Lexington, Massachusetts Investment Management
Lexington, Massachusetts Investment Management
It's That Time of Year
“Someday at Christmas, man will not fail.”- Stevie Wonder, Someday at Christmas
Is it time for the Santa Claus Rally? It's due to start soon, though one cannot put an exact date on such things (the classic start is a few days before Christmas, but you know how our modern trader likes to get the jump on things). Yet the market's big year-to-date gains seem to have traders less interested than usual in staging their usual holiday special. We may cruise the rest of the way to January on low volume, low interest and low volatility (and if that doesn’t invite a sudden explosion, we don’t know what will).
There are still holdouts insisting that the race to the 1150 level on the S&P (currently at 1106) will happen by year-end. It’s possible. After all, lighter volume does make the tape easier to push around. We’ve twice had the horse pull up short at 1120, and the ancient maxim that the third time pays for all has never been out of place on Wall Street. Last week’s diffident performance may have made the market look ready to stumble, but we wouldn’t read too much into it. It still wouldn’t be hard to engineer a quick slip past 1120, and that could easily trigger enough automatic buying to shove us into the goal.
Looking over the main news trends as we enter the final turn, the odds seem to favor the last gasp up. On the one hand, the rumblings about sovereign debt have been picking up momentum in the financial press. The new acronym PIIGS (Portugal, Ireland, Italy, Greece and Spain) is now making the rounds as popular shorthand for the marshlands. The Ukraine is in intensive care and telling the IMF it will die without emergency transplant surgery.
Yet the Street is very much a believer in the theory that what doesn’t kill you, makes you stronger, especially where rallies are concerned. As can be seen from the Asian currency crisis, the tech wreck and the subprime meltdown, traders love to try to race to the edge before jumping out. Momentum trades tend to go on long after it’s clear that they’re impossible. If sovereign debt issues were to deepen into a crisis, we could go for many months before reality finally imposed itself, for the full version is that ignoring them makes you stronger until it kills everybody else.
Then there is the notion that any economic strength brings the Fed closer to some kind of rate raise. Perfectly typical stuff on the trading desk to buy bad news on the notion that it keeps rates on hold, and sell good news because it might mean a rate increase. It doesn’t matter whether it makes sense, the game is to think of it first. That particular worry may not be the most deeply held idea right now, but it isn’t a tailwind either.
On the other hand, inventory rebuilding seems to have finally started in October (see below), which could plump up the data for a spell. It appears that the consumer is willing to spend a little something for Christmas, and though we suspect that it’s just for the season, strategists are more than happy to connect the dots for however many months you’re willing to believe. That could help out the news flow for a bit.
The trader’s playbook says it’s the season to rally and that December is one of the best months, and the market doesn’t often like to dispute such things. Another day or two of fretful anxiety somewhere could even be just the thing for the market to pull off one of the bullish reversals that traders love so much. Keep your eye on the dollar and oil, though – if the former keeps rising while the latter falls, it means risk is not on the menu today.
One topic of conversation that ought to keep everyone busy through the end of bonus season is bonus season. It’s always a big topic at this time of year, but whereas the headlines are usually a mix of admiration and envy, in 2009 it’s more like anger and loathing.
One must give credit to the folks at Goldman Sachs (GS) for reading the political winds correctly, an attribute that is something of a Goldman trademark. After last quarter’s earnings results indicated a record pool of banker booty, the ensuing backlash led management to decide that its top thirty bankers would get equity-only bonuses that would be spread out over five years. Clever lads. The fact that they may all fervently hope and believe that this year is a one-off and that they can get back to business as usual next year, well, it wouldn’t be in the Christmas spirit to bring that up, so please forget that we said anything (the Goldman people second that request).
Over in Europe, both the United Kingdom and France are threatening fifty-percent surtaxes on bonuses that are anything like the usual financial payout. This has bankers and brokers fuming no end, causing many a dramatic monologue to be hurled at Bloomberg monitors in the West End of London. The most common threat seems to be the idea that they will all high-tail it to Switzerland, but that is much easier said than done.
It isn’t at all clear why the Swiss – or anybody else - would now want to institute a structure of US-UK-style compensation that is currently blamed for nearly sinking the Swiss banking system as well as the global financial system. We can’t think of anyplace that would be rolling out that particular welcome wagon right now, something our indignant masters of the universe might want to consider before they put the townhouse up for sale and chuck the private club memberships. Still, all hope may not be lost – we hear Dubai has some vacant office space.
Consumer credit started off a week nearly devoid of major releases. On Monday afternoon, we learned that it contracted again in October, this time by $3.5 billion. That was a number that had the virtue of being better than expected (down 8 or 9 billion), but the vice of taking some altitude out of credit-card companies, because revolving balances fell by around $7 billion. The smaller total was due to a pickup in non-revolving credit, led by auto loans.
It’s interesting to note that the amount lent out by auto finance companies rose by 25% from August to October. That’s a pretty hefty leap, obviously pushed along by the cash-for-clunkers program, and accompanied a rise in loan-to-value ratios from a below-average 86% in August to 93%, a level reminiscent of 2006-2007. Some parts of the credit market are working again, it seems. Let’s hope unemployment does indeed stabilize.
At the other end of the week was the retail sales report for November. That one was more or less the centerpiece of the week, but the market’s reaction to a piece of positive news was surprisingly muted. Total sales for the month were up a reported 1.3% versus expectations for a 0.9%. Excluding autos and gasoline, sales were up 0.6%. The numbers were inflated by the usual downward revisions to the previous month (and will probably be revised downward themselves come January), but even so were still at the upper end of the range.
