Friday, September 28, 2012

More Disappointing Economic Data ...

It appears that this week can be considered as a week of bad economic data.  Today, the personal income & spending report was disappointing, and consumer sentiment and the Chicago PMI came in below expectations.
Personal Income & Outlays (August)
August personal income & spending report showed less than expected growth in income, moderate growth in spending, and growth in overall prices outpacing growth in income.  We view such report as disappointing as the higher spending and higher inflation gauge (PCE price index) were mainly driven by higher gasoline prices and not necessarily by an increase in demand.
  • Personal income increased by only 0.1% from July.  In addition, the July monthly change figure was actually revised down from 0.3% to 0.1%.
  • Consumer spending was in-line with expectations; up 0.5% from July.
  • Y/Y growths in personal income and spending were revised down by 20bps and 10bps, respectively.
  • Headline PCE price index increased by 0.4% from July, lower than the 0.5% consensus.  However, it was higher than growth seen in income.  Core PCE price index m/m change of 0.1% was in-line with expectations.  We note that the Y/Y changes in both the headline and core inflation measures were less than the Y/Y changes in personal income and spending.
Chicago PMI (September)
The Chicago PMI not only came in below expectations, but also showed contraction during September.  This will likely lower overall estimates for the ISM report which will be released on Monday.  We still expect a slight improvement (51.0 compared with 49.6 in the prior month) in the national ISM report. 
  • The 49.7 reading was significantly below the 53.0 consensus.
  • Most sub-indexes, including new orders, order backlog, inventories, employment and capital equipment, declined from the prior month.  New orders were very disappointing as they declined significantly to 47.4 in September from 54.8 in August.
  • According to the report, the employment sub-index came in at a 2.5-year low, while new orders and order backlogs were at their lowest since mid-2009. 
  • Purchases of capital equipment came in at a 17-month low.
Consumer Sentiment (September)
University of Michigan's consumer survey results also came in below expectations; 78.3 versus 79.0.  However, the results were better than the prior month's and significantly above last year's.  Respondents were less enthusiastic about current conditions, but expect improvement going forward driven by optimism about the economy and jobs during next year.

Thursday, September 27, 2012

Our Final September Mfr. ISM Estimate

Our final estimate for the upcoming manufacturing ISM index is 51.0.  Unlike August's 49.6, it appears the September number will indicate some expansion within manufacturing.  We note that as the regional surveys released by several federal reserve banks showed, overall manufacturing remains a mixed bag of improvements and continuing decline.  We are still unaware of what the consensus for manufacturing ISM is.  The official ISM report will be released on Monday (10/1) at 10AM (ET).

Not Too Many Bright Spots in Today's Economic News ...

