Lexington, Massachusetts Investment Management
Lexington, Massachusetts Investment Management
Rollin' Rollin' Rollin'
"Keep movin’, movin’, movin’, though they’re disapprovin’….soon, we’ll be livin’ high and wide.” – Ned Washington (lyrics), theme from Rawhide
Yep, it’s spring round-up time, and them cattle have to keep movin’-movin’. Most of the market indices managed to post some kind of nine- or ten-day streak last week, with the S&P 600 index (small-caps) managing the tenner. While the overbought state of the market has many expecting some kind of air pocket any day, the widespread conviction that we are moving towards a spring high has buyers throwing themselves into the dips.
The press has certainly caught the fever as well. The Journal headlined Thursday in large type that the “Credit Market Springs to Life”, and Friday enthused that “Americans Pare Down Debt.” The former went on to admit that only large companies were really enjoying vital signs, due to the floods of money coming into bond funds. Small companies, which depend more heavily on bank financing, are being left behind.
In fact, reading further into both editions seemed to indicate the editors and writers aren’t on the same page, so to speak. Page 2 of the Thursday edition carried gloomy stories about schools facing severe budget crises, with Missouri and Illinois singled out as especially difficult examples. The Friday story about paring down debt admitted that much of the trim was due to bankruptcy filings and foreclosures.
The Chinese are showing more signs of concern about their economy, and that is something to worry about. The debt problems in Europe have not at all gone away. Those two problems could eventually present a bill to the market, but for the moment nothing of substance has changed in the last couple of weeks.
That is to say, the market is firmly in the grip of the springtime and the recovery narrative. Don’t doubt the former – one reason the market goes up nearly every December and April is because everyone knows it’s done so in the past and expects it to repeat itself. It’s a bit overbought right now, and March usually brings a hiccup week. But confidence is strong that we will hit at least 1200 and perhaps 1250 on the S&P 500.
An ally of the markets, besides warmer weather in the environs of Manhattan, is that the domestic news flow should be largely benign for the next few weeks. The comparisons to last year are easy, and we could squeeze another month, even a quarter, out of the restock rebound before the evidence sets in that it won’t be as sustained as hoped.
The success of the springtime rally will be the most likely cause of its own destruction. First, economic data is being given a very benign reading for now. But as we rise towards 1250, there will be less room for any deviation from the big “V” fable. The narrative will become unsustainable.
But even if you are certain that the “V” is sound and that we are wrong about its sustainability, there are other hurdles. Should we get to 1250 on the S&P in April, we will be up 12% year-to-date, 88% from the March low and running at close to a 40% annual rate of return. Whatever you may believe about the merits of the rise, such a height will not just invite action from the authorities, it will positively beg for it.
Central bankers will be tempted to speed up the tightening process. So will China. Some may worry about a too-quick reflation of asset prices, others will see the market strength as an invitation to begin normalizing policy. But they will act, and any prospects of continued stimulus or more “extended very low” will be shelved. When such action occurs at the point of a 20%+ run-up from the February lows – in other words, after only eight to ten weeks - there will be a move for the exits that will turn into a stampede.
A third hurdle is that the modern market moves at accelerated speed. From our vantage, the certainty of 1200, if not 1250, is growing widespread very rapidly. Not only does that invite the opposite, as when any trade becomes too overloaded, but traders aren’t content to wait anymore. A move to 1250 by April, which two months ago was considered an ambitious year-end target, would exhaust the buyers too quickly. Sure, we might put on a show of “climbing the wall of worry” for a few extra weeks, but that would strictly be a way for the fast money to fleece the dumb money.
But for now, yes, we continue to believe that the markets will continue the springtime drive. We’ll hit a couple of potholes, but unless a big political thunderstorm comes along, these cattle are going to get where the cowboys are taking them. That could be the slaughterhouse. Till then, we’ll be living high ‘n wide.
