“‘There’s more evidence to come yet, please your majesty,’ said the White Rabbit.” – Lewis Carroll, Alice in Wonderland
One can think of the market action this year as something out of a Dickens novel. Chapter One would be, “We Go to the Moon.” Equities reveled in the glories of a steep prolonged momentum rally, launched back in late August by the Fed’s decision to pursue further monetary easing and support asset price reflation. Smitten by the move, strategists forgot that the economy never moves in a straight line and insisted once again that it would, throwing up projections for lusty 2011 GDP growth of around 4% that would in turn fuel another year of wonderful earnings growth.
Chapter Two came in February and might have been titled, “The Ship Discovers a Problem.” While the political earth moved in North Africa and the Middle East, the physical one in Japan shifted even more violently, creating chaos and destruction. Markets fell, and the trend line was broken.
Chapter Three we could call, “Rescued by Providence.” Amidst much bickering over the impact of the situations in both regions and a dim awareness that first-quarter GDP estimates were being quietly thrown overboard, passengers discovered the miracle of The Angel Fibonacci. The S&P 500 bounced smartly off an “important” 50% retrace (if you haven’t a clue what we’re talking about, just think ‘eye of newt’) and to the wonderment of all, the market rushed forth on a quarter-ending, marking-the-tape rally that was low on volume, credibility and reason – just as any magic elixir should be, we suppose.
Since then the good ship has gone in circles, and the voyage seems to have reached a critical stage. Although cracks in the global firmament appear to be multiplying, one should not underestimate the power of greed. The mix of charts and springtime may seem dubious to the secular mind, but as every good magician knows, only a little bit of the real is necessary to create a convincing illusion.
With last week’s options-related selling pressure off the table, next week will start to get down to the meat of the matter. Earnings, guidance, management candor, expectations and hopes are all in the recipe. Sometimes mediocre earnings get a free pass when the market wants to believe, or escape damage when big holders are left with little choice but to average down and go on CNBC to pitch the stock. Perhaps the short interest will have gotten too big, and even a flicker of hope sets off a squeeze. It can also happen that good earnings will get a beating, if markets were expecting more. Google’s (GOOG) latest result comes to mind.
In any case, next week we will get:
Monday – Texas Instruments (TXN). Mostly pre-announced, there should be little in the way of an earnings surprise, but guidance could be interesting.
Tuesday – Goldman Sachs (GS), Johnson & Johnson (JNJ), IBM, strong>Intel (INTC), and after the close Juniper (JNPR) and VMWare (VMW). IBM and Intel have produced several quarters of positive surprises, while expectations for Goldman have come down. VMWare is a cloud darling and needs to justify its sky-high valuation. Modest results have triggered sharp falls the last two quarters, yet the stock has managed to rally back. A third strike could be lethal. Juniper is cloud hardware.
Wednesday – AT&T (T), United Technology (UTX), Wells Fargo (WFC); after the close American Express (AXP), Apple (AAPL), F5 Networks (FFIV) and Qualcomm (QCOM). Wells Fargo is considered the best of the Gang of Four and there are hopes it can do something to lift the financial sector. The last three are very high profile, with Apple and Qualcomm swinging big weights in the Nasdaq. F5, an expensive play on cloud hardware, has been sagging for months and will either collapse or set off a truly vicious short squeeze.
Thursday – Dupont (DD), Ford (F), General Electric (GE), strong>Honeywell (HON), McDonald’s (MCD), Morgan Stanley (MS), Nokia (NOK), Phillip Morris (MO); and after the close Capital One (COF). That’s an awful lot of Dow (and other index) weight between Wednesday’s close and Thursday’s open. Pivotal.
Friday – Markets Closed! (Good Friday)
Ordinarily, there’d be a slate of heavyweights reporting after Thursday’s close (and there are some widely followed names on the schedule) but the Good Friday holiday and long Easter weekend will push most into the following week. Most European markets will also be closed to observe the traditional Easter Monday holiday there, so Tuesday the 26th could see some serious pent-up action.
So what will the next chapter be called? “We Resume Our Journey?” It could be. Usually the market comes roaring into April earnings, full of verve and brio. Afterwards it’s “lookout below”, hence the bromide about selling in May. The last two weeks, however, have seen minor declines that could well be a base for another attack at 1400. A few rabbits out of the hat – and belief is in the eye of the beholder, mind you – and the black boxes could be straining to try to trip the chart wire set at 1350 that would take us to 1400.
The results so far have tended towards mediocre, but the best sector in the first quarter, manufacturing, really hasn’t been heard from yet. It will be in the upcoming week. If companies like United Technologies and General Electric are cautious about the next couple of post-tsunami quarters, it could convince a lot of money to get to the sidelines. If they are full of confidence, get your charts out and buckle up.
Equities have rallied the last five Aprils in a row, but last year things crumbled in the late going and the market didn’t really get going again until the Fed intervened at the end of the summer. If one believes that we are repeating the 2003-2004 cycle – and many do – then the market would work its way lower in fits and starts until pessimism is sufficiently negative in the fall to reignite another upward move. Perhaps the next chapter will be, “Marooned.”
