Lexington, Massachusetts Investment Management
Lexington, Massachusetts Investment Management
Balancing Act
“I'm up on the tightwire, one side's ice and one is fire” - Leon Russell, Tight Rope
The Ides of January came and went last week (the thirteenth, in case you’re curious) and while many a jester pranced across the stage, the soothsayers are at a bit of a loss.
On the one hand, the market has risen nearly every day so far this month. On the other, we just had a couple of serious wobbles. The S&P 500 booked its first loss of the year on Tuesday, falling nearly a percent. Traders dusted themselves off and raced back to a new high in anticipation of glowing earnings reports from Intel (INTC) and JP Morgan (JPM). Friday gave it all back, with a definitive triple-digit loss on the Dow posting a down week for the markets.
High on the list of concerns: Alcoa (AA) booted another earnings report. Not that big of a deal - it usually does - but there were some hopes that this time the company might pull it out. Nope. The Intel report was pretty good, but not quite as great as some were hoping. Maybe more worrisome was that a decent bigcap tech earnings report was sold off, which does not usually presage a rising market.
Morgan’s outlook may have been conservative, and market worries overstated. But it wasn’t exactly a blowout either. The weakness in mortgages and other areas simply wasn’t what was wanted after such a long run higher in stock prices. Morgan is usually thought to be the best-run of the Gang of Four, and if its book is a tad weak, then what should one expect from the other three when they report next week?
Another concern is that technology companies, which have generally been enjoying good bookings, may be too over-owned to go much higher. If financial stocks begin to stall, then the market may run out of leadership.
There’s always a chance that energy stocks could take up the baton again, but that looks a bit difficult. Refined product demand has shown few signs of life of late, and proposed position limits for futures traders could be a drag on attempts to get that particular momentum train going again.
It’s a dilemma. An advantage to staying long is that it’s still too early for the economic data to paint a definitive picture of what’s going on. We could be riding the big rig on the road to recovery. Then again, maybe we’re not. But if - as we, PIMCO and others say - the economy is only on a bounce that runs out with the end of the inventory reload and government stimulus, then interest rates will stay at zero. That can’t hurt.
Throw in another parley - maybe the guvvies will come through with another stimulus package. The parley is that even if they don’t, hopes that they will could keep us going higher a while longer. As they like to say on the Street, it works until it doesn’t.
Against that are some problems. Even the bulls can’t make the argument - not with a straight face anyway - that the market is significantly undervalued. No, the usual plea is that the market is properly valued and can still go higher. Maybe, but it’s always safer when you’re in the undervalued zone.
Complacency is rampant, so much so that we proposed last week that a big turn has to be coming soon. Cash levels are low. Some posit that most of the action in the market is simply sector rotation. True or not, it isn’t the kind of argument that happens halfway up the long rally. It’s the kind of stuff comes up when the rally is almost over, at least percentage-wise.
Some are waiting for 1200 on the S&P to push the escape button. If we did manage to punch through, though, it would be at least to 1215, 1220 or so, just to punish the doubters and pull in the suckers. Then we’d get a pullback of twenty percent or so.
What to do, what to do. One thing you may want to keep in mind at this point is that there is probably a lot more room to fall than there is to climb. Monday is a trading holiday in the United States, in honor of the Reverend Martin Luther King’s birthday, so you have an extra day to think it over.
Retail sales for the month of December were the highlight of the week, more or less. Like so much of the data these days, they weren’t bad, and they weren’t great. From the market’s point of view, something a little bit more on the great side was expected, but we didn’t get it. Traders were busy betting on Intel, though, and quickly cast the report aside.
The consensus had been for a rise of 0.4%, so one might have thought that the actual fall of (-0.3)% might have shaken the marketplace a bit more than it did. However, the November report was revised upwards significantly, from a gain of 1.3% to 1.8%. It may be that many decided that it was a wash, although it really wasn’t. Had November been unrevised, December would still have declined, which isn’t in keeping with the “V” crowd.
There were other bits that might have cast doubt on the report: auto sales were reported to have fallen, which doesn’t seem to square with the industry’s own figures. However, seasonal adjustments this time punished the results. In the case of autos, unadjusted auto sales were up nearly 11%, although they included extra selling days. We would not at all be surprised to see the loss revised back up to no change, given the strength in the unadjusted data, but even another half-a-percent boost, like the one November got, would still leave a disappointment.
It’s early to say, but there are signs of a sharp consumer slowdown from December, as if people made an extra effort for Christmas but have now packed it in. The weekly retail sales reports have been falling significantly, with both the ICSC and Redbook blaming a lack of inventory and bargains for sale. Mall traffic in our own area has certainly become thin.