Initial Jobless Claims
Let's start with the good news - initial jobless claims came in significantly below expectations.  Annualized initial claims of 359K were much lower than the 376K consensus.  Of course, the prior week's number was revised higher by 3K to 385K.  We note that even with such a positive surprise, the average initial claims for September remain above what we saw in August.  This week's initial claims could be the difference maker in terms of whether September NFP will come in higher than August's.
KC Fed Manufacturing Survey (September)
Now the bad news, and we will start with September manufacturing survey conducted by the Federal Reserve Bank of Kansas City.  The composite index for that survey was 2.0, lower than the 5.0 consensus and a significant decline from 8.0 in August.  Not much looked encouraging in this report.  Production, shipment, new orders, and backlog sub-indexes all moved into negative territory from the prior month.  While the number of employees sub-index remained positive, it dipped to a mere 1.0 in September from 2.0 in August.  Continuing decline in the average workweek sub-index indicates even less hiring or some layoffs coming up in October.  Workweek declined to -13.0 from -5.0!  The forward-looking part of the survey was also not very encouraging.  In fact, new orders are expected to increase only slightly, while capex is expected to decline.  Also, those surveyed do not expect much of an increase in hiring during the next six months.
Durable Goods (August)
Durable goods orders for August, although disappointing, did have a few bright spots. 
Let's start with the bad durable goods numbers.  Change in new orders from July came in at -13.2% compared with the -5.0% consensus.  Excluding transportation, new orders were even more disappointing, coming in at -1.6%, lower than the Street's expectation of a 0.2% growth.  Orders for transportation equipment took a dump with a 34.9% decline. 
Excluding defense goods, new orders dipped 12.4% from July.  Orders for defense capital goods declined 40.1%.  We note that given the upcoming UN speech by Netanyahu, this figure could get bumped back up for the rest of the year, and maybe many more years, as politicians continue to market their pitch of attacking Iran and starting a potentially very costly war. 
Now, let's move to a couple of bright spots within the durable goods report.  New orders for non-defense capital goods went up 1.1% from the prior month.  We believe this represents mostly construction related capital goods such as machinery as we did see a better than expected uptick in homes being built in late Summer.  The other good news was the little growth, 0.6%, in total inventories.  Although we do not see that figure improve significantly for September, we do expect it to increase more as we get closer to the elections followed by a significant growth or a significant drop post elections, depending on who gets elected.
Pending Home Sales (August)
While homes continue to be built as we believe some data in durable goods orders showed, recovery in the housing market may not be as great as the market expected.  August pending home sales index was very disappointing as it declined 2.6% from the prior month level, significantly below the +0.3% consensus.  In fact, it was even worse than the lowest estimate out there (-1.5%).  Although this index is for existing homes, it is viewed as a leading indicator for the housing industry.  Some may use a supply shortage to justify such a miss.  However, such supply shortage is due to increased hesitancy in going after homes in foreclosure.  This also pushes up prices artificially.  Basically, once more foreclosed homes hit the market, combined with the uber-bullishness of homebuilders, supply shortage will end followed by too much supply, which we believe will create pressure on prices, which wil not be good news.
Given our pessimism the last six months, not many expected economic data to come in even below our estimates, but this was the case this morning with respect to the Q2 annualized real GDP growth.  We have stuck with our initial estimate of 1.6%, while the Street was expecting 1.7%.  The official figure came in at a mere 1.3%.  Personal consumption, residential and nonresidential investments were all disappointing.  Although this data is for Q2, we note that we have not seen much improvement in the Q3 economic indicators. 
As a reminder, August personal income & spending, along with University of Michigan's consumer sentiment survey results for September, will be released tomorrow.  After declining nearly 2% from last week's close, S&P 500 is up 0.4%.

Wednesday, September 26, 2012

August New Home Sales Missed Expectations

Although a bit delayed, we decided to provide a summary on and our thoughts about today's slightly disappointing new home sales data. 
  • August new home sales annual rate of 373K was below the Street's 380K estimate.  July sales were revised up 2K to 374K.
  • Y/Y sales were up in all regions with the West and Northeast leading the way with 64.6% and 56.5% increases, respectively.
  • On a monthly basis sales were down 0.3% from July.  This slight decline was driven mainly by nearly a 5% dip in new home sales within the Southern region.  Northeast led the way with 20% sequential increase. 
  • Months' supply was unchanged at 4.5, and remained at the lowest level for the year.
  • Based on non-seasonally adjusted data, median and average new home prices jumped in August when compared with July.  
  • However, the data also showed an increase in months' supply to the highest level since Feb. of this year.
  • The percent distribution of new homes sold based on price categories explained not only the increase in prices but also in inventory.  Sales of homes within the second highest price category ($500,000 - $749,999) jumped to represent 8% of total homes sold in August.  This figure is not only double that of what we saw in July, but also higher than last year's 5%.  In addition, it is above the 6% overall average for 2010. 
  • On the other side, sales within the second lowest price category ($150,000 - $199,999) represented only 16% of total sales in August, significantly below July's 25%, and 2010 and 2011 averages of 24% and 22%.
In our opinion, the widening gap demonstrated here between sales of more expensive and of cheaper homes, could result in further increase in overall prices but also possibly in increase in supply or inventory, which may create pressure on prices and limit this housing bottoming out and/or recovery.  While quantitative easing may have brought mortgage rates lower, the beneficiaries are mostly the wealthy potential home buyers and/or institutional investors that initially had enough capital to make big purchases even if rates were 200bps higher.  We remain doubtful about the trickle-down effect that the Fed and everyone else is hoping for, especially given the not very impressive growth in jobs and average wages or income.  Tomorrow's release of last week's initial jobless claims, along with Friday's release of personal income & spending in August, may provide a clearer picture.

