FMX | Connect – www.fmxconnect.com - (Reported 7/6/2010)
Excerpt from MARKET MUSINGS & DATA DECIPHERING
U.S. ECONOMY HITS A SPEED BUMP, TO PUT IT MILDLY
•ISM down to 56.2 in June from 59.8, a six-month low.
• NAHB homebuilder index slumps from 22 in May to 17 in June, tied for the steepest decline in the past four years and a three-month low.
• Consumer confidence sank to 52.9 in June from 62.7 in May, a three-month low. A decline of this magnitude is basically a 1-in-20 event.
• Retail sales slipped 1.2% MoM in May, the first decline since last September.
• Auto sales fell 5% in June, to an 11.1 million annual rate, the lowest in four months.
• Manufacturing new orders shrank 1.4% in May, the steepest decline since the depths of despair in March 2009, and a new three-month low.
• Housing starts collapsed 10% MoM in May, to 593k at an annualized unit rate, a five-month low.
• New home sales plunged 33% in May to an all-time low of 300k at an annual rate. The housing inventory backlog surged to 8.5 months’ supply in May from 5.8 months in April, the highest volume of excess supply since last June.
• Household employment fell 301k in June after a 35k loss in May, snapping a four-month winning streak. The index of aggregate hours worked dipped to 92.0 from 92.2 and is lower now than it was at the market lows of March 2009 when the index was 93.3.
• Wages declined at a 1.1% annual rate in June — this never happened during the recession and is a 1-in-50 event. Rare indeed.
• Consumer prices deflated 0.2% in May after a 0.1% dip in June — the first back-to-back declines since November-December of 2008 and before that September-October of 2006 and before that, April-May of 2003. Again, hardly a normal occurrence.
• Producer prices slipped 0.3% MoM on top of a 0.1% decline in May. The PPI has now declined in three of the past four months — this last happened as the market, yet again, was plumbing the deflationary depths in early 2009 (but hey, isn’t the recession supposedly over?).
• Mortgage applications for home purchases fell 15% in June after an awful 18% plunge in May, to stand at the lowest level in ... thirteen years.
• Bank credit dipped 0.2% in June, the third decline in a row.
CANADIAN DATA NOT LOOKING BLUE JAY-ISH EITHER
• Building permits were down 7.3% in April.
• Housing starts were off 6.3% in May, to 189k at an annual rate — a five-month low.
• GDP was flat in April, industrial production slipped 0.1% — first decline since last August.
• Real manufacturing shipments dipped 0.1% in April, the first falloff in eight months.
• Exports fell 1% in April after a 0.4% drop in March — first back-to-back declines in a year.
• Retail sales plunged 2% in April, ending a four-month winning streak and the sharpest decline since the economy was falling off a cliff (or so it seemed) in December 2008.
• Auto sales sank 4.7% in April after a like-sized decline in March — down to a five-month low.
WHILE YOU WERE SLEEPING
Global equity markets have turned around dramatically in the past few hours and are enjoying a technical bounce from oversold levels. The S&P 500, after all, is coming off losses in nine of the past 10 sessions and is due for a respite and Europe was coming off its longest losing streak in a year — so far today, though, more than 30 stocks are rising for every decliner. A 5% decline in the pre-July 4th week when the U.S. market is usually up three-quarters of the time is rather telling. So, U.S. equity futures are in the green column; the MSCI index is also up 1.4% as it enjoys its best session in two weeks.
Be that as it may, there is certainly nothing on the fundamental front to elicit a rally at the current time as double-dip risks continue to rise; at a minimum a growth slowdown of significance. The U.S. employment data revealed wage deflation, slow job creation and the manufacturing components signaled that the peak of the inventory cycle is behind us. The recent giveback in export-import flows also points to some reversal in the explosive expansion in global trade, which helped underpin the nascent economic recovery. And now, governments in the industrialized world are embarking on fiscal tightening that will drain more than 1% from baseline GDP growth starting next year after stimulative fiscal expansion added more than 1% per year to OECD growth from 2008 to 2010. (Governments seemingly responding to market prices which raised the odds of a default by 30% in the past quarter — those probabilities more than doubled in the European periphery.)
The reason why everyone bought into the V-shaped recovery view was because the equity market told them that this must be the case. Now, we have a situation where $1.6 trillion of wealth has been wiped off the books in the past three months from the stock market setback and so it’s no coincidence that at the margin, question marks are surfacing over the longevity of the recovery — if not the longevity, then certainly its veracity.
The next key event is Q2 reporting season with Alcoa kicking things off on July 12 — guidance will be even more important than ever, especially since the analysts have been busy raising their estimates for 2010 EPS to +34% from +27% at the end of March. But then again, according to Bloomberg estimates, the consensus was, on average, 13 percentage points too optimistic from 2007Q3 to 2008Q4 on their earnings growth projections … pass the salt please. There is no doubt that the combination of lower prices and higher earnings estimates has enticed the bulls into claiming that the stock market has entered into deep undervalued zone at a 12.5x P/E multiple. However, history shows that trough multiples could get as low as 10x, so there is nothing to say that the market could not get cheaper still, especially with all the uncertainty overhanging the economic outlook.
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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