Groundhog Rally


“Same as it ever was.” – The Talking Heads, Once in a Lifetime

The other morning, as futures pointed to the “today is the day to break the Dow record rally,” I heard a nameless CNBC announcer (Joe Kernan) tell a beaming Jim Cramer that he didn’t buy this spring sell-off stuff anymore. Four years in a row would be just too much of a repeating pattern for him. To which I say: Wait, it gets better.

The February jobs report is covered in more detail below, but for those who never get that far, the repetition between 2012 and 2013 looks impressive. The February 2012 jobs release – not the final, revised-many-months-later number, but the original release – was 227,000 jobs. The February 2013 release states that 236,000 jobs were added. Close, but the reality is even closer: February 2013 and February 2012 both reported increases of 0.72% from January (the latter based on revised data).

As for the stock market: On the day of the February 2012 jobs report, March 9, 2012, the S&P 500 closed up 9.0% for the year. On March 8, 2013, it was up 8.8% for the year.

If a late-spring correction four years in a row seems too pat to you, then chew on the fact that we’ve had an early-spring rally ten years in a row. Yes, even in 2008 and 2009 (though the latter didn’t get started until March 6th). Like Bill Murray’s character in the film Groundhog Day, we just keep living the same rally over and over again. Don’t think that the trading programs are unaware – or uninvolved.

I’ve been struck lately by some of the resemblances lately between 2007 and 2013. By April 21, 2006, the S&P was up 5.0% on the year. On April 20, 2007, it was repeating itself to a gain of plus 4.6%. In the first week of May 2006, the average was up 6.2%, in 2007, 6.4%. The gains are remarkably similar, just at this year’s gains are. This week CNBC was pounding us over the head with the news that the Dow was breaking records four days in a row. In May of 2007, I wrote a column noting that the Dow had broken its record 46 times since the fall.

I also used in that 2007 column, for the first time, a metaphor I have often used since: Market behavior was like the famous “chicken run” scene in Rebel Without A Cause. The week before last, the Wall Street Journal made the same observation. Six years ago I quoted a floor trader who lamented that “you can’t sell” in this market, but that “everyone is sitting with their finger by the button.” Same thing in – well, just about everywhere lately.

Today I saw a Journal article calling Ben Bernanke “the greatest market mover of them all. ” Back in May 2007, I quoted a trader who said that she felt certain that Bernanke would do the right thing, whatever that was (she admitted not knowing what that might be). When the economy and corporate earnings don’t seem to support rising stock markets, we instead project fantasy images of what might be onto central banks. Back in May 2007, markets rallied in constant expectation of the rate cut that never came – until October 2007, when it was already far too late (the fifty-basis-point cut was labeled a “trader’s dream” at the time, leading to a record close for the Dow Jones that stood until this week). Now we rally in anticipation of QE never ending, as if that might really be a sign of economic health.

There is no housing bubble this time. There is also no room to cut rates, and with the Fed running a $1 trillion annual buying program, it doesn’t have much room left for much of anything. There’s still a credit issue. Junk-bond issuance is running 36% ahead of last year’s record issuance of $433 billion. Student loan balances are soaring, along with default rates, yet because most of it is in federal hands, it’s assumed that it really isn’t a problem. There is also the not-so-little matter of the Fed’s balance sheet – I don’t even like to put up charts of sovereign and central bank borrowing. They’re too gruesome.

But wait, there’s more. During expansions, the actual counted job loss in January shrinks a little every year. That is to say, every January, counted jobs shrink by roughly 2%, due to terminations, transfers, retirements, etc. This year, the percentage of the January workforce that dropped off the rolls rose year-on-year. The last time that reversal happened was in – 2007.

Year-on-year corporate profit growth turned negative in the first quarter of 2007, something we won’t know about this year until June. But profit growth has been slipping even as the levels reach all-time highs – just as in 2007. Large corporations are fixated on buying in stock rather than investment, just as in 2007. The latest earnings season saw many companies reporting higher earnings per share on lower net income and/or sales. We’ll get the government’s fourth quarter profit estimates in two weeks.

I wrote an article a week ago for Seeking Alpha called “Echoes of 2007 in the Markets,” and some readers took me to task for the comparison, arguing that today cash is plentiful. But liquidity was the driving theme of the 2007 rally, to the point that Barton Biggs challenged his clients to think of a reason to buy stocks without using the word “liquidity,” to the point where the late lamented Mark Haines would automatically reply that liquidity was just another word for confidence, and could vanish just as quickly.

