FMX | Connect – www.fmxconnect.com - (Reported 6/02/2010)
Excerpts from MARKET MUSINGS & DATA DECIPHERING
WHILE YOU WERE SLEEPING
Risk appetite has suddenly jumped back on the front burner, but not likely for very long. European bourses have done an about-face and are up 2%; the Nikkei surged 3.2%, the Kospi rose 1.9%— Asia is coming off its biggest gain in six months (+2.7%) although the one fly in the ointment is the 0.7% dip in the Shanghai index, to a 13-month low. Credit default swaps are declining; government bond yields rising across the board and providing another opportunity to load up ahead of the next rally. Copper and oil are bid, commodity currencies and the Asian FX complex are rebounding, while the likes of gold and the U.S. dollar are slipping so far today.
What we really have on our hands is a manic market and a ton of volatility more characteristic of a bear than a bull phase. It is very likely that the highs in equity indices were turned in six weeks ago. The focus thus far has been on the European debt crisis and the contagion risks thereof and what that means in terms of depressing the market multiple. With leading economic indicators peaking out and rolling over, the focus will now be on the “E”, and not just the “P/E”, as global growth slows visibly now that the inventory cycle has run its course and tapped-out governments no longer have the fiscal flexibility to ease policy and rejuvenate growth.
SENTIMENT TURNING MORE BULLISH … IS THAT GOOD?
That can’t be a good thing from a contrary standpoint. But indeed, the latest Investors Intelligence poll for the past week showed the first rise in bullish sentiment since early May — up to 39.8% from 39.3%. By way of comparison, there are just 28.4% in the bearish camp, down from 29.2% last week. Lows usually occur when there are twice as many bears than there are bulls, so with great deference to what Mr. Market had to say yesterday, we are not at sentiment levels consistent with an extremely oversold condition in equities.
A BEAR MARKET OR JUST A CORRECTION?
Well, so far the S&P 500 is down nearly 10% from the highs, so this is indeed is a correction thus far but more often than not, declines like these morph into something more severe — even when we are in durable economic expansion phases like 1987 and 1998. This recovery is tentative, at best. But the numbers we are looking at is a 50% retracement of the March 2009-April 2010 runup, which means 943 on the S&P 500 and the reality that lows in the market, whether they be interim or more fundamental, tend to occur with the index 20% below the 200-day moving average, which at this stage would be 879. So at least we have a defined range of when to begin to put money to work. A break blow that range would indicate that Mr. Market is sniffing out a double-dip recession, not just a visible slowing.
CHAIN STORE SALES COMING IN BELOW PLAN
The weekly chain store surveys are flashing +2.5% YoY for May same-store sales in the U.S., below the 3% pace the retailers were shooting for at the start of the month. But hey, look at the bright side; at least it’s positive and not negative! In classic frugal fashion, the discounters reportedly led the gains last month.
Mortgage applications for new purchases are now down for weeks in a row and the YoY trend is falling at a 34% rate. How bad is that?
Be that as it may, auto sales did inch up in May, to an 11.6 million unit rate (annualized) from 11.2 million in April, but the bottom line is that with replacement demand close to 12 million, Americans are still in the process of taking the stock of vehicles on the driveways and freeways down from what are still historically high levels.
Moreover, we found out that there was a huge fleet sales from GM, related to a massive federal government purchase, which in our estimate accounted for 38% of the sales growth last month. Adjusting for that, the auto figure would have been below 11 million units — keep in mind that fleet sales do not show up in the consumer spending data within the GDP accounts.
Those who see a sustained acceleration in consumer spending at this point may want to have a look-see at the article on the topic on page B2 of the WSJ — Consumers Felt a Chill in May (also have a look at Consumer Spending’s Peak May Be Past on page C1 of the WSJ). Remember, this was where supposedly, based on the BLS assumptions in its payroll survey, we created 290k net new jobs (right).
Meanwhile, MasterCard’s SpendingPulse index showed that these new employees were wearing old clothes to work because specialty apparel sales tumbled 3.7% on the month. Furniture sales slid 9.6% (these are YoY figures, by the way) and the iPad, for some reason, could not prevent electronic/appliance sales from slipping 0.7%. Calendar effects and the wet weather alone do not explain this renewed caution on the part of the consumer — maybe the renewed rise in the savings rate in April, to a still-low 3.6%, was a telltale sign that it’s back to reallocating more of the household budget into the piggybank, cookie jar and coffee can. Believe it or not, frugality is not a terrible thing — it sure didn’t seem that way for Ward and June Cleaver.
MIXED MORTGAGES
The good news at least is that U.S. mortgage applications for refinancing purposes rose 2.4% during the May 28th week — the fourth increase in a row and while hardly a major boom that should cause any forecast shift and it does add a bit of coinage in household pocketbooks. But the big problem is with housing demand given that the homebuyer tax credits are behind us — mortgage applications for new purchases fell 4.1% and down for four weeks running. This is where the rubber meets the road for new home sales — a fresh 13-year low.
David A. Rosenberg
Chief Economist & Strategist Economic Commentary
drosenberg@gluskinsheff.com
+ 1 416 681 8919
Source: Market Musings & Data Deciphering
http://www.fmxconnect.com/
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