The Last Hurdle


“Screw your courage to the sticking-place.” – William Shakespeare, Macbeth

Now we wait, speculate and wait some more. The stock market put on a very typical jobs report rally Friday (a consensus beat equals automatic buying) that wasn’t quite enough to rescue the week into the green, but enough to bring it back up to essentially sideways and alleviate some of the short-term overbought status of the major indices. There was something in the jobs report for everyone, I suppose, because even the bond market rallied on Friday.

We may very well continue to go sideways until the Fed meets in about ten days’ time. The jobs-report rally has not typically been followed by stock market strength in recent times, probably due to the fear that it advances the time horizon of the taper. Like most of you, I have heard so much speculation about when the Fed might taper that I wouldn’t complain for a moment if I didn’t hear the “t-word” again until the FOMC (monetary policy committee) announcement on the 18th. There’s no denying that it’s the main focus of markets around the globe.

There is certainly the potential for explosive power packed into the next meeting. An indefinite deferral (“we will continue to be data-driven”) will give the markets permission to roar into the end of the year. A definite date and even an initial token cut would surely unsettle them, but to what degree will depend on how much anxiety has been priced in by that time.

This chart from Econoday tells you what’s happening with corporate profits:

This is actually somewhat better than publicly-traded profits, which only rose about 3.4% in the third quarter. What’s interesting to see is how little impact falling corporate profit growth rates had on the market in 1998 and 2006-2007. Momentum is a powerful force in the stock market – but gravity catches up eventually.

Last week notwithstanding, a 30% up year for the S&P 500 is still within reach, and traders only await the Fed’s permission for 2013′s last great leap forward. Watch the retail sales report this coming Thursday for the next clue, but keep in mind that despite the heavily over-extended nature of prices on both intermediate and long-term horizons, this stock market still very much wants another parabolic move upwards. If the current rate stays intact, we’re headed for big trouble next year, but that’s next year’s problem, isn’t it?

It’s still all about the Fed. Keep in mind that portfolio rebalancing might induce additional selling pressure if there are bouts of anxiety ahead of the report, but that said, I expect us to stay range-bound until we come to the last hurdle.

The Economic Beat

When I found myself with nearly 1500 words on the jobs report (and still not finished), I decided to submit them separately to Seeking Alpha, where you can find them under the title, “The Case of the Identical Job Markets.”

Earlier in the week, I had projected a job count based on the assumption that the year-to-date growth in 2013 payrolls would continue to match 2012, and that turned out to be the case: November 2013 year-to-date reads (for now) at plus 1.77%, compared to 1.76% in November 2012. For four months in a row now, the rates have been within two hundredths of a percent of each other, something I haven’t found in going back to 1981 .

The headline number was a 203,000 net job increase, and there seems to be something about that two-hundred level that the market finds magical. Had the number come in at the consensus of 180,000, we might have seen an even bigger rally based on the Goldilocks concept of not too hot, not too cold, but we’ll never know. The whisper estimate had grown to something around 200+K after the ADP report two days earlier had estimated 215,000.

One of the solidifying factors of the report – which I thought overestimates the strength of the market – was supposed to be the increase in average weekly hours, from 34.4 to 34.5. But average weekly hours have been between 34.4 and 34.6 for over three years now (only hitting 34.6 once), and November was the 10th time in the last 37 months with weekly hours of 34.5. It doesn’t seem remarkable to me. The aggregate weekly hours index moved up to 99.3, implying that in two or three more months we might see 2007 levels again.

While it’s still better than a poke in the eye with a sharp stick, the drop in the unemployment rate to 7.0% has more to do with people being eliminated from the labor force count and a lower participation rate than anything else. The latter perked back up in November after what was probably a shutdown-exaggerated drop in October, but at 63.0% it is still six-tenths of a percent lower than November 2012, and the unemployment rate has fallen seven-tenths of a percent in that time.

The most notable addition in November was the 27,000 increase in manufacturing jobs, the largest increase in some time but one that was given a very large push by seasonal adjustment factors. The raw data indicated a fall in 3,000 jobs, which came out at plus 27K adjusted, but in November 2005, a similar raw decrease of 6,000 jobs produced an adjusted result of minus 5,000. I guess the seasons are different now.

The revised total of 200,000 additional jobs in October did not show up in the October personal income estimate, which showed a (-0.1%) decline from September. Since spending increased by the expected amount of +0.3%, many assumed the income data was simply wrong or flawed by the shutdown. It might have been, although government workers should have received their back pay before the end of the month and government payrolls did not show a dollar decline. The swing factor was farm income, which spiked in September and then fell back in October. The data are supposed to be seasonally adjusted, but that’s an imperfect process – most of the other income measures did show “modest to moderate” gains, in the words of the umpteenth consecutive Beige Book report description of the economy.

The ISM purchasing manager surveys went in different directions, with manufacturing rising to a reading of 57.3 (54.7 for the directionally similar Markit survey), and that may have influenced the BLS adjusted estimate for manufacturing jobs. Alas, the ISM measures breadth, not depth, and has often not been matched by industrial output. It also tends to follow a pattern of rising and falling in keeping with inventory levels and the seasons, and according to the latest GDP estimate, inventories are quite high right now, implying an imminent decline for both measures. The ISM services measure went from 55.4 to 53.9, and while I don’t consider that to be especially significant, the stock market was pleased by the decline’s implication of a possibly deferred taper.

Perhaps reflecting the inventory situation, factory orders for October were down across the board, (-0.9%) in all, with declines in defense, consumer goods and business capital goods, the latter declining for a second month in a row. New car sales are at the best monthly rate since early 2007, and we should be very near to a peak for that rate. Employment is still below the levels reached in that year, and the rapid growth in subprime lending in the sector suggests that the number of potential customers is maxing out, despite the age of the fleet.

The trade deficit improved, partly on the back of art auctions to foreign buyers, but imports of non-petroleum goods continue to be challenged. What same-store sales reports were available were not encouraging and there was weakness in the Black Friday weekend sales data, though online sales fared better. Evidence from earnings reports suggests a very mixed picture. The November retail sales report is next Thursday, with ICSC-Goldman suggesting a positive number and Redbook suggesting weakness.

New home sales showed a big fall in September and then a bigger gain in October. In a separate Seeking Alpha article, I pointed out that the gains were concentrated in the South, the same region that had undergone substantial downward revisions in each of the previous three months. I suspect another revision in store, given that the gains were not echoed in homebuilder sentiment or private residential construction spending. Construction spending overall was reported to have fallen in September and risen in October, but this measure is also subject to large revisions.

Finally, the GDP estimate for the third quarter was raised to an annualized rate of 3.6%, up from an original 2.5%, but even Wall Street economists threw cold water on the number. The gain was mostly due to a buildup in inventories, with underlying weakness in domestic sales. Tracking reports for fourth-quarter GDP are in a range of zero to two percent.

After all the catch-up data (new home sales, construction) made for a very busy week, next week is quiet, with the retail sales report the biggest event on the docket. As speculation starts to build over the Fed’s action on the 18th, attention will also focus on the inflation indices, with the producer price index due on Friday and the less-watched import-export price data on Thursday. The consumer price index is the following Tuesday, and if the two reports are weak again the markets will likely hope for more quantitative easing.

There is also another labor turnover report on Tuesday (JOLTS), which may or may not give the Fed more to think about, as it hasn’t shown the same kind of lift that the jobs numbers have. Wholesales sales are out the same day, worth watching for the inventory-to-sales ratio as well as order trends.

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