What I’m Watching This Week-29 May 2013

Shrugging off the slowdown

The year’s robust start faded late in the first quarter across many key economic indicators, but the recent set-back is likely a temporary one as the U.S. markets continues to show little resistance and indeed have moved higher. The US economy continues showing a renewed capability to shrug off fiscal chains and respond favorably with higher stock prices and rising home values. Smells like…optimism. New home sales saw their strongest increase since July 2008 as a 2.3% jump in April put sales 29% ahead of April 2012, according to the Commerce Department. Also, the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, said prices on homes bought with loans from the two companies were up 1.3% in March.

No, we are not out of the woods yet and no the economy hasn’t reached any clear ‘break free’ momentum to surge forward without further central bank accommodation and assistance. Ongoing fiscal drags including the sequesters spending constraints and the impending debt ceiling are contributing factors as retail and professional investors agonize over monetary policy plans, and they question whether rising stock prices and bond yields signify increased market economic optimism and an ability to withstand a moderation of Fed asset-buying plans. Short-term ups and downs in overall economic activity are to be expected and increased volatility in the markets will corroborate the economic activity, positive or negative.

I remain optimistic. The remainder of the week’s economic data will provide substantiation regarding if the 2.5% initial estimate of Q1 economic growth holds, and whether consumer spending was affected in April by payroll taxes and federal budget cuts. Will we see a pullback of any significance if the data arrives not so positive? That remains to be seen; it does, on the surface appear that economic demand has been awakened and that more jobs are being added each month, but that could also be a brutally efficient head fake.

Have a great week!

What I’m Watching This Week – 20 May 2013

Bull Something….

The Dow Jones is up 16% on the year, up 1.6% last week for a record, 15,354. The S&P500 has ascended 16% so far this year, up 2.1% on the week, also at a record, 1667. The NASDAQ has gained 14% on the year, up 1.8% last week, sitting at 3499. According to Factset, the S&P500 has a valuation of 16.5 times estimated earnings. That temperature’s like Goldilocks and the three Bears’ porridge, just about right. Which leads to the question at hand…is this just the start of a multi-year Bull Market? Noticeably, there has yet to be a significant pullback (of at least 6%) in the last seven months. The few shallow ones that have made appearances were quickly disseminated away with a continuing upside rally. Could this be an alternative definition of irrational exuberance?

The bond market is having a brutal year, being mired in its first losing quarter since 2006. It’s been absolutely no fun for fixed income investors this year. The wholesale inflation rate for the last 12 months is 0.6%, its lowest since July 2012; Treasuries have dropped as investors rotate into an ascending stock market that peculiarly seems to not have a termination date. The markets ups and downs have justifiably been tied to weak corporate fundamentals, and that alone should align with a logical deference towards greater caution. More indicators than not, continue to forecasts an essential pause, even a slight to modest dip, in the market indices, that is overdue and necessary. Needless to say the drum roll for equities has continued, unabatedly. Dare I say, without a significant event sitting out over the horizon, the current momentum could take the S&P500 index above 1,700 by the end of summer.

Investors’ are shouting ‘Damn the torpedoes, full steam ahead’ even as the Federal Reserve’s monetary policy looms large, Chairman Bernanke testifies on the economy Wednesday morning in conjunction with an afternoon release of the Fed’s latest policy meeting minutes. Since last month’s meeting, the improving economic data has lessened the general fiscal weakness and has provided further catalyst to the upside for the bullish continuance of economic activity we are experiencing. However, being the contrarian that I am, I will remain cautious even with the favourable improvements. I’ll be digesting the minutes of the Federal Open Market Committee (FOMC) to see whether sentiment is slanting towards winding down quantitative easing sooner rather than later. A quicker exit from QE is the market’s primary downside risk which would in sequence; involve that mysterious market pullback that has failed to materialize thus far this year.

I remain optimistic. The Bears have been getting their tail ends handed to them and the Bulls have continued to open champagne bottles. The CBOE VIX “fear factor” index has been down 31% to 12.45, its lowest since mid-April. Necessary awareness to consider, on Thursday ECB President Draghi makes a speech in London. Investors will be focused on the central bank’s residence in a global pecking order of forceful monetary easing, including not only the U.S. Fed, but also the Bank of Japan, Bank of England and Swiss Central Bank. I’m expectant that the positive momentum continues nevertheless I’d be a fool to not anticipate weaker overall data. I’m cautious, observant and optimistic.