The biggest stories of the week may have been first, the oft-repeated trick of marveling about the economy’s resilience in the face of the February snowstorms. That bit of shtick didn’t merely border on the ridiculous, but crossed the lines and took up residence in the capital. The people who actually report and analyze employment and sales data say the weather (which much of the Northeast corridor escaped entirely) made no difference to February totals, but try telling that to the press, in particular some of the cheerleaders on television.
The other bit of sheer silliness that nonetheless impresses in velocity and ready currency is how the U.S. labor market turned last month. The four-week moving average for initial claims is higher than it was at the beginning of the year. It has been rising for six weeks. The total number of people collecting unemployment insurance (extended plus emergency) has topped eleven million. The unadjusted employment rate is 10.4%, which is about where the adjusted rate would be if the BLS wasn’t kicking so many people out of the labor force.
That’s not the only way the BLS is helping – it stolidly attributes close to 100,000 additional jobs each month from its business births-and-deaths model, despite the deepening slump in small business confidence and in the face of the evidence that they were off by a million or so with last year’s over-estimates (according to the bureau’s own benchmark revisions). The U-6 rate, which is the total percentage of people unable to obtain full-time work, rose last month back to nearly 17%.
And yet. And yet somehow, because the initial estimate for February was a loss of “only” 36,000 jobs versus a consensus for a loss of 50,000, and because the press has wholeheartedly swallowed the notion that the estimate was really (-75,000), a number we never saw until after the announcement, it’s being reported around the globe that the U.S. labor market has recovered. More recovery like this and the patients will need undertakers instead of doctors.
But the news flow was nearly empty last week and the market had been on an uptrend. That usually equates to prices continuing to move higher, which they did, which of course can’t be wrong, so we were essentially stuck with having to listen to the same fluff over and over. It’s springtime with an up-trend, so don’t look for a much of change, either. Marveling at the emperor’s new spring clothing is going to be obligatory.
The global recovery that the press is talking so fondly about resulted in drops in both imports and exports for January. Wholesale inventories declined again in January, but by a smaller amount and business inventories were unchanged, indicating that the run-down of stocks is about complete. That should bode well for the February and March industrial production numbers.
Weekly sales were up last week and should continue to run comfortably ahead of last year for the rest of the month. Confidence was in the basement a year ago when the stock market was hitting its low and job losses were soaring (a loss of 726,000 in February 2009). Add in the fact that Easter season is already upon us (April 4th) and the March comparisons will be easy. Nevertheless, according to Redbook, stores are below plan. Don’t expect to read much about that until well after the Easter bulge has passed.
Retail sales were in fact the story of the week. Supposedly they rose more than expected in February, but they really didn’t: January sales were revised sharply downward, so February’s dollar total, which matched expectations, became an increase instead of a drop.
That led to a bit more silliness about how robust everything is. Strangely enough, the consumer hasn’t caught on, at least not in a way that’s reflected in the regular survey conducted by the University of Michigan. It dropped about a point from the previous month, instead of posting the expected increase.
Besides the industrial production data next week, we’ll get the regional Fed surveys, starting with New York on Monday and moving onto Philadelphia on Thursday. The consensus numbers are quite cautious, so an upside “surprise” is more likely.
The FOMC renders its verdict on Tuesday. We look for another tentative baby-step towards the possibility of tightening, which is usually interpreted as a sign of strength by traders determined to rally on every FOMC statement. However, the overbought state of the market and the skittish Chinese situations might serve to upend the trend.
We’ll get another update on homebuilding, with the sentiment index on Monday and new starts on Tuesday. The weather is already being blamed for weakness, so any lack thereof will doubtless be a positive surprise. Will the leading indicators (Thursday) suffer the same snowy fate? Never have so many suffered for so few flakes.
There is much price data on tap, with imports and export data on Tuesday, the PPI (Producers) on Wednesday and the CPI (consumers) on Thursday. We’re not making any predictions about them, but some hot numbers might well shake another percent or two off the recent highs. At the very least, it would provide an excuse to take some profits after a long run. Friday is a quadruple witching day, increasing the chances we’ll get a “pause that refreshes.”
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