Lexington, Massachusetts Investment Management
Lexington, Massachusetts Investment Management
Reeling in the Year
“The things you think are precious, I can't understand.” - Steely Dan, Reeling in the Years
At Avalon’s MarketWeek, it’s that Time of the Year,
For us to take stock of What got us all Here.
The Faces of Finance, the Great and the Small,
Are set down here in our Annual Roll Call.There’s Chairman Ben, the head of our Bank,
Who no longer takes tips from Paulsons named Hank.
From Time comes the word, he’s Man of the Year,
From Congress the notion he’s the One we Must Fear.He was late, it’s true, to see the Crisis that was Coming,
The credit collapse, and Boneheads like Bunning.
The Fed isn’t perfect, yet we know it never will,
Be ever so ignorant as the Fools on the Hill.A moment of silence for the Lewis named Ken,
Who got the chop when he messed with Lord Ben.
Yet off in the distance, one can still hear the cheers
From the heads of the banks he’d bought through the years.He vacuumed up Countrywide for hardly a penny,
Then saved Merrill Lynch from a Lehman-like ending.
But dear old Ken tried to fudge one deal too many,
One should never shake down the Fed for more money.We saw the ascendance of the analyst named Whitney,
Who predicted no dividends from the mess that is Citi.
She’s called the banks right, but to modest avail,
A woman you see, the Street would rather have fail.Our new Doctor Doom is Nouriel Roubini,
Who still doesn’t see the right happy ending.
It seems he’s still worried about bad loans and credit,
But the boys on the Street say he just doesn’t get it.From London has arisen the most mighty wailing,
For the head of one Chancellor Alistair Darling.
It seems he won’t give his props to a system of bonus,
Where they keep the profits and we get the losses.A glass to Tim Geithner, head of our Treasury,
He learned to talk just in time for the rally.
We wish him good luck and a speedy recovery
From the charlatans that make up a Congressional Committee.For Bernie Madoff, the king of the scammers,
Who has taken to wearing plain striped pajamas,
There’s a heartfelt request from our SEC,
Is there anything else that we couldn’t see?For Mohammed El-Erian, raise a Pimco glass high,
He gave us the “new normal,’ and the market’s “sugar high.”
If he and Bill Gross prove right, as they so often have been,
The stock market has gotten overvalued yet again.Sound the bugle for the passing of Dr. Paul Samuelson,
A wonderful prof who taught economics to a nation.
Though Wall Street may yet prefer Milton Friedman,
We think markets work better with a bit of regulation.A bottle in memory of the late Lord Maynard Keynes,
whose stimulus theories sprouted most of the year’s gains.
Though the goldbugs want to tell us of coming Armageddon,
Frankly we’re happy that the markets can work again.Now ends our review of Two Thousand and Nine,
It had a rally not seen for a mighty long time.
Your indulgence we beg, for the Verses seen here,
Thank you for reading, and a Happy New Year!
If you were to go by market reaction, there was no report of the week last week. We’re not sure there was one either, even allowing for the extremely light holiday trading – the lightest three days of the year were last week.
We thought that it might be the Chicago PMI, or Purchasing Manager's Index. It reported an expansionary reading of 60.0 where the consensus was for something around 55 or 56. A positive surprise, improvement in most categories, we looked forward to digesting this good news. As the folks at Econoday put it, “the survey has now posted three months of accelerating gains.”
But it hadn’t, as it turns out. Nor have new orders. The unadjusted reading actually fell to 52.8, and increases in new order readings have declined for three months in a row now. It’s the usual problem of trying to fit the square peg into the round hole: the seasonal adjustments are keeping the numbers at higher levels.
We certainly agree that it’s normal for some business to slow going into the winter, so in a normal year, some slowdown should be compensated for with seasonal adjustments. But this isn’t a normal year, a drumbeat we’ve been sounding for a couple of months now. When durable goods orders are still down 20% from last year and GDP was still negative through the first nine months of the year, one has to ask, a slowdown from what? Given how weak the second quarter was, we should still be posting increases in the raw data. We’re not really earning that recovery sobriquet.
