Stock Market Analysis
Conclusions: The S&P 500 index traded within a 2% range this week but the heaviest volume was on Monday when stocks dropped about one percent. Smaller stocks such as the Russell 2000 were up slightly on the week. Stocks celebrated the Empire State Manufacturing index by reaching new all-time highs on Wednesday.
Earnings season is upon us and so far the initial reports have been positive. About 10% of the S&P 500 has reported and those companies had earnings growth of 13.62% and sales growth of 4.19%. This isn’t too surprising as the companies that delay reporting are generally the ones that have issues. We would wait for more companies to report before declaring the final quarter of 2013 a success.
Most of the companies that have reported earnings have been in the finance sector where earnings have been strong (+15%) but sales growth is essentially flat (+0.59). We note that much of their reported earnings have come from reducing their reserves set aside in prior quarters for losses. The timing of such reserve releases tend to be counter cyclical and that’s why they are called “estimates.”
Another week went by and the Bulls continue to run on Wall Street. We regularly report on the American Association of Individual Investors (individual investors) and Investors Intelligence (institutional investors) surveys which have been bullish. Citigroup also has a Panic/Euphoria model and Barron’s reports that it is currently at levels last seen in 2001 as the Tech Bubble was breaking.
The careful observer will once again, insist on looking at the data rather than relying on another’s interpretation of the news. Nowhere is this more apparent than in the many optimistic reports this past week praising strong employment gains and healthy earning and sales. The facts are otherwise. For the most recent month, 200,000 new jobs were expected by the “experts.” Actually, only 74,000 new jobs appeared. Cheerful writers ignore that 347,000 souls despaired of getting a job and quit looking, actually dropping out of the labor force. Retail sales over Christmas were expected and hoped to rise by 6%. Actual gains are now estimated at less than 1%. Earnings are a similar sad story; in fact Best Buy is only the most recent of many firms who are “disappointing” on the earnings front. J.C Penny’s and Sears are said to be retrenching, so is Macys, which is laying off 5,000 workers. If consumption represents about 70% of US GDP, and it is faltering, is it reasonable to expect strong growth?
Not only that but all of the top Wall Street firms expect positive returns in global equities in 2014 and expect negative returns in global fixed income. As Mark Twain said: “When I find myself on the side of the majority, I know it’s time to find a new place to side.”
Our leading intermediate term indicators are still in the neutral camp, while long term indicators are positive. Our interpretation: Look for a good buying opportunity after a setback ahead. In view of the extended nature of prices we would maintain a conservative bias while trimming portfolios which hold excessive equities. Our research shows bargain stocks hold up best and do best overall in extended market declines.
Matt Watson, CPA
F James, Ph.D.
Bond Market Analysis
Conclusions: Last week bonds did well, with 10 and 20 year Treasury yields declining about 4 basis points.
In the heart of the recession, 2008 and 2009, personal consumption expenditures were declining, along with changes in gross domestic product. With all the fear and uncertainty, it is no wonder that precious metals also rose. After TARP, a bit of inflation worry was in the air. But things have changed since then. And for a time, it seemed the natural workings of capitalism were moving ahead, with labor returning to their jobs.
We have earlier lamented about the poor outcomes of massive Federal programs, in spite of every good intention. So called “Stimulus” programs commenced in 2009. The current example is the so called “Quantitative Easing” program which began near November 2012. Designed to lower long term bond rates and thereby boost the economy, we have nevertheless seen Long Treasury rates rise irregularly from near 1.58% to as high as 3.04% in December 2013 (most recently 2.84%).
Any improvement in the economy cannot be proven by jobless or consumption numbers. Nor by looking at the income workers have available for spending. Real disposable personal income is running at only + 0.11% from November, and less than 1 percent, [+0.63%] from a year earlier. Spending increases over the past months have been concentrated in Durable Goods and Services, provinces of the affluent, while lower income bracket spending on Consumable non-Durables has declined. It seems Luxury item sales are booming while mass merchandisers suffer. Unfortunately, the monetary stimulus has rewarded the rich over the poor. In fact, in 2012, we learn that the top 1% earners of the population increased their income by 20% while the remaining 99% saw an increase of only 1%. Increases in home prices and stock mainly accrued to the affluent.
Increased taxes to fund expensive health and social programs have been deemed necessary. Personal taxes as a percent of personal income have risen from less than 10% in 2010 to touch 12% last year. Clearly, such increases in taxes and sluggish earnings raise the possibility of a more lasting downturn and contraction in the overall economy. It is just a possibility at this point, but the possibility should not be dismissed.
A very rough guide to future corporate profitability can be found, our researchers have found, contrasting Consumer and Wholesale price changes. Recently we find consumer prices rising 1.5% year-over-year, and producer prices advancing 1.2%. Now the most recent month-over-month advantage is reversed, with wholesale prices rising faster—and this is one source of current earnings difficulties as shown by many firms such as Sears, Penny’s, Best Buy, and now Intel. For some of these firms, and more generally nationwide, rising inventories have come with lower sales. No wonder consumer confidence polls taken by ABC and Bloomberg are coming up with negative numbers.
The sad part of economic difficulties is that poor economic conditions tend to be associated with lower bond yields and therefore higher bond prices. This could be a reason why bond prices have begun to firm recently.
Sentiment figures for bonds are now bullish, with traders going from bearish future projections to bullish ones. They will have to go a very long way, globally one of the most strongly felt sentiments of traders has been negative toward bonds. But slower economic conditions or even a contraction would tend to coincide with lower bond yields, and higher prices. And municipal bond prices are especially depressed due to some widely noted bankruptcies, creating opportunities for the well informed investor. Our intermediate term bond indicators are bullish and where it is appropriate we would begin to extend durations.
F James, Ph.D.
