“It is a tale told by an idiot, full of sound and fury, signifying nothing. ” – William Shakespeare, Macbeth
If you’ve never seen the movie Groundhog Day, here’s a spoiler alert: Bill Murray’s character plays a self-obsessed TV weatherman dying for the big time, only to find himself trapped in a rural Pennsylvania town, forced to relive the same day (Groundhog Day, February 2nd in the US) repeatedly – and apparently, indefinitely – until he finally earns redemption through unselfish behavior.
We now find ourselves in a similar situation, politically speaking, doomed to confront the debt ceiling every few months until one or both parties learn unselfish behavior. In other words, indefinitely.
As it did at the end of last year, Congress turned back at the failsafe point, with the House of Representatives agreeing that the world could go on after all a few hours before the bomb was scheduled to detonate. Though the recalcitrant House Republicans were unable to extract any of their desired concessions from the President or Senate in this go-round, their agreement was no more than a cessation of hostilities, conditioned on a shot at a rematch in three months time. Despite the hopes of both parties, there is a very good chance that we will remain stuck in an endless cycle of confrontation until disaster or elections – perhaps one and the same – can sufficiently alter the make-up of the Capitol.
There is a great deal of analysis on the subject elsewhere, should you be so inclined; I will move on to my own particular bailiwick, the stock market. It suffered the usual bout of doomsday anxiety, but less so than the previous time, and similarly responded with another rally, also less than the last time. Or perhaps less concentrated, as the market has rebounded about five percent from its post-Fed low in early October. This time the recovery took ten days; at the beginning of the year, two.
Despite the ebullience that had overtaken many by Friday, however, the way forward is less sanguine than it appeared at the week’s close. With few exceptions, earnings season has been a somber affair, the glamour of Google’s (GOOG) price move over $1000 notwithstanding (a move considerably helped along, for my money, by options dealers wiping out put positions). A long list of companies are reporting revenue declines, and while the balmy backdrop of Thursday and Friday smiled on those who could beat estimates, don’t expect the euphoria to last.
Earnings seasons follow certain rhythms. About two-thirds of companies will beat estimates nearly every quarter – that is a given, however artificial. Seasons like the current one, riding in on a wave of optimism over one thing or another, typically start to move up after a few days and then sell off at the end. There is no hard-and-fast rule about the week or day of the fade, but it will usually begin by the third week. With the markets already overbought, there is a good chance the slip could begin this week, depending on Tuesday’s delayed jobs report.
At some point prices are going to have to answer for declining revenues and lowered guidance, and it will probably be soon. There was a certain giddiness at the end of the week that should carry over to an immediate stab at my long-predicted 1750, a sentiment that is entirely predicated on disaster avoided (the debt-budget drama) and a weaker economy (= more stimulus). I don’t expect any burst of rationality to suddenly overtake our fantasy world and precipitate a major decline, but this kind of soft complacency is the perfect setup for an oversold market by mid- to late November.
But only mildly so; I don’t expect the selling to get too serious either, partly because the recent political farce is going to provide a handy excuse for soft data points. Many estimates will be quickly recalibrated so that the data, however weak, can only surprise to the upside. January may bring new surprises, but I’m afraid that we are still stuck on another Groundhog Day track in politics – and in asset price bubbles, and in forecasts that things will get better “next year.”
The Economic Beat
While next week will have a raft of overdue reports from the Labor Department as the government catches up from the shutdown, last week had little to report again as the effects of the shutdown carried on through the week. There was still no word on Friday from the Commerce Department, whose most prominent release is the retail sales report.
There was a bit of dry humor concerning the surveys from the Northeast Fed branches, New York and Philadelphia. The New York manufacturing survey showed little growth with a reading of 1.5, down from 6.3 the previous month and well short of the consensus estimate of 7.0. The reading was immediately dismissed as an unfortunate casualty of the drama in Washington, though the new orders index did increase.