While we breathlessly await the next installment – will the Easter Bunny bring us chocolate and jelly beans, or rotten eggs? – we again remind our readers that the U.S. markets are closed Friday (although our banks and other companies are open – only the trading markets have the day off). If you’re wondering why, Good Friday was once a time of obligatory reflection, and for centuries it was widely frowned upon to work during the daylong period of Christ’s torture and execution. As noted earlier, most European markets will be closed for the traditional Easter Monday holiday, so we wish all of our colleagues a long weekend rest.
The Economic Beat
It’s hard to say this time around which of last week’s releases was the big mover. Retail sales for March might be as good a place to start as any, though its mixed nature had markets more confused than anything else.
The total monthly sales change was estimated to be an increase of 0.4%, with the “core” number of ex-autos and ex-gasoline being an increase of 0.6%. Expectations for the total were for a bigger increase of 0.5%, but February was revised higher from 1.0% to 1.1%, so it was a wash in dollar terms. The ex-auto number of 0.8% bested consensus for 0.7%, but rising gas prices drove much of that and many noted that the 0.4% total was the lowest rate of increase since last June.
There were many small anomalies in the report – vehicle sales were down from February but are up nearly 11% over twelve months, similar to online sales which fell 0.3% but remain up 12.4% from last March. Furniture stores had a huge month, rising 3.6% for the month, but are only up 2.7% for the entire year.
What may have kept a lid on equity trading was that the year-on-year rate of overall sales growth fell to 7.1% in March from 9.1% in February. Most of the growth is being driven by auto sales (+10.9%), where credit is available, and gasoline (+16.7%), where necessity is available. Gasoline demand has been falling for five weeks in a row, but prices are now about a third higher than a year ago.
A report greeted more warmly was the March industrial production release, for the simple reason that the result of 0.8% beat the consensus for 0.6%. Perhaps analysts were also cheered that the Fed (which releases the report) switched from a black-and-white format to a color one. Manufacturing posted another good increase of 0.7%, with autos leading the way. Chemicals, paper and construction were also strong. We had to smile, though, at Econoday’s comment that “manufacturing remains robust.” The pace of recovery may be robust, but the industry most certainly is not: activity is still about 10% below 2007 levels, and capacity utilization remains well below the historic average.
Utility production posted a big reversal, helped by a cold March, but that looks set to reverse in April and should drag on the total. Manufacturing, though, looks poised to continue from the looks of the New York Fed’s survey, which posted an impressive result of 21.7 (zero is neutral) against a consensus estimate of 17.5. The survey’s new orders component also showed a strong result of 22.3. Against that, prices are rising to 52-week highs, and that is likely to bite into trade.
Unfortunately, domestic manufacturing is much smaller now than only twenty years ago and won’t pick up employment the way it once did. Weekly claims rose sharply last week, back up above the 400,000 level (412,000, seasonally adjusted). It’s partly an effect of the first quarter ending, but it was nonetheless the third highest number for unadjusted claims (443k) for that week in the last eleven years, with the only worse weeks coming in 2009 and 2010. The week also makes up part of the measurement period for the April jobs report.
That could affect the second measure of consumer sentiment, which rose slightly in its preliminary April measure to 69.6, helped along by the quarter-ending stock market recovery. The outlook for prices and the economy remain pessimistic.
Anxiety about prices was high going into the week, but the two main reports didn’t produce any big negative surprises. The Producer Price Index (PPI) reported an increase of 0.7% that was lower than expectations for a gain of 1.0%, thanks to a drop in food inflation. Its ex-food and energy number of 0.3% was a tenth higher than expected, but the Consumer Price Index (CPI) ex-food and energy increase was only 0.1%, a tenth lower than expected. That reassured markets, as did the CPI’s expectation-matching overall increase of 0.5%. However, 0.5% is still well ahead of the rate of income growth and will mean another drop in real disposable income.
Import and export prices rose sharply in March, led by food and energy; the latest year-on-year rates are approaching double digits. Excluding energy, import prices rose 0.6% for the month compared to the garish 2.7% total, but both numbers are still very elevated and bite into purchasing power.
The Fed’s Beige Book revealed nothing new – economic growth is moderate but uneven, with manufacturing doing well and housing and real estate not doing well. Business inventory growth was tepid in February, making it look as if GDP will need a big build in March (or another comically low price deflator) not to post an anemic result for the first quarter. Mortgage purchase applications fell back again and remain at very low levels, though above the very worst levels of the downturn.
Even so, we should see some sort of rebound next week in housing data, beginning with the homebuilder index on Monday, housing starts on Tuesday, and existing home sales on Wednesday. The spinmeisters will be out in force to paint what is only a bounce from a dreadful February as something more bullish. The federal data on sales prices due out on Thursday may paint a less spinnable picture.
Thursday should be the day of the week, with claims probably retreating from their end-of-quarter spike (consensus is for the adjusted number to drop back to 390k from 412k), giving the news services a chance to wax warmly over the drop (“claims fell by more than 20,000 in another sign that the nation’s economy is recovering!”). If it manages to come near that, it would dovetail well with the Philadelphia Fed’s latest manufacturing survey later that morning. The latter looks set for a good number after the New York Fed’s strong reading.
The day and week will still belong to earnings, though, and we aren’t making any predictions. Management feels more pressure than ever to put its best face on results, and Thursday could easily produce either a triple-digit rally – guidance is upbeat, claims hit consensus – or triple-digit loss, if claims disappoint and guidance is uncertain. The markets are closed on Friday; caveat emptor.