Have a great week!

What I’m Watching This Week – 13 May 2013

Is everything subjective?

With 89 percent of the S&P 500 companies having reported earnings so far, 66.7% have surpassed profit expectations, above the average of 63% since 1994. However, only 46.4% have beaten revenue expectations, well under the average of 62 percent since 2002. (Factset) As I mentioned last week, when sales revenue continues to be reported as less than spectacular and earnings data are above estimates, something is incongruous here. Correspondingly, when the number of Americans filing new claims for unemployment insurance falls to its lowest weekly level in more than five years, it’s a fantastic signal that the job market is improving, but still not at the speed and breadth needed to jumpstart the U.S. economy.

Last month’s string of weak economic numbers were a disappointment, to say the least, but they were to be expected, as the sequestration has been making a very prominent appearance in regards to the day to day life of millions of Americans. This week will bring a new batch of prominent economic reports and with options expiration at week’s end, I would expect a fair amount of whipsawing volatility, but I’ve been proven wrong before. The Dow and the S&P 500 carry on setting another string of record closing highs, it’s anybody guess what the outcome will actually be.

I remain optimistic. I’ll continue to have concerns regarding a technical pullback as we move through this quarter. The market’s strong performance thus far this year has increased the probabilities of equities rallying throughout the year, but I ‘m ever so cautious about the fundamentals. The market is driven by good fundamentals from corporate earnings and with sales revenue being unimpressive in our consumer based economy, I’m forced to think of it like a lingering bad taste in your mouth after eating something that was pleasant, you’re searching for a sweet lozenge to cover up that flavor.

Have a great week!

What I’m Watching This Week – 6 May 2013

Short term thinking

The inevitable market pullbacks are out there. As we’ve seen over and over for the past few weeks and months, the whipsawing natures of the markets are keeping investors on the edge of their seats. Today’s up, tomorrow’s down…what’s the current correlation of commodities to the dollar? Europe’s finally behaving, um wait a minute, no they are not…. Asia’s recession is a headache; HA! What Asian recession? The emerging markets are leading the charge to prosperity! It’s enough to bruise your eyeball sockets and send you into a fit of misperception. Unfortunately, I see nothing that would lead us to believe that the markets won’t continue to repeat this pattern in the short term. While the Dow Jones and S&P 500 closed out on an all-time highs last week, residential housing is surging accompanied by record low mortgage interest rates, employment numbers are curiously receding to near pre-crisis levels; what does all this really tell us? Have the collective brain trust gone nutters believing that all has returned to the better?

Markets will inevitably go higher and they also, inevitably, will go lower. American industries are driven by earnings; they are the growth engine of the country. But corporations and the analysts who study them are lowering earnings expectations for Q2 2013. In terms of preannouncements, 63 S&P 500 companies have issued negative EPS guidance for Q2 2013 as noted by FactSet. Of the 400+ S&P 500 companies that have reported earnings to date for Q1 2013, 72% have reported earnings above estimates. This percentage is marginally above the average of 70% detailed over the past four quarters. Conversely, merely 47% of companies have reported sales revenue above estimates. Yup, you read that correctly, earnings are up but sales are down. No, I also haven’t become a Doom and Gloom card carrying member, but it’s hard not to notice that something is incongruous here.

Companies and analyst have lowered earnings expectations so dramatically that it’s become predictable that companies can inevitably beat them. Sales, you know, people coming in the doors and plunking down hard cash, are lower and are continuing to confirm a long term weakness. To paraphrase one of Sen. Marco Rubio’s favorite modern poets, Rakim… the American worker keeps digging into their pocket, all their money’s spent. So they dig a little deeper but still coming up with lint. 47% is below the average of 52% recorded over the past four quarters (Factset). If 47% is the final percentage, it will mark the third time in the last four quarters that the percentage of companies reporting sales revenue above estimates finished below 50%. Short term thinking and solutions aren’t solving our long term problems.

I remain optimistic. Trying to assess whether equities can continue their mighty upward run versus the reality of the Q1 earnings reports are fraying the few hairs I have left on my head. Things are getting better; they aren’t getting better rapidly however. A little less short term exuberance and a lot more long term solutions are my prescriptions for the U.S. economy. Will the market take notice and the U.S. Government get serious in treating our economies ailments? Dunno, but I remain cautiously optimistic.