"Stock indexes turn positive after choppy morning," ran the headline. It feels like it's been that way for sometime, what with the market up seven of the last eight days. And after all, is there any more bullish fundamental for the economy and the market than the monthly turning of the calendar? Having made it this far, it's nearly a cinch we'll cruise into Friday with another weekly gain. So long as the jobs report doesn't lay an egg, look out 1400. It's only a little more than two percent away.
We understand the set-up - with bonds overbought, Europe shaky, China slowing down, cash returning nothing, where else are you going to go? We get the big herd move into U.S. equities.
We also get that it doesn't matter - at least for a little while - if the crowd is right or not. Whatever the real value of that object up on the auction stand, when everybody in the room needs to buy something and there isn't much else to spend it on, the price of the object is going to go up. Buyer's remorse is for another day.
We also get the common notion that if only everyone would all feel a little more confident, then you know, things really could get better. There's a will to believe out there that's perfectly understandable.
But at the risk of boring you with our repetitiveness, though, we'll say it again - things are not as good as the headline factory is saying. Earnings growth is slower than a year ago. Economic growth is slower than a year ago. The ECRI was chiming in last week saying much the same thing we've been saying, only more so. We compare the current rate of change with that of a year ago and say, this quarter isn't really as good as the first quarter of 2011. The ECRI is gloomier.
They have a point - year-on-year real disposable personal income has been negative for months. Year-on-year real spending, or PCE, has been declining for four months. Perhaps we're due for a bounce, yet we haven't really seen it in the data yet. We gave considerable heed to the Safeway (SWY) conference call last week, partly because the company is so close to the ground on spending habits, partly because management stuck with its 2% GDP call last year at this time when the Street was running half-drunk with 4% predictions. For them, the "bi-furcated" recovery continues: the upper income consumer is fine, while all else struggles.
We've also spent a deal of time looking at industrial ordering, and while there is no doubt that it's up at the moment, the increase is smaller than a year ago - no doubt due in part to the changes in accelerated depreciation - and there is no indication from recent historical ordering patterns that suggest that this is anything but another restocking pulse.
The market has climbed higher on what has been called a "stream-of-anecdotes" news flow. The economic data is being judged on comparison with Street estimates rather than on its own. That game works for a time, but not a very long one. Nearly absent from mainstream reporting is the fact that all of these economic "surprises" reflect growth patterns weaker than a year ago.
Oil prices are soaring, turning into the latest can't-miss-parlay. First, the Mideast: trouble in Syria, trouble in Iran, they won't sell oil to France. The fact that the EU already voted in an Iran embargo months ago is conveniently forgotten. Besides, maybe Iran will fire some shots in the Gulf, that ought to be good for five bucks a barrel. Or Israel tries to take out Iran nuclear production facilities: ten to fifteen bucks a barrel.
Second, if growth really is accelerating around the globe, then the demand story is good for a trade. If in fact it's slowing down, as the EU, IMF, China and the World Bank say is the case, why then there will be more quantitative easing, more central bank money pumped out and so you have to buy commodities.
Third, short covering in the euro means weaker dollar, weaker dollar means buy more oil. Last but not least, the casino just increased everyone's credit line at the tables: the CME cut margin requirements for oil contracts. Against all logic, oil prices shot up faster afterwards. We're sure there's no connection.
The usual suspects are making the usual arguments for why "this time will be different" for surging oil prices: we'll use natural gas instead (tell that to the airlines, trucking, chemical and delivery companies); Americans don't really care if gas is $4 a gallon (that must be why consumption is falling); it's a reflection of strong emerging-market growth (as PT Barnum said, there's a sucker born every minute).
We heard the pending home sales data on Monday celebrated like it was the second coming. This is odd, given that the meager 2% gain suggests that home sales will be either flat or down for the month. Closings run below contracts for a variety of reasons, most importantly financing and appraisal issues.
Pending home sales are supposed to lead existing home sales by a month or two. The index rose 10.4% for October 2011 and 7.3% for November, and fell 3.5% in December. Existing home sales gains for those months were 1% in October, 1.8% in November and were nearly flat in December.
The index goes up anyway, though. And while announcers breathlessly informed us that it was 8% higher than a year ago, they neglected to mention that the existing home sales rate is up a barely noticeable 0.7% year-on-year. Maybe not even that much - the January number gets a heavy dose of seasonal adjustment, and the January 2011 existing home sales rate was the highest reported number for the rest of the year, not surpassed until - drum roll - January 2012.
