Last week stock markets were mixed again with the DJIA declining -0.43% and the S&P 500 up 0.9%.
The big news items last week were the U.S. jobs report for February and the Greek debt restructuring. February was the third straight month with over 200,000 jobs created with 227,000 new jobs created. The unemployment rate held steady at 8.37%. This is further evidence that the U.S. economy is still on a gradual recovery path.
This week look for the Consumer Price Index number on Friday, estimated to be up 0.4%, as the result of higher gasoline prices. If gasoline prices rise to $4 per gallon and stay at that level for a significant time period it would be a drag on the economic recovery. The chart below shows the national average for gas prices over the last 3 months.
Greece successfully completed its debt restructuring which should buy the European Union time to address debt issues in Spain and Portugal. However, it is probably only a matter of time until contagion spreads to these countries.
“All life is an experiment. The more experiments you make the better.”
- Ralph Waldo Emerson
US stocks were mixed last week as the S&P 500 posted a 0.3% gain and the Russell 2000 (smaller companies) posted a -3% loss. Oil posted a loss for the week at -2.4%.
GDP for the 4th quarter of 2011 was revised higher from 2.8% to 3% mostly due to inventory growth. Motor vehicle sales continue to recover and spending remains constrained at the state and local government level.
Personal income growth slowed from 0.5% in December to 0.3% in January. Meanwhile consumer spending increased from no change in December to 0.2% in January. How can spending increase while incomes are moderating? The answer is consumers are sacrificing their savings to satisfy their spending. The personal savings rate peaked during the last recession and has been declining since to January’s rate of 4.6%.
Consumers are also beginning to feel more comfortable about debt. This week we will get an update on January’s consumer credit outstanding. The chart below shows that revolving debt (such as credit cards) and non-revolving debt (such as auto loans) are on the upswing. Low and falling savings and growing debt are providing a short term boost to US GDP growth but will be a drag longer term.
The last few months have shown improving trends for US employment. Rising employment is necessary to keep the consumer alive. We’ll keep our eye on this Friday’s Employment Situation update.
“Problems can become opportunities when the right people come together.”
Gasoline prices have closed in on $4, with expectations of $5 or higher by the summer driving season. This increase is causing more than a little discomfort for consumers, and a determined search for scapegoats by politicians and population alike.
When President Bush encountered intractable gasoline, he fanaticized about switchgrass. President Obama recently promoted algae, his own version of biofuel. Unfortunately, algae’s transportation future is not likely to be any rosier than was switchgrass’s. The only question is how much more taxpayer dollars will be “invested” before this reality is conceded.
The most powerful near-term factor affecting energy prices is the turmoil in the Middle East. The “Arab Spring” seems to be ending badly, the question of Iran and its acquisition of Nukes promises more instability in the months ahead and the Afghan transition is in trouble.
We do have some options [ignoring political impediments]: Approval of the Keystone XL pipeline from Canada to Louisiana, which would also provide jobs and contribute to our national security. Reestablish an efficient licensing procedure for the Gulf of Mexico [why are we allowing the Cubans to drill 90 miles from our shores without responding?] would also be a big help.
And, what should be done? In a nutshell, the solution for higher prices is higher [free market] prices. Higher prices restrain demand and, in the fullness of time, produce supplies that will overcome claimed “shortages”. Volatility will continue, but supplies will remain sufficient [1974 gasoline shortages will not return].
Ps: this note was inspired by a recent WSJ editorial page commentary. The entire piece is available at: http://online.wsj.com/article/SB10001424052970203960804577243221763257612.html.
“If you put the federal government in charge of the Sahara Desert, in 5 years there’d be a shortage of sand”
- Milton Friedman
One of our favorite business writers Mark Hulbert seems to consistently come up with interesting and useful information about the markets’ behavior. He titled a recent piece “Don’t sell a dull market short”. In it he dissects a measure of volatility “vix” which receives much attention. A low number for the vix means there is less volatility, a higher number more.
This year volatility has been quite low as measured by vix, less than the median of 20. The number of days in which intraday Dow movement has been more than 200 points has been just one. Hulbert has reviewed the data and concluded that this is a good thing and cites the numbers to prove it. So don’t feel that a lull is necessarily a bad thing.
Speaking of good things, the news regarding the Greece bailout is upbeat. Agreement on a 130 billion euro bailout came down today. It would be nice if this were the last bailout, but at least it takes the immediate pressure off. In addition there is agreement that private bondholders will accept a 53% haircut on their bonds. Austerity measures for the country will not be well received.
Finally we note with some amazement that Apple Inc. has accumulated some $100 billion in cash reserves. Some suggest a special dividend or a major stock buyback. How about a bailout of Greece? Apple could take the Parthenon as collateral!!
Enjoy the spring weather.
“Never spend your money before you have earned it.”
Last week saw a pause in the rally in the equity markets as the S&P 500 dropped 2.26 points or 0.17%. The markets continue to watch negotiations with Greece and this week Moody’s downgraded six European nations including Italy, Spain and Portugal. In addition, the firm warned that the U.K.’s rating could also be at risk. Any slowdown in Euro zone economies will be a drag on the earnings of many large U.S. companies.
Positive earnings surprises for 4Q 2011 continue to lag prior quarters and profit margin improvements are stalling out. In the 4th quarter productivity, as measured by output per hour was up just 0.5% from the prior year.
