“I’ll give thee fairies to attend on thee.” – Titania, in William Shakespeare’s A Midsummer Night’s Dream
Sometimes you just can’t keep a good market down, and sometimes you can’t keep a bad one down either. The S&P 500 is now up a lofty five percent this month, driven not by earnings, not by the economy, but by the momentum wave launched on the first day of the month.
Round-number targets galore beckon to traders and trading algorithms: 1500 on the S&P 500 (barely one percent away), 900 on the Russell 2000 (ditto), 14,000 on the Dow Jones (needs another two percent), and 200 on the MDY, the S&P Midcap ETF (thirty basis points away).
I saw the rally variously attributed to eBay (EBAY) earnings (give me a break), the strengthening labor market (continuing claims reached a ten-month high and the reported weekly number was dubious in the extreme, as you will see below), and the improving global economy (Italy announced it would be in recession in 2013). A Wall Street Journal storyline on Friday said it best: “Stocks Put on Their Rally Shoes.” Indeed, the market has fought off lower openings to finish higher seven of the last nine days.
With an additional fillip from the Republican “compromise” offer on the debt-ceiling, expect all of those round-number targets to be reached this week. The proposal is problematic, as it envisages a series of rolling extensions, to which the President just announced his opposition; a shift in terrain to the sequestration battle, whose deadline is simply another two weeks or so after the fuzzier debt limit is reached; and an attempt to shift the onus back on the (Democrat-controlled) Senate. That’s a challenge.
But it doesn’t all have to come to pass to get a debt limit deal done under the deadline. As reported in the Houston Chronicle and then in the Journal, Senate Republican whip John Cornyn (R., Texas) remarked that “I will tell you unequivocally, we’re not going to default.” That ought to be enough to bias the tape towards hitting all of the targets.
Third-quarter earnings didn’t matter right away, and fourth-quarter earnings probably won’t either. The big commercial banks reported uninspiring earnings, and that usually is a harbinger of trouble down the road. But the big investment banks, Goldman Sachs (GS) and Morgan Stanley (MS) did, and that should be enough to smooth things over for a time. Regional banks are also doing better, though everyone’s net interest margin seems to be under pressure.
The earnings calendar is heavy next week, but so long as there aren’t any disasters, estimates will be “beaten” and the market should continue its skein of fighting off weak mornings (based on news) to close higher (based on momentum). The quadruple charm of all those targets is simply irresistible, However, it’s also a trading rule of thumb that the first attempts to breach new highs are swatted back, so look for a pullback to follow in the month’s last week.
There really isn’t that much more to say for now, but a bit of additional context may help your thinking. Last year, the S&P put on a spectacular first-quarter rally based on an assumption of “escape velocity” that never happened – in fact, the real economy was slowing throughout the first half. The equity markets were dead flat after that for the rest of the year, though there were peaks and valleys along the way. Equities were also quite literally bailed out by repeated doses of large-scale central bank intervention.
That has both mutual fund managers – who largely underperformed again last year – feverishly buying dips with what money they have, in an effort to make sure they don’t get left behind in the first-quarter tables. It also has the trading algorithm and HFT set modeling very nearly the same behavior, so we are getting a somewhat sped-up version of the first quarter this year. That’s where the buying pressure is coming from. If you think the market is moving purely on fundamentals, consider Friday’s close of exactly 500.00 on Apple (AAPL), which gave over 400,000 expiring January put and call contracts a value of exactly zero.
The other bit of context is that many veterans have been comparing this year to 1994. That year also started with a strong January (+3.3%), only to finish slightly minus on the year, which is unusual. We are not entering 2013 with strong global economic momentum, although the tape may beguile much of the media into reporting it as if it were so. The payroll tax increase and unfavorable weather comparisons won’t start to show up in the data until some time next month. Can the banks pull off another rescue act this year? Stay tuned.
A reminder to all readers is that all US markets, banks and government offices are closed Monday, January 21st, in honor of Dr. Martin Luther King.
The Economic Beat
The report of the week was without a doubt, the weekly jobless claims release. Two factors came together to make it so – one, a market that had fought off weak openings five days in a row and was just aching for an excuse to take out 1474 (the previous intra-day high) on the S&P 500; and two, a seasonally adjusted number that has every appearance of being not just wrong, but outstandingly wrong.
