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David Moenning is a the Chief Investment Officer at Heritage Capital Management. Dave is also the proprietor of StateoftheMarkets.com, which provides free and subscription-based portfolio services. Dave began his investment career in 1980 and has been an independent money manager since 1987.... More
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Daily State of the Markets
  • Withering Roots (Again)? 0 comments
    Apr 4, 2013 8:19 AM

    Daily State of the Markets
    Thursday, April 4, 2013

    Good Morning. Part of my daily routine is to try and identify the drivers of the stock market action. And while there is likely to be some disagreement over what I deem to be the primary driver of the market from time to time, I think it is safe to say that at least one of the reasons that stocks have been rising this year has to do with the idea that the economy is improving. Note I used the word "improving" and did not suggest that the economy is doing well. No, the key here is that the economy is not at risk of recession at the present time, which is something that is a bit of a surprise to the macro bears.

    This BTE (better than expected) theme has been a recurring one for the past three years. Each year for the past three years, the economic stats have come in above consensus during the early part of the year. And each year, the market has rallied on the idea that the economy may have finally turned the corner. Unfortunately though, the economy's "green shoots" have turned to "withering roots" by the time the "Sell in May and Go Away" season rolled around. And while Korea's blustering b.s. may have gotten some attention yesterday, it is the fear that the economy is going to experience yet another spring/summer swoon that caused the fast money to start hitting the sell button in earnest yesterday.

    As faithful readers know, I am a card-carrying member of the glass-is-at-least-half-full club when it comes to the outlook for the economy and the stock market. However, I am also an analyst who prides himself on being objective. And the bottom line is that after surprising to the upside during the first quarter, the economic data has come in on the punk side lately. As such, I too am concerned that these green shoots might once again miss out on their potential.

    As Exhibit A, I offer that yesterday's ADP report was the 5th economic indicator in past week to disappoint. It turns out that private sector job growth came in at 158K in March, which was a 5-month low and more than a little light compared to the expectations for 201K new jobs (as well as last month's 237K). So, while February totals were revised higher, March has to be considered a "miss."

    Sticking with the employment picture, we also learned yesterday that the Rasmussen Employment index slipped 1.3 points in March, its third decline in a row. Then a separate report indicated that online help wanted ads fell 3.1% in March, which was the most in four years. And on a year-over-year basis, ad growth fell to the slowest level seen since January 2010. Ughh.

    Yes, it is true that the slowdown in job market activity likely reflects a response to reduced government spending stemming from the fiscal cliff deal and the sequestration cuts. And no, this shouldn't be a surprise to anyone paying attention. But unfortunately, the "misses" haven't been limited to the jobs front.

    Reports also indicate that the consumer isn't feeling it right now as Consumer Confidence dove to a reading of 59.7 in March from the 68.0 level in February. Ouch.

    Next up, the ISM Manufacturing Indices, which is designed to be a proxy for the health of the manufacturing sector came in at 51.3 in March, which was down hard from February's reading of 54.2 and January's 53.1. While the reading was above 50 (an indication of expansion in the sector), the rate of growth is clearly slowing. In addition, the New Orders component dove to 51.4 from 57.8 last month.

    The ISM Non-Manufacturing Index (an indication of the state of the services sector) fell 1.6 points to 54.4 in March, which was the lowest level in seven months. Economists had expected a smaller pullback of just 0.2 points to 55.8. Thus, this was the biggest "miss" in 11 months. Oh, and the employment component fell 3.9 points to a reading of 53.3, which was the most in four years. Are you sensing a trend here yet?

    Given the sequester cuts and the recent headlines from across the pond, the fact that the data has been less than stellar shouldn't be surprising. However, given that (a) the economy isn't exactly hitting on all cylinders at the moment and as such doesn't have much wiggle room (economists are only looking for GDP growth of 2.2% in the second quarter), (b) the early economic strength has sagged for a couple years running, and (c) the stock market has become overbought (and everybody on the planet knows it), I can't really blame anyone who might wondering about a case of deja vu all over again.