Two days later, the Philadelphia index posted a surprise reading of 19.8, a bit slower than the previous reading of 22.3 but solid nevertheless and well past the consensus of 15.0 (zero is neutral in both surveys). New orders showed the broadest two-month rate of expansion since 2004. Note that I didn’t say fastest, because the report measures breadth, not depth, a nuance that many business reporters seem unable to comprehend. Naturally the Street wants the Philadelphia report to be taken seriously, but not its New York cousin.
That’s typical behavior of Wall Street, but in this case I think the Philadelphia report was indeed impressive in light of general conditions. The New York report may or may not be a reflection of government escapades, as it tends to be less in synch with the rest of the surveys anyway.
There was a dark lining to the Philadelphia silver cloud, one that isn’t immediately obvious: The six-month outlook. It soared to its highest level since 2003. The problem with that is that the six-month outlook is nearly perfect as a coincident indicator, and even better as a contrarian leading indicator. Look at the chart below, and you will see that peaks in the six-month outlook are invariably followed by declining conditions. In other words, it marks the peak of the current cycle.
Although the Federal Reserve has its own funding, its industrial production report was nevertheless delayed while the bank awaits data from the government. The report is now slated for Monday the 28th.
The homebuilder sentiment index, a.k.a. the Housing Market Index, eased slightly to 55 from a revised 57 (originally 58) the month before (50 is neutral). These are very mild changes that really amount to nothing so far as trend is concerned, but the index is an excellent tip-off on the housing starts report that usually follows the day after. It’s a safe assumption that starts declined very mildly or went sideways, again probably not reflecting much more than the fact that homebuilders are satisfied with their current supply-demand balance and don’t want to spoil the party. The delay in the starts report will give the Street time to rejigger its estimate to a more beatable level in the wake of the sentiment decline, and then any potential starts decline can be blamed on the government.
Weekly claims remain elevated for the second week in a row, but this time the move could be government workers filing claims, while the previous week was skewed by a catch-up in California. My own analysis of the data suggests that 325,000 (seasonally adjusted) is probably about the real level right now. Claims could pick up by the end of the year, however, as more publicly traded corporations resort to lay-offs to try to prop up earnings – revenues are not doing the job.
Weekly retail sales reports continue to point to another soft reading for month-to-month, but perhaps the government worker back-pay will come to the rescue. If it doesn’t, it will be predicted to do so in November.
The Fed’s Beige Book continued its usual “modest-to-moderate” tone. Employment strength was not found, so my guess would be that the ADP report of 166,000 might be close to the actual number. The Labor Department’s report comes out Tuesday morning, with consensus currently at 184,000, a figure that might ratchet downward a tad by Tuesday. One would think that the two elevated claims reports will result in a soft October reading, but we’ll have to wait until November 8th for that one.
Other reports slated for next week include the Chicago Fed national activity index on Monday, but that doesn’t seem likely in view of the missing data. A check of the website revealed no new release date as of yet. The existing home sales report comes out Monday, and as it comes from the National Association of Realtors it will be on time. Bloomberg television was talking Friday evening about a Tuesday release of housing starts, but I could find no confirmation of this, not even on the Bloomberg website.
Catch-up reports besides the jobs report include the weekly oil report on Monday, September import-export prices Wednesday, and the labor turnover report (JOLTS) on Thursday. The other price indices, consumer and producer, will come the week after. We’ll probably get an updated slate from the Commerce Department by Monday or Tuesday, so the retail sales report may or may not make a visit in the back half of the week.
Over in China, the 32-province, billion-plus-population country produced its GDP estimate for the third quarter two weeks after it ended. Quite remarkably, the data is never revised. Despite the fact that very few economists (if any) take the numbers seriously, the media loves to talk them up, and the 7.8% rate blew past the 7.5% whisper number, helping set Asian markets on fire. For a day or two. Enjoy it while it lasts, because Chinese officials are talking down GDP growth to the 7% level, quite possibly smoothing the way for some type of digestion of its overbuilt property sector.