Tuesday, September 25, 2012

Our Initial September Mfr. ISM Estimate

With the manufacturing ISM for September due out next week, we thought to provide some color regarding where we think that number will come in at.  We believe September manufacturing ISM will be within the 50.0 and 52.5 range.
Our manufacturing ISM model does include results of the Federal Reserve Bank of Kansas City regional survey, which will not be reported until Thursday morning.  Once that number is out, we will have our final estimate by that afternoon.  The consensus for this economic indicator is not out yet, but we think it will be above 50.0, which is encouraging for the market, especially after coming in below 50.0 for three straight months.  However, based on regional employment sub-indexes and initial jobless claims, we do not expect this month's NFP to be as encouraging as the ISM.  We will post our NFP estimate at the end of this week. 

Thursday, September 13, 2012

Bernanke Proved Us Wrong

The Fed announced QE3 earlier today.  Unfortunately, we had given the Fed too much credit when we assumed it would not announce nor implement a QE before the elections.  Our assumption was also based on the recent front running spike we had seen in the equity market.  Again, we were certainly wrong.  The S&P 500 is up 22 points, or 1.5%.  VIX is taking dump, down nearly 10%.  Gold futures is trading at $1766, up 1.9%; and WTI oil futures is up 1%. 
Before the FOMC press release, August PPI came in at 1.7%, 50bps above expectations.  Again, prices, input prices are rising.  Although the core PPI was in-line with expectations, today's QE3 announcement will likely make those volatile components of PPI, foods and energy, less volatile while they continue to increase, pushing up input costs even more.  This is not good news for the economy.  At some point, those higher costs will be passed on to consumers that are not seeing their wages increase.  This is also not good news for the economy.  Higher input costs may also slow down the very modest growth in jobs that we have seen the last few months.  Again, this is not good for the economy.  Simply put, contrary to how the Fed 'marketed' its latest move, QE3 will not help improve the job market. In addition, it does not address the lack of demand that we are seeing in this economy. 
The Fed also released its so-called economic projections, all of which was revised to show less optimism in 2012, followed by improvement in 2013, and baam, happiness and glory days coming back in 2014 and 2015.  Of course, the Fed's projection of inflation, based on PCE, was not changed much for this year or next.  However, for 2014 and 2015, the upper end of the inflation forecast range is above 2% (for both headline and core inflations).  So, all of this monetary easing better work before 2014 or else; at least that is what the Fed is implying. 
Yes, we have been wrong regarding the Fed's action, but we continue to ask - how does all of this monetary easing help "foster maximum employment and price stability"?  Yes, as Bernanke said, the weak job market does concern many Americans.  Whether his monetary easing will help create jobs is still a big question, even after four years! 
Bernanke keeps saying that the monetary policy will continue until the Fed sees signs of improvement, but he fails to tell us what those signs may be.  In addition, the Fed wants the MBS purchases to lower mortgage rates in order to, hopefully, attract more home buyers.  Mortgage rates have tumbled for the last few years but we haven't seen much improvement in housing.  In our opinion, a combination of jobs, higher income, and lower rates would increase demand within the housing market.  Unfortunately, the Fed's policy does nothing to address the first two - jobs and income. 
Speaking of jobs, last week's initial jobless claims of 382K were much higher than the 369K consensus.  BLS stated that 9K were due to the tropical storm, Isaac.  Even without that, seasonally adjusted initial claims would've come in at around 371K, above the consensus.  Of course, the prior week was revised higher. 
While the equity market keeps going up and we continue to realize that, for the time being, we made the wrong call on the QE matter, we remain pessimistic.  In our opinion, the current spike in the stock market has increased the probability of a correction further before the end of this year.  By the way, with all of this great news, the less risky sectors such as consumer staples are still up nicely compared to other sectors.  In fact, only two other sectors, materials and financials, are up more than the consumer staples.  This is pretty interesting.