Although the retailers were feeling pretty good about their margins last week, if unit sales continue to weaken in this manner, there’s going to be some big bumps in the road ahead. The trend to close stores would of necessity gather steam – Wal-Mart (WMT) announced the closure of eleven Sam’s Club stores last week. A common refrain in recent years is that the U.S. is over-stored, and so many analysts would say that the shrinkage would result in a healthier industry.
They have a point. But a significant retrenchment in stores at this juncture would mean more jobs lost, and less commercial rent paid in an already feeble economy. Ever-shrinking lots of inventory sold at higher prices isn’t going to raise our spirits or our standard of living – or those of our Asian suppliers.
Consumer sentiment on Friday was also a mild disappointment, being essentially unchanged instead of showing some expected improvement (it was also partly blamed for the fall in the stock market, but it really had very little to do with it). We think we know one reason why: the jobs market. The Department of Labor is determinedly sticking with its seasonal adjustments, based partly upon the absolute carnage of a year ago, when companies were practically bulldozing workers off the cliff.
The weekly jobless claims number was reported as 444,000, an 11,000 increase from the week before. That backup was a bit of a disappointment to traders, but it was also about as far from reality as it’s possible to get. A year ago this week, when the bleeding was at its worst, 957,000 claims were filed. Using this data point, the DOL looked at last week’s unadjusted data of 801,000 new claims and it came out as an improvement (actual claims actually rose by 156,000).
But it isn’t an improvement at all, because there were about six-and-a-half million more people working then. Layoffs a year ago totaled about 0.7% of the workforce; last week’s equate to about 0.6% of the workforce. That’s very little improvement, especially when set against the frequent proposition that companies laid off too quickly last year, and are now ready to hire back.
To be sure, the numbers are probably boosted by holiday workers reaching the end of the season, but that was the case a year ago as well. With long-term unemployment setting new duration records every month, and every drop in continuing claims more than offset by increases in emergency and extended claims, there is little wonder as to why sentiment is flagging. 801.000 real jobs lost is a long way off from the seasonal estimate.
Sentiment isn’t flagging in the RBC CASH (Consumer Attitudes and Spending by Household) index, which rose smartly from the previous month. However, that index is something of a contrarian indicator, last peaking in September 2008.
Prices are behaving for the moment. Although energy prices are up quite a bit from last year’s collapse, they’ve been range-bound for some time, leaving the monthly changes muted. Import prices were unchanged (overall) in December, and the CPI rose only 0.1% in both the overall and core categories. Export prices rose 0.6%, led by agriculture (and commodity speculation), but prices have eased recently.
There was nothing new in the Fed’s Beige Book telling us that conditions are slowly improving, but the New York Fed’s survey of conditions in its state rose to about 16, up from 13 the month before, with new orders picking up. At the national level, industrial production in December rose 0.6%, the same as November. The weather caused a big surge in utility output (+5.9%) to run up against a big drop in construction (-2.0%); manufacturing decreased by (–0.1%). The latter has been zigzagging, in keeping with an economy that is growing at low speed, so we can probably expect a pickup next month.
Next week is a short one, dominated by earnings reports. We’ll get another look at homebuilding with the sentiment index Tuesday afternoon and December starts announced Wednesday morning. The PPI is also due Wednesday, with Leading Indicators and the Philadelphia Fed survey out on Thursday.
The main focus, though, will be on earnings: Citigroup (C) reports Tuesday morning and IBM after the close. A bevy of banks comes Wednesday, including Morgan Stanley (MS), Bank of America (BAC), US Bancorp (USB) and Wells Fargo (WFC).
The barking about banking bonuses should be in full throat by Thursday morning, when Goldman Sachs (GS) rounds out the big banks. The calendar is very heavy that day, with Google (GOOG) being the most prominent company to announce after the close. GE and McDonald’s (MCD) will highlight Friday’s slate.
These days we like TriQuint Semiconductor (TQNT). TriQuint has several divisions: networks, which is about a quarter of the business; defense electronics, another ten, and the other two-thirds is the part we like best: RF semiconductor chips for wireless handsets.
Like RFMD, another company we featured recently, we won’t put you to sleep going through the product portfolio. What it comes down is this: TriQuint is very well positioned with the smartphone makers. The company has been growing revenue smartly and is debt-free. It sells at about ten times free cash flow, has nearly a dollar a share in cash and last week raised its guidance on last quarter’s (December) results.
A feature of TriQuint is that it doesn’t have much control over its very large customers. This can make its order flow lumpy and unpredictable, and that is why the stock price is selling at a relatively cheap $6.23 on Friday, down from its 52-week high of $8.59 in October. We think it’s time to come in.
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