All of this is not to say that we are doomed to immediate recession. But I fear for the consequences of extended credit expansions on the scale we have seen, especially ones that are contrived, such as the housing bubble and its massive amount of paper tied to mortgages, or the current central bank expansion. I was much more optimistic two or three quarters ago, before the Fed embarked on its program. The central banks and legislatures are caught in a standoff where the legislatures will not act so long as the banks keep disaster at bay, and so long as the legislatures don’t act, the banks keep going further out on the proverbial limb.

Stimulants are okay in their place, but I would rather see a spending program than the Fed’s buying program. An equity market that lives too long on central bank heroin eventually has to pay for its excess. In the case of this year, though, not quite yet. I expect stocks to ape the first quarter of 2012 right through to the end of this month, just as 2007 mimicked 2006. The payback will come later.

The Economic Beat

The February 2013 jobs report resembled its year-ago ancestor in many ways. Not only was the number and percentage increase virtually identical, average weekly hours were 34.6 a year ago, and 34.5 now. The employment population ratios are identical, at 58.6. The participation rate actually fell from 63.9 to 63.5 (had it remained the same, the unemployment rate would be 9.2%).

The good news is that the weekly payroll index rose 0.7%, which is promising for personal income, and both construction and temporary help showed respectable gains. The bad news was that the number of long-term unemployed rose to a three-month (unadjusted) or four-month (adjusted) high; the drop in the participation rate was responsible for the easing in the unemployment rate to 7.7%; January jobs were revised downward; manufacturing employment weakened and worst of all, the real jobs number might be about 50,000 lighter than reported.

The swing factor between February 2012 and February 2013 is that retail help went from a loss of 24,300 a year ago to a gain of 23,700. However, the basis for this change looks suspect. The number of actual jobs in retail didn’t really increase, of course, that doesn’t happen in February.

What happened is that the number of counted jobs fell by 167K in February 2013, compared to a 214K decline in February 2012. That yielded an adjusted gain of 23.7K. But, but. It may entirely be due to lower staffing up in December. In December of 2011, retail employers added about 155,000 positions for the holidays. In December of 2012, the addition was 108,000, or 47,000 less. That was followed by 47,000 fewer retail layoffs in February 2013, and a jobs report showing an extra 48,000 jobs in retail – seasonally adjusted.

It certainly looks to me like the real difference wasn’t February job strength, but lower December hiring resulting in lower subsequent layoffs. So the “real” adjusted number might have been about 190,000 – still above official consensus, a good match of the ADP payroll number, but below expectations of about 200,000 and below the year-ago total. This isn’t “escape velocity.”

Here’s another area of concern: Wholesale sales and inventories. Wholesale sales rose, welcome news and to be expected after the cliff paralysis and a sub-par fourth quarter. Analysts were billing and cooing over the 7.2% increase in business investment spending in January, as revealed in an upward revision in the factory orders report. The increase in inventories also helps Q1 GDP.

But, but. The inventory-to-sales ratio, not seasonally adjusted, rose to a two-year high. The adjusted ratio rose to its highest level since November 2009. Not promising. The rolling twelve-month rate of change in actual sales fell for the 16th month in a row, to 4.8%. It never fell below 5% in 2007 or 2008, not until January 2009. “Escape velocity.”

Weekly claims stayed between 340K and 350K for the second week in a row, but it’s been due to spectacular drops from California. Excluding California, they rose to about a 370K rate! I do have a call in to the Labor Department, but I’m not sure what they can tell me. The Challenger layoffs report rose sharply from JP Morgan’s mammoth announcement, but jobs is jobs. The sequester may add to the total.

More non-escape velocity: the ISM non-manufacturing rate was at 56 vs. consensus for 55, and the market went crazy over the beat. But it was the weakest February reading in three years, and if the readings follow the pattern of recent years, we could be flirting with the sub-50 level by June.

The very small remaining sample of chains reporting monthly same-store sales produced mostly negative reports for February. The weekly reports were mixed again during the month, so it’s hard to know what to expect. That said, few retailers have been reporting good quarterly numbers of late. The February retail sales report comes out next Wednesday, and as usual is the highlight of the mid-month week.

More non-escape velocity: imports and exports. Falling imports are a sign of economic weakness. Though imports did show a rebound from the December port strike in California, the December-January total, which ought to have factored it out, fell from its year-ago total. That hasn’t happened since the trade collapse that followed the Lehman bankruptcy. Exports also fell sharply, and the January import recovery is going to ding first quarter GDP. Look on the bright side – the payroll tax increase is probably going to pull imports down the rest of the quarter, and that will help the GDP number. Such prosperity.

There are three price reports next week – import-export prices on Wednesday, producer prices (PPI) on Thursday and consumer prices (CPI) Friday. After retail sales, which follow EU industrial production on Wednesday morning, the main interest is Friday, when the New York Fed reports its latest survey and the central bank reports February industrial production.

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