    So... will the recent economic green shoots blossom into beautiful and sustainable recovery this time around? Or will those shoots once again shrivel up and die - leading us to yet another period of market misery during the second quarter? Obviously, I don't have the answers. Thus, we will be watching every piece of economic data - including Friday's Jobs report - very closely. And while reviewing economic data may be dull, it is what the game is about right now.

    Looking for a disciplined approach to managing stock market risk on a daily basis? Check Out My "Daily Decision" System. Forget the fast money and the latest, greatest option trade. What investors need is a strategy to keep them "in" the stock market during bull markets and on the sidelines (or short) during bear markets.

    Turning to This Morning...

    As expected, the Bank of Japan unvelied aggressive easing measures overnight. Across the pond, Spain held a successful bond auction, Portugal's government survived the confidence vote, and both the Bank of England and the ECB left rates unchanged. Here at home Fed Chairman Bernanke and Vice Chair Janet Yellen are both scheduled to speak today (Bernanke at 10:30 am eastern and Yellen at 5:00 pm). Stock futures are currently following Europe higher and are pointing to a positive open on Wall Street.

    Pre-Game Indicators

    Here are the Pre-Market indicators we review each morning before the opening bell...

    Major Foreign Markets:
    - Shanghai: closed
    - Hong Kong: closed
    - Japan: +2.20%
    - France: +0.85%
    - Germany: +0.54%
    - Italy: +1.48%
    - Spain: +1.32%
    - London: -0.19%

    Crude Oil Futures: -$0.04 to $94.41

    Gold: -$7.70 to $1545.80

    Dollar: lower against the yen, higher vs. euro and pound

    10-Year Bond Yield: Currently trading at 1.811%

    Stock Futures Ahead of Open in U.S. (relative to fair value):
    - S&P 500: +7.36
    - Dow Jones Industrial Average: +65
    - NASDAQ Composite: +10.11

    Thought For The Day...

    "You've got to be very careful if you don't know where you are going because you might not get there." -- Yogi Berra

    Positions in stocks mentioned: none

    Follow Me on Twitter: @StateDave


    The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning's opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report and on our website is for informational purposes only. No part of the material presented in this report or on our websites is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed nor any Portfolio constitutes a solicitation to purchase or sell securities or any investment program. The opinions and forecasts expressed are those of the editors of StateoftheMarkets.com and may not actually come to pass. The opinions and viewpoints regarding the future of the markets should not be construed as recommendations of any specific security nor specific investment advice. One should always consult an investment professional before making any investment.

    Any investment decisions must in all cases be made by the reader or by his or her investment adviser. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that the investment objectives outlined will actually come to pass. All opinions expressed herein are subject to change without notice. Neither the editor, employees, nor any of their affiliates shall have any liability for any loss sustained by anyone who has relied on the information provided.

    The analysis provided is based on both technical and fundamental research and is provided "as is" without warranty of any kind, either expressed or implied. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.

    The information contained in this report is provided by Ridge Publishing Co. Inc. (Ridge). One of the principals of Ridge, Mr. David Moenning, is also President and majority shareholder of Heritage Capital Management, Inc. (HCM) a Chicago-based money management firm. HCM is registered as an investment adviser. HCM also serves as a sub-advisor to other investment advisory firms. Ridge is a publisher and has not registered as an investment adviser. Neither HCM nor Ridge is registered as a broker-dealer.

    Employees and affiliates of HCM and Ridge may at times have positions in the securities referred to and may make purchases or sales of these securities while publications are in circulation. Editors will indicate whether they or HCM has a position in stocks or other securities mentioned in any publication. The disclosures will be accurate as of the time of publication and may change thereafter without notice.

    Investments in equities carry an inherent element of risk including the potential for significant loss of principal. Past performance is not an indication of future results.

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