The S&P 500 rose 0.5% last week, but Nasdaq rose 1.5% despite a shutdown of over three hours on Thursday. Nasdaq re-opened strongly late that day, up 1.1% Thursday. The gains continued on Friday - option expiration day for many Nasdaq stocks. Earlier, on Tuesday, we saw bargain hunting in high-dividend stocks since Wall Street seemed to think that the rise in long-term bond yields was overdone. We also saw heavy buying in quality stocks, so it looks like traders continue to buy on dips.
The U.S. Stock Market is Still the Best Place to Be Invested
On Wednesday, The Wall Street Journal featured an article showing that short sellers are facing their worst annual losses in a decade. The 100 most heavily shorted stocks have risen by an average of 33.8% this year, almost double the S&P 500's performance.
By contrast, the emerging markets had a rough time last week. The Financial Times reported Thursday that central banks in the developing world (excluding China) have lost $81 billion in emergency reserves due to capital outflows and currency intervention since May. Nations that saw their currency reserves fall furthest were Indonesia, Turkey, Ukraine, and India, falling 13.6%, 12.7%, 10% and 5.5%, respectively.
If these central banks keep intervening in the currency markets, they will likely burn through even more of their currency reserves. Many of these central banks seem to be realizing that massive intervention is not sustainable, so they will let their respective currencies float in a wider trading range. Not surprisingly, the Indian rupee hit a record low last week versus the U.S. dollar, even though the Reserve Bank of India announced new measures to curtail the rupee's decline. Also, Brazil's central bank launched a $60 billion currency intervention program on Friday after the Brazilian real neared a five-year low to the U.S. dollar.
Meanwhile, in countries where their currencies remain relatively strong - such as China, Japan, and the U.S. - the markets are also holding up better, so U.S. stocks should continue to provide an oasis of safety.
Speaking of China, HSBC announced on Thursday that its preliminary China PMI rose to 50.1 in August, up from 47.7 in July. Also on Thursday, Markit's German PMI for August rose to a seven-month high of 53.4, up from 52.2 in July. Markit's PMI for the entire euro-zone rose to a 26-month high of 51.7 in August, up from 50.5 in July, so the recession in Europe (and the slowdown in China) may now be over.
Another boost to the U.S. economy is that refined energy (e.g., diesel fuel) and coal exports have nearly doubled to $110.2 billion in June vs. $51.5 billion in June 2012, according to the Financial Times. Crude oil and natural gas exports are also up 68.3% in the past 12 months. As a result, the U.S. trade deficit is shrinking and the U.S. energy surplus is increasingly being exported, which is boosting U.S. GDP growth.
Stat of the Week: Resolving Conflicts in Housing and Jobs Data
There have been several interesting reports released recently on the housing front. First, Goldman Sachs reported last week that more than 50% of all home sales are paid entirely in cash, including a whopping 57% in the first quarter, compared with only 19% in the first quarter of 2005.
This brings up the question of how much the recent rise in mortgage yields will impact housing sales. Apparently a lot, since on Friday the Commerce Department reported that new home sales declined 13.4% in July, to an annual pace of 394,000. This was a big disappointment, since economists were expecting the annual new home sales rate to reach 485,000, not far below the 497,000 pace in June. The decline was nationwide, as every region reported declining sales. Due to the slower pace in new home sales, the inventory of unsold homes rose to 5.2 months in July, up sharply from 4.3 months in June.
Many homeowners are repairing old homes rather than buying new homes. Last week, both Home Depot and Lowe's reported better-than-expected second-quarter sales and earnings while issuing positive future earnings guidance. Home Depot's same-store sales soared 10.7% last quarter, the best gain since 1999.
This news flies in the face of the Commerce Department's June retail sales report, which told us that sales at home improvement stores fell 2.2%. This makes me suspicious of some details in the monthly retail sales reports. Perhaps retail sales are stronger than reported, especially in the home improvement area.
Speaking of suspicious statistics, the Gallup unemployment rate is suddenly diverging from the Bureau of Labor Statistics [BLS] data even though they historically track each other well. Specifically, during the past month, Gallup's unemployment rate has surged from 7.7% to 8.9%, its highest reading since March 2012 and fully 1.5% above the BLS rate. The culprit is that unlike the BLS, Gallup's unemployment numbers are not seasonally adjusted. So perhaps this jump is because many workers have decided to take extended summer vacations - or something fishy is happening with how jobs are counted at the BLS.
Maybe the discrepancy is not due to seasonal adjustments, but the distortion of payroll statistics due to the dramatic rise in temporary jobs. Economist Ed Yardeni provided the best explanation of the fuzzy payroll numbers in his bulletin last Thursday. Specifically, Yardeni explained that the BLS' payroll survey counts one worker doing two part-time jobs as two payroll jobs. According to the BLS' payroll survey, 1.3 million payroll jobs have been created in the first seven months of 2013. However, according to the broader household survey, only 980,000 jobs were created in the same seven months, of which 731,000 were temporary jobs. So according to Yardeni, the unemployment rate is being distorted due to the double counting of people who hold two or more temporary jobs. I think Yardeni's diagnosis of job statistics is the correct one.
Historically, any diversion in BLS and Gallup data points to a three-month period in which the official [BLS] unemployment rate will be either flat or gently rising, so don't look for any good job reports soon.
The Future of the Fed is as "Foggy" as the Air in Jackson Hole
Interestingly, the leading candidates for the next Fed Chairman are laying low at the Kansas City Fed's annual retreat in Jackson Hole, Wyoming, which is now underway. Ben Bernanke and Larry Summers are not there and Vice Chair Janet Yellen is not speaking, except on a panel. It is smoky in Jackson Hole due to all the fires in Idaho, so the inside joke is that Jackson Hole's skies reflect the foggy future of the Fed.
The Fed's mandate to lower the unemployment rate to 6.5% also seems a bit fuzzy, due to problems with the BLS' double accounting of temporary jobs. That's the conclusion I reached after reading the minutes from the last Federal Open Market Committee [FOMC] meeting, released last Wednesday, which revealed that Fed officials at that meeting thought it best to stick with their 6.5% target for now.
At the same time, "several" FOMC members were willing to consider lowering the 6.5% employment threshold to 6% or 5.5%, which means the Fed will keep its money pump in operation even longer.
My impression from the FOMC minutes is that the Fed is not yet ready to taper and, if so, it will taper by a small amount. Furthermore, the FOMC's decision to taper will likely be postponed from September to December or later. In other words, the Fed's $85 billion per month money pump remains on. If anything, the Fed wants to lower its mandated unemployment threshold so it can keep its money pump on longer.
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