That didn’t seem to jibe with the weakish same-store sales released the week before, but apparel was weak while electronics did rather well, and apparel stores make up a large chunk of reporting stores. November 2008 was a dismal month (down ten percent from the year before), so these aren’t exactly robust sales by comparison, but that didn’t stop floor traders from immediately speculating on how soon the Fed might raise rates. The shrieking heard in Washington was probably coming from Chairman Bernanke’s office.
Friday produced a rather good round of news, in fact, but couldn’t push the market out of its lethargy. Consumer confidence rose smartly from the month before, going from 67.4 last month to 73.4 in December, as measured by the University of Michigan (well past the timid call of 68.2). The rise was concentrated in the current conditions part, which isn’t as good as expectations, but let’s not slice it too finely. Most times that big of an improvement would be greeted with joy by traders. Thursday’s RBC Cash index, a similar measure, also reported a big uptick.
The business inventory report was also positive (0.2%), as were the wholesale inventories on Wednesday (+0.3%). Both represented the first increase in over a year, so it would appear the long-awaited inventory restocking got underway in the fourth quarter. The strength of the trend should be clearer next week, when we get the November industrial production report and New York Fed survey on Tuesday and the Philadelphia Fed report on Thursday.
Inventory rebuilding would help GDP, which might get a boost also from the trade deficit. Imports slowed in October, primarily because of a drop in oil demand. With the magical meters of GDP, the brakes sometimes appear as gas pedals. Yet one area that’s growing faster is price: sharp November increases meant that year-on-year changes in import and export prices turned positive for the first time since October of 2008.
It isn’t demand inflation, it isn’t cost-push inflation, you might call it desperation inflation. Revenue-starved producers have a tendency of late to raise prices at the first sign of any increase in orders, or even if it’s simply a case of stabilizing declines. Commodity prices, including oil, have been marching to songs written by financial markets. Next week will tell us if it’s spreading: the PPI comes out on Tuesday and the CPI on Wednesday.
Despite much of the talk during the week about improving Christmas sales, chain-store sales fell sharply in the week ending December 5th. It’s only one week’s data, but it may signal a generally cautious consumer willing to hold out until the last minute for bargains, much like last year. Both Movado (MOV) and Neiman Marcus talked about weakness with their upper-end customer last week.
Mortgage-purchase applications rose last week, for the third week in a row. That’s the good news. The bad news is that they are still quite weak despite historically low rates and government subsidies, below the level of the third quarter, That didn’t stop the folks at Econoday from rhapsodizing that “ongoing improvement in the housing sector is perhaps the greatest positive right now for the economic outlook.” Well! With positives like that, who needs negatives? The homebuilders will give their own opinion next week on the “greatest positive” with their sentiment index (Tuesday afternoon) and production data (housing starts, Wednesday morning).
Maybe the Mortgage Banker’s Association – home of the weekly mortgage data – just isn’t getting aggressive enough with the seasonal adjustments. Certainly the Bureau of Labor Statistics is doing its part. The latest initial claims data showed a weekly increase of 205,000 in raw claims, which the Bureau reported as an increase of 17,000 seasonally adjusted. Uh-huh. No wonder the unemployment rate is going down. Continuing claims fell, but not by as much as extended benefits rose (the emergency extension that the federal government pays for after state payments expire).
Perhaps next Tuesday will be the day of the week, with the PPI, New York Fed survey, Industrial Production, Treasury International Capital (who’s buying the dollar?) and Housing Market Index. Or should it be Wednesday, with the CPI and housing starts in the morning and the Fed’s latest FOMC pronouncement in the afternoon? But then Thursday has the Philadelphia survey, Leading Indicators and high profile tech earnings from Research in Motion (RIMM), Palm and Oracle (ORCL).
Retail earnings next week include Best Buy (BBY) on Tuesday, which will surely be highly scrutinized for its assessment of the Christmas season, and Nike (NKE) on Thursday, no doubt being pitched a lot of questions about Tiger Woods. Whatever the denouement of that unfortunate situation, if the market doesn’t do some moving and shaking next week, it’s really shut down for the season.
If you’re in the mood for some Grinch-like action and a short-sale, you might want to think about Amazon (AMZN).
Amazon is a pretty respectable company that frequently gives a bargain, but the company’s stock price is anything but one. This one is all about the valuation. It trades at nearly eighty times earnings, fifty times cash flow and sixteen times book value. Yes, maybe it’s only 45 times next year’s earnings, but – only 45 times? We’re sorry, but trees don’t grow to the sky.
Another reason to worry about the stock price is the Kindle. It’s Amazon’s number-one selling product, which some take to be exciting news, but we have quite a different view on it. It’s more like this year’s Walkman, as far as we can see. Sony (SNE) has an e-book product, Barnes & Noble (BKS) has the Nook on the way, Google (GOOG) is getting ready to distribute books over the web, and Apple (AAPL) is lurking in the wings with its reported new tablet. We’re willing to bet right now that it isn’t going to be the number one product next year.
Did we mention that the stock has tripled so far this year? That isn’t just a function of undervaluation at the market bottom in March – the price is up seventy-five percent from September alone. Repeat after us – trees don’t grow to the sky. Just ask the folks over at one-time market darling Wal-Mart (WMT), who’ve been heavily discounting books, video games, movies and a lot of other stuff this holiday season. It isn’t helping Amazon’s profit margins to match the discounts.
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