Monday, September 10, 2012

Sector Performance Update & Comments on Upcoming Economic Data

For the week which ended on 9/7, monetary easing was certainly in-play, even though we believe it has been priced into the US equity market for a very long time. As shown in the table and chart at the end of this post, the equity market performed very well driven mainly by encouraging remarks made by the ECB and mixed economic data, which did not really lower the chances of central banks actually implementing those encouraging remarks and strategies.  How and when the monetary easing will be launched remains to be seen.
Some important economic indicators are due out this week.  In addition, the Fed's FOMC meeting will take place on 9/13.  We believe the Fed will not announce any additional specifics regarding a QE3.  As usual, it will say that all options remain on the table, hoping that such a positive comment will act as a psychological QE, driving asset prices even higher, and hopefully increasing businesses' confidence in hiring.  We note that expectations, as indicated by the upward movement in the stock market and articles written in the WSJ, are very high.  It won't be too difficult for Bernanke to disappoint.   
Consumer credit for the month of July will be released on Monday.  We will likely see a jump in that number compared to June, mainly due to the m/m 0.4% growth we saw in the July PCE, combined with slower growth of 0.2% in overall wages. 
Wholesale inventories for July will be out on 9/12.  We expect an increase from the prior month not necessarily due to rising demand, but mainly driven by seasonal factors along with hedging against rising prices.  
Initial jobless claims is due out on Thursday, 9/13.  The consensus stands at 369K.  We might get a figure slightly above the consensus as last week was shortened due to the Labor Day holiday, which we think forced some to delay their jobless claims filing the prior week, for which they had to make up last week.  We also won't be surprised by an upward revision of the prior week's number. 
As we began to point out about a month ago, actually a month too early, prices have been creeping up.  We will see evidence of that in the August PPI and CPI, which are due out on Thursday and Friday, respectively. 
August retail sales growth will also be released on Friday.  Given the better than expected auto sales numbers, overall retail sales growth will likely be close to the Street's estimate of 0.8% or slightly higher.  However, excluding auto sales, the retail sales growth rate will be only around 0.5%.
Industrial production and Capacity utilization for August will also be out on Friday.  We usually have our own estimates for these two indicators.  Regarding industrial production, we expect a decline of approx. 0.8% from July, or an index of 97.2.  The consensus is a decline of only 0.2%.  Our estimate for capacity utilization matches the Street's 79.2, which represents a 0.1% decline from July. 
University of Michigan's initial consumer sentiment survey for September is also due out on Friday.  The Street's estimate is 73.3, representing a one point decline from August.  Given our assumption of a jump in consumer credit in July (to be released on Monday) and August (will not be released until a month from now), driven by a not-so-robust job market and slow growing wages, we think it is likely that the consumer sentiment will disappoint.  In our opinion, the factors mentioned above will more than offset the recent spike in the equity markets.  In addition, while the upcoming election may influence consumers' responses, we think that given the close race between the candidates, the election-driven positives and negatives will likely offset each other during the next two months.
Lastly, we were of course very disappointed by the Wolverines' loss to Alabama last week.  However, the Wolverines survived a scare from the Air Force on Saturday and came away with a win at home.  Also, surprisingly, our beloved Jets scored many TDs in Sunday's convincing win over the Bills.  Of course, next week's matchup with the Steelers might be a different story.  And by the way, luckily with only 22 games remaining, the Yankees are up by one game over the surprising Orioles.
Below is the table and chart representing last week's sector performance update. 



