Once again, the bears have been declawed! Yet again! As we go to print, the market has retraced its highest levels since October 2008. As both buyers and sellers argue whether we deserve to be here, even those in the contrarian camp are capitulating and committing money to this market rally. They’ve missed this move off the lows, the “sell all rallies” strategies left them as cannon fodder for the stampeding herd. Many hedge fund managers after their “black box” quantitative models broke down in 2008 and underperformed thus far 2009, are coming to grips with the old adage, “you don’t fight the Fed”. Meaning, when the Federal Reserve is priming the pump, easing rates those monies will eventually find its way into the economy and markets. Only this time, the impact has been magnified by the extraordinary steps and programs the Federal Reserve has implemented along with quantitative easing. Bring in the Treasury teaming up with the Federal Reserve, and well, you have a 50% rally of the lows I guess? Is this move substantiated? Let’s look at a few metrics.
Remember the ACDC song TNT (for those that are old enough to remember ACDC) well today it’s P-M-I is DYNOMITE! That’s what I’m talkin’ bout! Growth in China, announced overnight and reflected in the Purchasing Managers Index (PMI) came in at 52.8 driven largely by domestic demand. That’s 3 months in a row reflecting an expansion in the domestic economy. The China stimulus program is gaining traction. Even as their exports sputtered, domestic orders picked up the slack.
Back on our shores we had had a much bigger than forecast jump in the Institute for Supply Management (ISM) PMI, which was forecast to come in at 46.5 leaped to 48.9. A few whiskers below that all important 50 level. A reading above 50 is reflective of an expanding economy. Buried within this report were some more nuggets for optimists, indicators which are more predictive of future expansion or contraction, such as new orders, which leapfrogged over 50 to 55.3. The employment index bounded 4.9 points month over month. Which by the way would point to good news coming in Friday’s non-farm numbers, (which is a lagging economic index)?
Lastly on the PMI, of the 18 manufacturing sectors reporting, 6 have returned to growth or expansion mode. I’ve mentioned in the past the trend developing in the Leading Economic Indicator (LEI), 3 months in a row of growth. This is one index to keep a close eye on. This Friday, while the overall rate of unemployment may inch higher, I’ll be closely following two components buried within the report. Hourly Earnings and The workweek. Those two are leading indicators worth watching. We know job losses continued simply by watching the weekly announced Unemployment Claims numbers. However, by watching the workweek, and perhaps seeing an extension of the workweek, think overtime, would give hope that once the existing workforce is stretched enough, head count additions can’t be far behind.
Good news from the auto industry. Yeah! I typed it and even I had to go back and re-read that one! Cash for Clunkers program has inspired new car buyers to get off the couch and into the dealership showrooms. As we speak Congress is in the hunt for funding to expand the program from $1 billion, which is already tapped out, to $3 billion. Ford (NYSE:F) reported today auto sales increased 2.3% the first year over year gain in two years. While Chrysler, yes they’re still around, can’t make the same claim, they did report workers are back on the assembly line and working overtime. Wow! Who’d a thunk it? Now contrarians will pose the following argument, although I’ve seen nothing documented to support it. “The Cash For Clunkers has only borrowed car purchases from the future and once the funding is exhausted, car sales will slump back to prior levels.” Meaning, automobile buyers that may have normally purchased a vehicle in September to January, in order to take advantage of the potentially $4,500.00 break, simply moved up their purchase date. I believe you could argue the following, buyers, knowing this incentive was on the horizon, put off purchases until recently to take advantage of the voucher program. It is widely accepted we may not get back to the 17 million annual automobile run rates anytime soon, however the current 8.5-9 million run rate is insufficient as well. Now, we have a case of the pendulum having swung to both extremes. Over the next year or so we’ll find out where the supply/demand equation actually levels out.
There is mounting evidence the worst of the recession is behind us and perhaps has indeed ended. But it is early. The sages of Wall Street are realizing they got it wrong, in a big way. As the data reflect an improving economy, and the current earnings season is coming in much better than anticipated, many analysts are scrambling to update their models and projections. Two of note. Goldman Sachs, supposedly the best and brightest by some raised the target for the S&P 500 from 940 to 1060. Their prior analysis saw earnings estimates for 2009 at $40.00 share for 2009, and $63.00 share for 2010. Those have been bumped up to $52.00 and $75.00. Huge bumps, but certainly not the highest estimates. Over the weekend a well respected analyst picked up on what I’ve been telling clients, that due to massive head count reductions, streamlined inventories and trimmed back capital spending, in anticipation of the next great depression and coupled with productivity gains, have, “spring boarded earnings to catapult higher, even without a strong resumption of growth.”.
While the market has rallied 50% off the March lows, keep in mind at that time the market seemed to be pricing the US economy and corporations for liquidation. That is off the table, along with the fear factor that that presided over that period. In other words, it was the effects, of a number of factors I won’t go into again, of a perfect storm that pushed us to levels we never should have seen. I would also remind contrarians and short sellers that make the argument we’ve rallied too far, to take a step back and see how far from 2007 prices we’ve fallen, even at today’s lofty levels For the time being I’m staying with my target range of 1050-1100 but I’ll be monitoring conference calls and economic releases closely for any changes .
Now for Income Investors, a not so little company called Inergy, symbol NRGY. Inergy is a Limited Partnership operating in the energy sector. Inergy focuses on the fragmented Propane distribution, sale and storage along with natural gas and liquified natural gas in the US and Canada. They have a "growth through acquisition" strategy" thus far very successfully executed. The company continues to purchase small local propane distributors in this highly fragmented industry, keeping the local brand names in most cases. One important criteria for any acquisition is it must be immediately accretive to earnings. Lastly, once all of their current projects are completed Inergy will have an estimated 53 billion cubic feet of natural gas storage capacity. At current levels, this Limited Partnership yields a still healthy 8.8%, with a history of increasing dividend payouts.
Disclosure: I may currently own or in the future will purchase NRGY for myself or clients. Please do your own due diligence before making any investment decision.