What, Me Worry?


“It’s a good idea to save your money. One day it might be worth something again.” – Alfred E. Neuman

April is proceeding right on schedule, so we salute it with another of our favorite springtime themes, namely the futility of worrying. Markets go up, don’t they?

They did last week, shrugging off the rather titanic news that the United States had its credit rating put on notice. Nothing new about that, said the jaded and the long, it was just the confirmation of something that the markets had long known.

Was it now? The death of the dollar and the downfall of our financial system were frequently predicted and widely talked about for most of the nineteen-seventies, and not a few more times in the eighties and nineties. But it never did happen, not until now.

It appears that one of the things most preoccupying the Standard & Poor’s rating agency that issued the warning is the prospect that our government will muck up the budget deficit. Surely not our heroic pols? The stock market did indeed give the matter a few hours thought, then decided it wasn’t worth thinking about any longer. Excelsior!

Manufacturing and especially Apple (AAPL) were the stars of earnings season last week. While the age-old Street show of topping estimates carefully designed to be beaten is a spectacle that brokers and traders never tire of, Apple really did produce some show-stopping results. Reflecting its mythical CEO’s disdain for the Manhattan massage-oil community (made from genuine snakeskin!), the company may be the worst offender of all when it comes to providing phony earnings guidance. Yet its results made it plain that the company’s product line is enjoying growth that ranges from surprising to stunning.

That put a lift back into technology stocks, aided by an impressive quarter from Intel (INTC) that arrested the decline in semiconductors, and overrated results from VMWare (VMW) that not only reignited cloud stocks when it didn’t miss estimates, but lit a fire under nearly every high-multiple, high-momentum stock on the board (risk on!).

That probably won’t happen with some of the Japanese companies most affected by the country’s tragic disasters, as well as some of the American companies with significant supply relationships therein. But the Street is largely giving them a pass for now, even if the stocks aren’t at the top of buy lists.

The financial sector results continue to disappoint, by and large, especially those from the too-big-to-succeed Gang of Four jumbo banks (Wells, Citi, JP Morgan, Bank of America). That’s not a good underpinning for the broad economy. Although Apple and its suppliers should continue to do well throughout the year, we still see signs of decelerating growth elsewhere in manufacturing and technology, and the next two quarters are apt to be less kind to the order books. A market led by soaring commodity prices and energy stocks has a tendency to finish badly.

But that’s the finish, right? Right now the emphasis is on topping up this week’s move and to start preparing the rigging for May. The old cliché on the Street is “sell in May and go away,” so to keep the game going the market needs to whip up worry now that it can push against later. Complacency is still fairly widespread, and even among those who worry about such things as the end of Fed easing or the gathering clouds abroad, there’s a pronounced tendency to believe that the game can keep going for another thirty or sixty days.

It’s one of our favorite Street images, one that we love to evoke: the craps-game gamblers on the top floor know the cops are on the way, hear the cars pull up, but keep telling themselves they can get out the back window when the knock on the door comes. It’s crazy and dangerous, but most of us, from the hardened professional trader to the hedge-fund manager, right down to the looks-once-a-quarter retail 401k investor, can’t bear watching from the sidelines while somebody else makes the “easy” money. So why worry? The cops aren’t here yet, are they?

The Economic Beat

The news of the week may seem to have been the rating agency downgrade of U.S. debt, given that it had the largest impact on the market. It wasn’t really news, though, said the wise, and so quickly chucked into the circular file.

Housing news was the most copious, yet of little influence. Nothing but weak data, with almost nothing but attempts to make it appear better. Data that could not be dressed up included the homebuilder sentiment index and home prices, which both fell, while the dismal data in starts and existing home sales was typically tarted for retail consumption.

The only piece of data that really mattered, though, was the price decline. The sentiment index did fall from 17 to 16, and next month it may go back to 17 or drop one more to 15, but really it’s completely meaningless. The neutral level is 50. Sentiment has been in the basement for the last couple of years now, with the most recent twelve months mostly wandering in a narrow range between 15 and 17. One guy checking a different box in the survey from one month to another probably represents boredom as much as anything else.

The pressure on new homes can be seen in existing home sales, which set new records for all-cash sales and hit a new two-year high for distressed sales. The all-cash sales reflect both the continuing lack of credit and bottom-feeding by hopeful investors, particularly in the former fever centers of the bubble, Nevada and Florida. With median prices falling again, the price advantage of buying distressed properties is a check on new home sales. The tightness of credit is also reflected in the falling number of first-time buyers (along with steady complaints from realtors who keep losing sales).

Existing home sales did bounce back from a dismal showing in February, leading to the usual nonsense about a recovery. February is the annual bottom of the market and lousy weather fell on top of lousy credit conditions. Permits bounced back too, but so what? They are still down on over thirteen percent on a year-ago basis.

