Lexington, Massachusetts Investment Management
Lexington, Massachusetts Investment Management
The Philadelphia Story
“Don’t say ‘stinks’, darling. If absolutely necessary, ‘smells.’ – Margaret Lord (Mary Nash) in The Philadelphia Story
Welcome to our second August vacation issue! The poor stock market is trying to get into the spirit of things (August usually being a good month for equities), but alas, the data out of Philadelphia wasn’t going along last week.
The market really has wanted to go higher, believe it or not. But the confusing economic data that is following in the wake of earnings has neatly swatted prices back below the middle of their range. One result is to increase the number of people fearing a major correction, which in the perverse world of the markets raises the likelihood of the exact opposite.
The Wall Street Journal ran some interesting pieces. One said that the bond bears have all capitulated. That suggests to us that it’s time to start getting out of fixed income. Another article acknowledged that the oil futures market is now highly correlated with the stock market (a little better than 0.7, or 70%). We’ve been saying it since 2007, and weren’t exactly the first to notice, either.
However, the party line on the Street is still to pretend that commodity prices haven’t been overtaken by financial speculation. It’s sort of like the Flat Earth Society. Total U.S. oil inventories are at their highest level in 27 years. Care for a cup of peak oil?
Mergers and acquisitions are picking up the pace, notably with the BHP-Potash (BHP, POT) drama and the Intel-McAfee (INTC, MFE) deal. This is a good sign. The virtuous cycle in M&A comes during the early days of post-recession economies, when big business has reloaded the cashbox but is still worried that sales might be wobbly for a quarter or two.
So management does things like replace old equipment and software, restart dividends and stock purchases, and buys customers-in-a-box packages by acquiring other companies. Expanding production capacity (like labor) comes later. Not much comfort for the unemployed, but it’s a start.
The economic data got a “C minus” last week. The New York Fed survey came in with a “C+” (positive reading, but short of expectations and new orders declined). Industrial Production for July got an “A,” though, going well past consensus with a monthly increase of 1.0% and a capacity utilization rate of 74.8%, the latter posting the highest reading since the Lehman crash (it’ll take a bit of doing to close the pre-crash gap, though). Readings were good across the board.
Unfortunately, the Philadelphia Fed survey got an “F,” going into minus territory (-7.7 versus consensus of +7.0) and being as weak across the board as the Industrial Production report was good. Coming out after an inflated weekly unemployment claims number, the two combined to put a hurt on the market.
Yet we continue to posit that the adjusted claims data is off. The raw data fell last week down to 400,000, while the official report took it back up to 500,000. We think that the 2009 data - when claims were falling at a faster clip, but from much higher levels – are being overweighted in the adjustment process. After reviewing weekly claims from the last ten summers, we don’t think that the 500,000 estimate is representative. As the bulge of temporary census workers filing claims subsides, we could see the claims numbers start to decline precipitously.
Existing and new home sales come out next week, but the market probably won’t care. Even the talking heads know that home sales data are going to smell for months, though they may feel obliged to act grimly surprised. A good durable goods number (Wednesday), however, would give the market a real lift. The other number of interest will be the first official revision to second quarter GDP, to be released Friday. With consensus sitting at 1.3% (originally announced as 2.4%), the bar is set low.
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