Lexington, Massachusetts Investment Management
Lexington, Massachusetts Investment Management
Now Dash Away All!
“A wink of his eye and a twist of his head, Soon gave me to know I had nothing to dread.” - Clement Clarke Moore, The Night Before Christmas
We don’t know what the consumer may think, but Santa Claus seemed to be making his rounds on Wall Street last week, where the market rose every day of the holiday-shortened seance. It wasn’t always by much, volume was light again, but it was still up and we would expect next week to provide more of the same.
Will it mean anything? Maybe. Rallies, even calendar-based ones with little volume, have a way of attracting the hopeful. As to the fundamentals, the Street can always cook up whatever cover might be required in the way of justification. Few bulletins from the front are expected next week, making it easier to manage the tape.
There’s a possibility of weakish news on the retailing front, but even that could be construed positively if the market is so inclined. A certain breed of trader loves to get the first jump on the distant drumbeat, and so one of the latest wheezes on the Street is to be the first to worry about Fed tightening. Ergo, weak news could be good news because it would “keep the Fed on hold.” One is tempted to wonder about the joys that a real thirties-style Depression could bring in this regard, but that might be considered cynical.
Over the last few days of the trading and calendar year next week, we can look forward to a number of things. To begin with, a weekend filled with the returns and exchanges of ill-fated Christmas items. That should be followed by a week’s worth of reflections on the year just passed, characterized chiefly by musings over the sharpness of the rally and whether or not it was justified.
It will also officially kick off the prediction season. As Dave Rosenberg has pointed out, the most common view calls for a scenario that we might characterize as “Goldilocks:” a market neither too hot nor too cold, gradual recovery in the economy, eventual slow improvement in unemployment. Some will make the case for accelerating inflation, while others still worry about deflation.
We do predict that there will soon be passage of a health-care bill. Even more confident is our prediction that whatever the final version, it will be attacked immediately by the opposition as the end of the world as we know it. A steady stream of Republicans will appear on CNBC to tell us how the nation is being put at risk by the way President Obama brushes his teeth, while the further fringes of the left will excoriate the administration for protecting the major banks (instead of letting the financial system collapse and precipitating a global depression). As every President finds, that second year is a doozy.
There will be some end-of-year rhymes and ditties appearing, to which we plan to append our own. It will also be the beginning of a new decade. Almost certainly it will outperform the last, if for no other reason than we are not starting out with markets valued at over forty times earnings.
We hope our readers had the Merriest of Christmases possible under the circumstances, and wish them the Happiest of New Years. Markets will be closed on Friday.
It’s hard to say how much weight any of last week’s data really carried in the holiday-period marketplace, but with that in mind one can attribute the larger impact to the housing sector. Existing-home sales for November were reported on Tuesday, and the results brought a smile to economic optimists.
Sales rose 7.4% from October as buyers surged to take advantage of what was thought to be an expiring tax credit. You may have already read that it was the largest annual rate since February of 2007. Yet even the National Association of Realtors, eternal optimists and producers of the report, had to allow for the spiked nature of the punch, predicting that that sales would start to fall again before regaining strength in the face of the next expiration in April. The market’s mild reaction reflected the data’s potential limitations.
The median price rose, though still down on a year-on-year basis, but this looks like a clear case of changing mix to us. The median fell in the Northeast and Midwest, but rose in the South and West, where the most excessive homebuilding took place. Most of the lowest-tier inventory in those areas has been cleaned out, and some analysts have long predicted such developments would bring about deceptive increases in median price. The improvement in the FHFA (i.e., government agency) price data may be part of the same change in mix.
Certainly the next day’s report on new-home sales went in the opposite direction. October’s sales data was reversed from a six-plus percent gain to a loss of one-percent and change. November plunged steeply by over ten percent in a miss that was so wide of expectations that we should probably expect further revisions down the road, perhaps in the other direction this time. The main hint from the previous month’s data – median months for sale, which continued to climb, pointed the way to the weakness.