The housing market is healing slowly, in the sense that that distressed inventory is being taken out and the supply of new homes is probably at a post-WWII low. That helps tighten supply. But falling prices – the latest federal data showed a minus 5.7% year-on-year rate for the national average through February – keep pressuring the banks, along with all of their self-inflicted wounds, and therefore credit.

One sign that the Gang of Four doesn’t know how to lend money is their documentation process. During the middle of the decade it was half fiction, half non-existent, a brainless assembly machine for approvals that gave it all away (the desperate grab for outsized profits). Then it morphed into a brainless take-it-all-back program, symbolized by the thousands-a-day robo-signing of documents attesting to personal knowledge of the mortgage holder and loan (the desperate squeeze of outsized bleeding).

That led to over a dozen consent orders being crammed down their throats recently, in effect saying, “stop butchering the paperwork.” Now our best-and-brightest lenders (judging from the pay scales) want documentation of direct descent from George Washington while piously rejecting loans with endless Kafkaesque requests for cover-my-behind documentation. It’s no wonder they’ve all been reporting disappointing earnings, or that the sector can’t get any respect (to be fair, it’s tough to lend money to buy assets in a falling market. But too much caution on new lending only worsens the existing book).

But the most noteworthy report was the Philadelphia Fed manufacturing survey for April. You may recall that last month the survey hit multi-decade peak at 43.4, with the six-month outlook predicting nothin’ but good times ahead. We warned that such numbers are typically peaks that precede a deceleration. The index fell sharply to 18.5 in April.

It’s still an expansion number, as most media outlets hastened to emphasize. It certainly doesn’t indicate recession. But it does point to the growth slowdown we’ve been talking about in this column of late. Another indicator was a still-elevated number of layoffs for the latest week. The adjusted number came in at 403,000, raising the four-week average to nearly 400k. Those two weeks go into the April jobs survey, and aren’t exactly a tailwind. The data isn’t a sign that things are falling apart, but it isn’t the recovery path either that Wall Street is trying to sell you until they get the IPO backlog cleared out.

Leading indicators rose a bit more than expected, at 0.4%, but the extra tenth came from a bounce in the volatile building permits series. Mortgage-purchase applications bounced too, but that was mostly due to an impending increase in federal mortgage-insurance premiums. Retail sales bounced up as well, thanks to Easter, but as gasoline creeps up over $4, that’s going to bite. One can only hope that the speculative bubble in oil soon gets pricked.

Next week’s focus is still earnings, but the economic calendar will provide some serious competition this time. Housing tops off its monthly picture with March new home sales on Monday, followed by February pricing from Case-Shiller on Tuesday and March pending home sales on Thursday.

Manufacturing chips in durable goods orders for March on Wednesday, along with two more April surveys: the Richmond Fed on Tuesday and the more widely followed Chicago purchasing-manager index on Friday. The consumer is heard from with the widely followed Conference Board confidence report on Tuesday, and the final April sentiment reading from the University of Michigan on Friday.

But the two most interesting events will take place between Wednesday lunchtime and Thursday’s market open. The Fed’s policy-making group, the Federal Open Market Committee (FOMC) meets on Tuesday and Wednesday and will move up its historic statement release time from 2:00 PM to 12:30PM. That will certainly mean more lunch delivery business for lower Manhattan delis.

Then at 2:15, the FOMC will have its historic first-ever post-meeting press conference, featuring Chairman Ben Bernanke. Perhaps Ron Paul will be in the room, demanding to know how much the Fed spends on its coffee supplies.

The next morning, the first estimate of first-quarter GDP will come out from the BEA. January’s 4.0% consensus has fallen all the way to 2.0%, with the whisper number being lower and some big banks calling for 1.5% (strategically lowering the bar and setting the stage for an upside “surprise” rally). Much will depend on what the price deflator is alleged to be, with the previous quarter’s number being propped up by an absurdly low inflation estimate (the headline number is “real” GDP, or the total increase less the estimated inflation rate).

We would not all be surprised to see a “positive surprise” being enthusiastically embraced by the business press, while the underlying data quietly results in second-quarter estimates lowered the following week. It’s a fine Street tradition.

The Wednesday-Thursday combo also features an extremely heavy earnings calendar, led by Dow stalwarts Exxon-Mobil (XOM – can they report record profits?) and Microsoft (MSFT – can they get anyone excited again?). It should be the pivotal two days that decide whether or not we head into May with a genuine “sell-and-go-away” mentality, or the last lurch of the lemmings to 1400 on the S&P.

share this blog post
Facebook Twitter Plusone Linkedin Digg Delicious Reddit Stumbleupon Tumblr Posterous