If housing is picking up, then someone one needs to explain how the median price and the average price fell for existing home sales in January, while the year-on-year price changes for median and average were, like new home sales, in the negative single digits. Or why Case-Shiller data continue to show declines.
There hasn't been strength in new home sales, either. New home sales came out on Friday, and the details were illuminating. The latest run rate of 321,000 is still anemic, and while December did get an upward boost, its rate of 324,000 is hardly different.
December and January are of course low-water marks for building activity during the year, and perhaps not the best indicators. Even so, a look at year-ago activity suggests that there has been no real change in the industry, with the exception that it continues to slowly get rid of old inventory and come into balance.
Unit sales were up from a year ago, but a look at the underlying unadjusted data tells you that all of the increase came from a small bump up in the South, from 11k to 13k. If one had said in November that one of the mildest winters in the last century would produce an increase of exactly 2k starts in the South (and a decline of 1k for the rest of the country), would anyone have been impressed? The median price fell sharply year-on-year, from $240,100 to $217,100, suggesting both a mix shift and probably some price-cutting to get rid of unwanted inventory. The average price also fell, from about $276k to $261k.
We're not saying housing is getting any worse; it's hard to see how it could. Supply-demand conditions are the most favorable they've been in ages, and new construction is running well below the household formation rate. But financing is still extraordinarily tight and buyers still fearful of falling prices. Some economists think it may take a generation for attitudes towards home purchase to fix itself, à la Great Depression. We hope not, but the news is setting up markets around the globe for disappointment.
Contrary to pending home sales, durable goods sales took a sharp tumble in January, falling 4.0% while business investment spending fell 4.5%. Pay no attention to that man behind the curtain, thundered the bulls, and indeed the Wall Street Journal rushed a "doesn't count" explanation into print.
Don't get us wrong - we think that the durable goods number was a bit off ourselves. We've already made the point that the expiring accelerated-depreciation credit pulled some spending into December. It wouldn't be a surprise either to see the latest number get revised back upwards next month. But January is still the month of new budgets, and a drop is still a drop. We've also made the point that the inventory replenishment episode that began in Q4 2011 probably ends in Q1 2012. January's number is in line with that thesis, and revision or not, will not present a good start for first quarter GDP.
The Chicago Fed's National Activity Index (NAI) was released last week. It's made up of 85 monthly indicators and, like the Philadelphia Fed's coincident and leading U.S. indicators, seems to us to paint a better picture of overall economic activity than some of the reports more celebrated by the market, such as the ISM surveys or the jobs report.
The NAI reported a value of +0.22, down from +0.54 in December, but "positive for the second straight month for the first time in a year." Aye, and there's the rub, at least from our perspective.
The NAI in January 2011: +0.27, against the current +0.22. The current three-month moving average: +0.14, versus January 2011's reading of +0.15. In short, it seems to us that the economy is doing very much the same thing it did a year ago, which is to say getting a boost from new budgets and the inventory replenishment, but not a huge boost and one that will ebb again.
Consumer sentiment as measured by the University of Michigan rose a bit to 75.3, consumer confidence as measured by the Conference Board rose to 70.3, the highest reading since oh, February 2011, the last time the stock market was on a six-month run. It's all retracing the same pattern of a year ago. The stock market headlines and "better-than-expected," weather-boosted data are giving a false impression about how well things are going, obscuring the fact that this quarter's pickup is actually not as strong as it was this time a year ago. We're also about to hit a harder speed bump in the form of soaring oil prices, and no Virginia, it isn't different this time.
The February jobs report comes out Friday. Our sense is that the headline number is going to benefit once again from the weather and adjustment factors. We are adding jobs, which is good, but adding them at a below-par rate whose underlying trend rate hasn't really changed, despite a couple of months here and there that exaggerate gains and losses. It raises the final disappointment potential for the current momentum trade.
Apart from weekly claims, we aren't seeing any economic data at all that says this year's first-quarter growth is better than it was a year ago. Given the exceptionally mild weather, one would have had to expect improvement in claims and hiring, but we fear that the seasonal factors will create an appearance of reversal as we get into spring. On the other hand, it's created margin problems for retailers this quarter.
Personal income and spending data come out Thursday, and given that financial sector bonuses are down considerably from last year, we think that the year-on-year data there isn't going to add up to much either. The only real improvement of late has been in stock prices, which are also retracing last year's pattern, not to mention last year's early hype. Believe it at your own peril.