Perhaps the hope is that optimistic headlines will embolden us. It doesn’t seem to have worked yet on the Chicago survey participants, whose comments were not at all cheerful. The best that can be said of them is that nobody said we were standing on the brink, but the ones cited showed considerable anxiety and skepticism. The reading was revised two days later to 58.7 to take into consideration new seasonal factors. That doesn’t matter all that much, but one change that was a pity was the drop in employment from growth to contraction.
The bit about seasonality can of course be repeated about the initial claims readings. Certainly the Street has started to wake up to this, as evidenced by the number of traders on CNBC shrugging off the latest improvement to 432,000 from 454.000 (it was also well known that heavy weather in the Midwest made it impossible for many to file). The raw data was 557,000, and as we’ve been saying every week for months, that’s too high a number for this stage in the cycle, time of year or not.
All of this certainly makes us wonder about what we are going to get next week in terms of the two big reports on Monday and Friday. Monday will bring the ISM (same as PMI) national manufacturing index, which is the survey that the Street pays the most heed. The Chicago number might have raised hopes for a better number; consensus is for the usual very modest increase from 53.6 to 54.0 (which the ISM itself would call unchanged).
An interesting fillip for the handicappers is last week’s draw in natural gas storage. It came in about fifteen percent less than expected, quite a miss given the cold weather in most of the country. That kind of big swing in the face of the more typical weather variation implies (we have learned to our cost) a drop in industrial use. Will it be reflected in the ISM manufacturing report?
The consensus estimate for the jobs report on Friday is for zero losses for non-farm payrolls. Some hope for a positive print. We may get one, I suppose, but it’s going to take quite a bit of special sauce and seasoning to produce a positive number. To be blunt, we don’t see such a print as possible without some heavy help from the swamis of smoothing. Nevertheless, hopes were growing over the weekend for a plus reading and some strategists are jauntily predicting 250,000 monthly additions by the spring.
Consumer confidence was little changed, according to the Conference Board, those merry folks who also bring us the Leading Indicators. The reading of 52.9 was very mildly better than the previous reading of 50.6, the latter being a slight revision from 49.5. The survey results have been wrapped around the fifty-level, give or take a couple of points, since May.
The interesting part of the report: the number of people saying that the current economy stinks grew, yet so did the number of people saying that future conditions would get better. The bull view is that means things are about to get better, while the skeptic would say that people reckon they can’t get much worse. Maybe it was just year-end optimism.
Weekly shopping numbers continued to show restraint, while the Redbook data is implying a November-to-December decline. The confidence data showed a drop in the number of people wanting to buy a car or home; we’ll see if that shows up in the Tuesday reports on December car sales and pending home sales.
The last two weeks have been about eating goodies, with diets due to resume next week. On the economic side, it’s been the reverse, with almost nothing the last two weeks and a banquet of data arriving in the days to come.
As noted, ISM manufacturing arrives the first day of the trading year at 10 AM, along with the November construction report. Tuesday brings factory orders and the pending home and car sales reports for December. Wednesday brings two harbingers of the jobs report (ADP and Challenger), the ISM non-manufacturing report for December and two weeks of mortgage-purchase application data (omitted last week for the holidays). That afternoon, the FOMC minutes will be released (the usual pattern of late is to trade up before the report and exit quickly afterwards).
Before you can catch your breath, same-store sales for many chain stores report December results on Thursday, along with jobless claims and an extra-large holiday helping of Treasury funding results.
On Friday we’ll get updates on wholesale trade and consumer credit, but above all the jobs report will be dumped on our laps. We have to say that for the first time in a long time, we have no idea what to expect on that number. Estimates range from a loss of fifty thousand to a gain of forty. The one bet that we’ll make is that the number will be significantly revised down the road – way, way down the road, where it can’t do any harm.
We must report that our StockWatcher was last seen crossing the Boston Common with a rambling gait and one of those infernal horns, muttering imprecations about gold and hard-money humbugs. We hope to locate him and press him back into service as soon as possible.
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