Friday, September 7, 2012

August Employment Missed Expectations

The unemployment data for August, which missed expectations as we had estimated, is not very encouraging, unless one is still on that QE3 bandwagon.  However, as many politicians and optimists might say - at least jobs were added.  With such a disappointment in jobs numbers, the market opened slightly up.  The S&P 500 is up more than 3.5 points.  VIX is down another 1%.  And gold futures hit $1730 with hopes for a QE.  It used to be that the stock market was a leading indicator of the economy.  These days (starting a couple of years ago), the stock market is a leading beggar for more money printing by the Fed and other central banks around the world; all of this while the economy barely grows.
  • August NFP came in at 96K, below our estimate and the overall consensus.  We note that we expected 110K, compared to the Street's more optimistic estimate of 125K.  The official unemployment rate fell to 8.1% from July's 8.3%.
  • Further push for a QE3 was brought on by downward revision of the July NFP; revised lower by 41K.  Private NFP for July was lowered by 20K.
  • With a net loss of 7K in government jobs, the private NFP figure was 103K, significantly below what the ADP data was hinting yesterday.
  • August hourly earnings actually declined by 1c!  This is alarming given rising prices.  In addition, it again may question the reality and stability of what many refer to as the housing recovery.
  • Average weekly hours worked stayed at 34.4.  We note that the July figure was revised down by 0.1 hours.
  • U-6 unemployment rate dipped down to 14.7% from 15.0%, which is somewhat positive.
  • Labor force participation rate declined another 20bps from previous month to 63.5; that's down from last year's 64.1. 
  • Number of people employed declined 119K from July; up 2.34MM from last year.  We note that the civilian labor force shrunk by another 368K from July.
  • The long-term unemployed (27+ weeks) figure declined by 152K from July.  It appears that reality has caught on to manufacturing, as the sector lost 15K jobs in August compared with July.  Also, the initial net addition of 25K manufacturing jobs for July was lowered to 16K.  We did mention last month that the July manufacturing jobs number was suspect.
  • 119K jobs were added in the private space, lower than the 139K boost it got in July.
  • Temporary help in professional and business services dipped 4.9K, which is not a good sign given the accompanying slower rate of growth we are seeing in the NFP (incl. private NFP).  we also note that July's 14.1K net adds in temporary help services was revised down to 6.7K.  In addition, the dip in temp jobs brought down the increase in overall professional and business services to only 28K, compared with the 40K+ we had seen the last few months.
  • The seasonally strong leisure and hospitality space added another 34K jobs in August, after adding 28K in July (revised up from 27K).

Thursday, September 6, 2012

ADP & Initial Claims Beat Expectations; NFP Estimate Updated

Better than expected ADP employment numbers and last week's initial jobless claims, along with ECB's continuing promises of monetary easing, have pushed S&P 500 futures up more than 8 points.  Gold front month futures is above $1700.  It appears VIX will take a dive at least in early trading this morning.  The higher ADP number upped our August NFP estimate to 110K from the 95K we posted earlier this week.  We note the NFP consensus remains at 125K.
August ADP private payroll figure of 201K was significantly above the 143K consensus.  In addition, the July number was revised up by 10K.
Initial jobless claims came in at 365K, below the Street's 370K estimate.  This number is somewhat encouraging as initial claims had been abover 370K for three straight weeks.  Of course, optimism must be held in check as the prior week's number was again revised up. 

Tuesday, September 4, 2012

A Very Good Interview (from Yahoo! Finance)

This interview shows just how dependent the market is on the Fed.


Market Update & Our August NFP Estimate

The market remains in the red with the S&P 500 still down nearly 8 points.  VIX has 'stabilized' a bit, up only 6.5% compared to nearly 9% earlier this morning. Out of the sector ETFs, only utilities and consumer staples are in positive territories.  However, other sectors have begun to pare their losses.
Assuming an August ADP of 149K, which is currently the Street estimate, we expect a 95K August NFP print on Friday.  Our estimate is below the 125K consensus.
If the NFP is as bad as we think, the market's negative reaction could be limited with the growing expectation of a QE3 announcement at the Fed's FOMC meeting later this month.  We continue to doubt that any additional detail will be provided at the FOMC, given the upcoming election. 

August Manufacturing ISM Disappoints

August manufacturing ISM results were a miss and they could have been what the QE doctors had ordered.  Higher costs due to higher prices, which we had touched on before, were clearly evident in the August report.   The market has reacted negatively to this bad news, but the decline is somewhat contained as the possibility of a QE remains. 
  • ISM came in at 49.6, down from 49.8 in July and below our 50.1 estimate.  The overall consensus was 50.0. 
  • The disappointing combination of sub-indexes that we saw in the July report worsened in August.  Declines in new orders, production, and backlog,were accompanied by increase in inventories. 
  • Along with what appears to be lack of demand faced by manufacturers, their input prices increased significantly according to the prices sub-index.
  • The only so-called bright spot in the report was a slight dip in customers' inventories.  Some inventory replenishment could be in order, but that remains to be seen and is far from being an indication of consistent growth in demand. 

More disappointing news regarding the economy came out this morning.  Construction spending for the month of July declined 0.9% from June, versus an expectation of a +0.5% increase.

US economic growth, if there is any, remains very sluggish.  However, bad news such as the ISM report is met partially with optimism, as hopes for a QE remain strong.  The S&P 500 is down only 0.5%.  VIX is up nearly 8%.  And that QE 'leading indicator', gold front month futures, is up around $8.