2012 may be a challenging year for corporate profit growth.
“I shall make the most of all that comes: And the least of all that goes”
- Sara Teasdale
Last week was another positive week for stocks as equity markets posted decent gains. Greece/Europe and the Middle East are concerning. However, U.S. economic data continues to be resilient. Most notable data point was last Friday’s employment report which highlighted an impressive gain of 243,000 jobs and another drop in the unemployment rate from 8.5% in December to 8.3% in January.
A Greece resolution may finally be in the works nevertheless Europe is not out of the woods. The European Central Bank has restored liquidity to the area via a program called LTRO (Long Term Refinancing Operation) which is similar to our Federal Reserve’s policies of quantitative easing and accommodative interest rates. Their policies have been effective in the short term however we are not ready to say the coast is clear.
This week we will keep our eyes to the east as things continue to develop abroad. Back in the U.S. we are wrapping up another decent round of corporate earnings reports and a fairly quiet week of economic data.
“We must free ourselves of the hope that the sea will ever rest. We must learn to sail in high winds.”
- Aristotle Onassis
The Dow Jones Industrial Average moved slightly lower last week – down 0.47%. The S&P 500 eked out a small gain, +0.07%, for the week. For the year-to-date period, the Dow is ahead 3.6% while the S&P is higher by 4.7%. Oil was up by 1.4% while gold jumped ahead by 3.95% on continuing global fears and the Fed announcement. The markets are off to a good start in 2012, but perhaps it is time for the markets to take a rest.
Last week saw mixed economic data with better-than-expected consumer sentiment and durable goods only to offset less-than-expected fourth-quarter GDP and pending home sales. Earnings have been reasonable so far with 59.9% of S&P 500 companies beating estimates, 29% missing estimates and roughly 11% in-line.
The Federal Reserve announced their intention to keep interest rates low until the end of 2014, but their language was vague enough (of course) to allow an increase in rates if warranted. The old adage – “don’t fight the Fed” appears to be working. The Fed is forcing investors to take on more risk, and we see equity prices moving higher as the year progresses. In the short-term, however, we would not be surprised (or disappointed) if the markets gave back a bit of their advance.
Europe continues to be a wildcard. We’re fairly confident that the next crisis (yes, there will be one) will originate in Europe. The absence of a viable Greek debt restructuring will rattle investors as spreads on Italian, Spanish and Portuguese debt widens.
“Understanding is the first step to acceptance, and only with acceptance can there be recovery.”
- Joanne Kathleen Rowling
This week will have some important economic data releases, as well as a slew of earnings reports.
Housing numbers [will the bottoming process continue?] and the Fed’s meeting [they’re expected to keep fed funds rate next to zero] will be out on the 25th.
Unemployment [don’t forget to monitor the drop-out rate], durable goods orders, and leading indicators will be out on the 26th. We will also get the preliminary look at 4Q2011 GDP.
Earnings reports will also power markets this week. Early reporters have produced mixed results, with technology strong, while many banks reported less-than-expected results. Apple, the Big Kahuna, will be reporting Tuesday evening.
The conventional wisdom prevalent at the start of the year was for a difficult first half followed by a more rewarding second half of 2012. This was an extrapolation of the Eurozone panic which impacted the second half of 2011. However, since then fears have subsided [at least for now] and the markets have advanced.
The market has actually gotten off to a great start this year, with the DJIA’s 4.1% increase the smallest of the major indices [the Nasdaq is up 7%]. There may be a tad “too much” optimism in today’s market, but this is a presidential election year, which tends to [unrealistically?] boost the country’s outlook.
Economic reports out today reveal trends favorable to U.S. and most foreign stock markets. Here at home the Empire State Manufacturing Index for January improved more than expected, rising to 13.5 from 8.2 (anything above 0 means the economy is expanding). Amusing to me the Chinese economy “only” grew at 8.9% for the quarter. As a result China may consider more easing of monetary policy.
An interesting report from Mark Hulbert (http://www.marketwatch.com/Journalists/Mark_Hulbert) was in the news discussing the first five days of January indicator. A commonly held theory is the market will be up for the year if it is up the first five days. Hulbert’s data debunked such an idea. He also brought up the “Santa Claus” theory about the last five days of the previous year and found the same lack of correlation. And he finished off by looking at the two together and found no predictive value.
He finished his piece by pointing out the real predictors-sales and earnings going up that year.
And Hulbert’s final words of wisdom-“Hope is not a Strategy”
On Friday the December jobs report showed the economy added 200,000 jobs and the unemployment rate dropped to 8.5% from 8.71%, continuing evidence that the economic recovery has accelerated from the 3rd quarter. Most economists are projecting 3% GDP growth for the 4th quarter of 2011.
This week starts the beginning of the 4th quarter earnings reports, starting with Alcoa on Monday and JP Morgan on Friday. These earnings reports may not be as robust as we experienced earlier in the year, as companies are running out of the ability to cut expenses. Also, in 2012 the projected recession in most of Europe will be a drag on earnings, including large U.S. multinational corporations. The European debt crisis has not yet been resolved and the Euro dollar (€) has further to fall (vs. the U.S. $).
“Be the change you want to see in the world.”
- Mahatma Gandhi