The actual weekly claims number for the week ending January 14, 2012, was 525,422, reported as a seasonally adjusted 364,000. Last week, which ended January 12, 2013 and is the nearest equivalent, reported an actual total of 555,708, or 30,000 higher. The reported seasonally adjusted total, however, was 335,000, or 30,000 lower (10%)! It’s difficult to swallow. There were no holidays, no storms, just the highest weekly adjustment factor in three years.
That didn’t stop newsreaders from running with the number and crowing that it was the lowest number in over five years. I didn’t hear anyone mention that the total number collecting benefits hit a ten-month high, or that the number is only 5% lower than a year ago. Considering that people eventually drop off the rolls, that isn’t much progress. Looking at the year-on-year numbers carefully, I don’t see any real trend change, certainly nothing to justify a reported 10% drop from the previous week.
Are we in for a rerun of the first quarter of 2012, when a series of warm weather-inflated data painted a false picture of the economy? It didn’t appear that way in other data, and it isn’t especially warm right now. December retail sales were up 0.3%, as expected (excluding autos), and while many tried to boost the notion that the ex-auto, ex-gas number of 0.6% was something special, it wasn’t. December is supposed to be the biggest retail month of the year, and November was held back by Hurricane Sandy. The two factors should have led to a bigger year-on-year increase than the actual 2.45%, well below the 20-year average of 4.2%, with much of the increase concentrated in restaurant and hotel spending. What happens when you take out the late-night pizza bills from the fiscal cliff?
The manufacturing surveys didn’t appear to be inflated either. The New York Fed reported a diffusion result of (-7.8), while the more influential Philadelphia Fed reported a decrease of (-5.8), when almost the exact opposite was expected. On top of that, the previous month’s pleasant surprise gain for the Philly index was chopped almost in half.
The numbers aren’t quite as bad as they look, because diffusion surveys can inflate things as numbers move back and forth from the “same” category and the future optimism indicators for both results were still positive. The future indicators are actually lousy guides of the future, but they are decent reads of the present and the inference is that once again the budgetary mess in Washington has a lot of business on hold.
The industrial production number for December was decent, though, with an increase of 0.3% that masked a decline in utility output. Dave Rosenberg reported that it was the warmest December in 55 years, and that works both ways – the same warm weather that cut utility usage boosted mining and manufacturing (and housing), with manufacturing up by a healthy 0.8%.
The other weather-boosted number was indeed housing starts, which reported a seasonally adjusted total of a 954K run rate in December. It too was a little hard to believe, given that the actual number of single-family home starts hit a ten-month low (explaining why homebuilder sentiment remained stuck at the same levels). We were all reminded last year that the government’s seasonal adjustment factors don’t work well with the weather, and that will start to show up next month. January 2013 isn’t as warm as January 2012, and while it’s early, nobody is talking about a warm February either. The cold weather has been propelling natural gas prices higher.
There may be food inflation, and gasoline prices are higher than a year ago, but otherwise things have been mild lately. Both the consumer (CPI) and producer (PPPI) price indices reported ex-food-and-energy gains of 0.1% for the month of December. The CPI’s headline number was at zero, while the PPI showed a retreat of (-0.2%). The latter is due less to a fall-off in the demand for oil than to a fall-off in the demand for betting on oil futures in the face of the fiscal cliff, but the discussion of such unpleasantries is usually avoided by the business media.
Consumer sentiment fell instead of rising as expected, but it really isn’t that meaningful a number. It more likely reflects anxiety over the budget battle, a reasonable thing to have. The Fed’s “Beige Book” of regional economic conditions had no surprises and could have been called the “lukewarm” book.
And overseas, by a remarkable coincidence, all of the Chinese economic data came in just ahead of consensus. Very gratifying for the new premier, I am sure. No doubt a complete surprise, too.
Next week’s economic calendar is light, leaving a heavy calendar of earnings reports free rein. Monday is the holiday, and after that we’ll get existing home sales on Tuesday and new home sales on Friday. The latter one should get a lot of attention, given the current market infatuation with housing. A couple of regional Fed indices are on tap as well (Richmond, Kansas City), but the number I’ll be watching is the Chicago Fed index on Tuesday.
Notable earnings reports next week include;
Tues…….Johnson and Johnson (JNJ); Verizon (VZ), Google (GOOG), IBM
Wed…… United Technologies (UTX); Apple (AAPL), .
Thurs……AT&T (T), Microsoft (MSFT)
Fri……….Honeywell (HON), Proctor & Gamble (PG)