The markets didn’t like the news, but there isn’t all that much new to it. The industry is still in the same ditch, constrained by credit conditions, unemployment, write-downs on land and lack of demand. The industry has been trying to create a sense of urgency about basement prices and low rates for many months, so far without success. Mortgage-purchase applications fell sharply again the prior week, and even a rebound this week will leave them at very low levels.
The original third-quarter estimate of GDP (3.5%) that was widely doubted at the time took another hit downward, this time to 2.2%. Even that number keeps benefiting from a very easy price deflator. It’s old data at this point, but it doesn’t help the market’s faith in government numbers. Another suspect item on the list is weekly unemployment claims. The adjusted figures showed about a five percent decline from the week before, while the unadjusted figures rose again.
The raw data of 560,000 is very high two years after the onset of the recession. We wonder what the gnomes will do with next month’s jobs report. Some Street economists were already predicting a positive print based on the easing in claims, although the actual number of job losses is going up. If only we could get some seasonally adjusted incomes and spending.
Personal income and spending both rose in November, by 0.5% and 0.6% respectively. Both numbers were about in line, though a little on the low side of estimates. Real disposable income rose 0.2%. It’s the right direction, but anemic. At least the core PCE index was too, unchanged from the month before.
Weekly retail sales were on the light side, leaving retailers hoping for a late rush. However, the markets seemed more taken by the prospect of winter storms meaning more business for online retailers, and sent Amazon (AMZN) stock spinning back higher in a classic reversal. Next week’s data will be revealing, although the market’s reaction may be something of a false note with so many participants absent.
November durable goods new orders were reported to have increased by 0.2%. A stronger number (0.5%) was expected, but the data were swung considerably by variations in aircraft spending. It wasn’t all bad, with a decent pickup in private business spending, but not all good either, being unchanged after excluding defense. It isn’t V-shaped, but maybe one can hope that the sluggish rate of replacement growth will eventually mean a stronger pace is necessary. We're still running twenty percent lower than a year ago.
Along the same lines, consumer sentiment was little changed in its last December reading. A little lower than expected, not all bad, definitely not great. The Conference Board reading next Tuesday will get more attention. It may even be the report of the week, if it can conjure up a surprise. Expectations are for the usual mild improvement, as they are for nearly every single report these days. The Street is playing it safe.
Case-Shiller home prices are due out on Tuesday morning as well, and it may be that the same change in existing-home sales mix will come through in the Case-Shiller. That may lift hopes again in a week known for its positive bias. Besides the weekly claims report, the only other major report of interest scheduled is the Chicago Purchasing Manager’s Index (PMI) on Wednesday morning.
Some markets will close early (2 PM) on Thursday, the last trading day of the year, but not the equity markets. There will be the usual marking-to-performance shenanigans as most players leave at lunch, never to return this year. Once again, Happy New Year!
We wish that we had talked about Harmonic Inc. (HLIT) before an upgrade by a brokerage house sent the stock up another ten percent or so last week. But we’ll still tell you about it this week.
Harmonic’s main strength is in supplying the IPTV market, or television using Internet protocol. As such, their main customers in recent years have been cable companies. The analyst upgrade talked positively about Harmonic’s capabilities in 3-D television, which may or may not be the next big thing. However, we believe that Harmonic’s strength in IPTV will serve it well in another of our favorite areas, mobile video.
Mobile video is still evolving in terms of delivery methods, but one thing we are certain of is that it will continue to grow fast on the demand side as smartphones take over the cellphone marketplace. Carriers will need ways to efficiently compress and deliver the data streams, and without drowning you in a lot of techno-speak, we believe that Harmonic is well situated to take advantage of this phenomenon.
At about twenty-four times 2010 estimated earnings, the stock isn’t really cheap, so you may want to look for a lower entry point. Against that, the company is debt-free, and has about $2.63 a share in cash against last week’s close of $6.24. The range for the stock over the last five years has been between four and twelve dollars, so there is plenty of upside. We’ve been building a position.
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