slight decline in permits.  Housing starts and permits estimates for April are 680K and 730K, respectively.

Regarding April's industrial production, the market expects a 0.5% increase from March.  After running through some numbers, we think this might be a bit too optimistic.  We are looking for an increase, but slightly less than the consensus; approx. 0.2%.  We expect capacity utilization to also come in below the 79.0% expectation.  Given the disappointing employment figures the last two months, we believe we may see a slight decline in capacity utilization and look for that figure to come in at approx. 78.56%, .04% lower than March. 

Of course, the US economic indicators have once again taken a backseat to the crisis in Europe.  Combined with the 6%+ decline in the S&P500 that we have seen since the beginning of May, slightly disappointing economic data may not have much of an impact on the equity market tomorrow (Wed.).  In addition, the market will be waiting for the release of FOMC minutes in the afternoon.  We note that Thursday's initial claims, of which the previously reported week keeps getting revised upward, along with the Philadelphia Fed's manufacturing report, are potential market movers. 

Initial claims will likely come in slightly below the 365K consensus, but we are confident that the previous week's figure will be revised up to approx. 369K.  We think by now, given the Department of Labor's consistent upward revisions, the market has taken notice. 

Expectations for the Philadelphia Fed manufacturing figure have risen after the surprisingly high Empire State manufacturing data released this morning.  For this reason, a mere in-line Philadelphia Fed manufacturing number could be seen as disappointing.  We must also note that while the Empire State survey results were better than expected, most of it was due to the current indicators within that survey.  Significant increases in current shipments and average employee workweek, along with a slight uptick in number of employees, were encouraging.  However, the forward looking indicators were not as encouraging.  The overall forward looking index declined significantly driven by lower expectations of number of employees hired, along with declines in average employee workweek, new orders and shipments.  Again, the much better than expected headline Empire State manufacturing number could have raised expectations for the Philadelphia Fed figure just a bit too much.

Lastly, we note that since our post on 3/5/12 before the open (it was approx. 1:45AM (ET)!), the market has declined 2.9%.  It did peak at 1422.38, as we had assumed it would get above 1400, but we also suggested that it was time to rotate equity holdings into more defensive types of sectors.  In addition, our suggestion of strangle positions on VIX and USO have also worked out ok.  Unfortunately, given the weaker Euro and no further indication of Bernanke becoming more aggressive regarding QE, gold has declined.  It may go down further, but that just may be necessary in order for it to break the positive correlation it has had with the equity market since the start of the monetary easing policies.  From a technical standpoint, S&P500's next support level is 1325.  If it goes below that, then there isn't much support until around 1290.  However, the Facebook (FB) IPO (which we are still trying to figure out how it will grow its revenues consistently), along with a potential dead-cat bounce, might just help the market create a base at the 1335 - 1345 level, at least for the short term.  By the way, we note that there are reports stating GM has withdrawn its ads from FB saying those ads do not pay off. 

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