It was a busy week, and a very telling week. What moved the market down were housing data, jobs, and consumer confidence. What brought the market back was the implication that core business was holding firm. First and foremost, housing was hammered. New Home Sales fell 11.2%. Existing Home Sales fell 7.2%. Home prices fell 1.6%. Mortgage applications were off by 8.5%. To top it all off, there was a report from CoreLogic saying that 11.3 million mortgages were now underwater. We know that the data were skewed by the weather, but that isn’t enough to account for the problems across the board of these data. We also know that January sales may have been impacted by that period of time when the government wasn’t quite sure they were going to extend the tax credits. Since new and existing home sales are based on closings, the November delay in the decision and the seasonal slowdown around the holidays led to very few closings in January. If the tax credits pulled forward sales that normally would have taken place in these winter months, the impact is rearing its ugly head now. The pressure is on come spring and summer. If there is no recovery, especially in price, another round of foreclosures is extremely likely. In other words, this round of housing data portend tough times ahead come summer.
Stocks were also hit by a “double whammy” with falling consumer confidence to 46.0 from 56.5. Both current conditions and expectations were significantly lower. The outlook by the consumer had fallen off of a cliff in February. That dire expectation was bore out in the weekly Initial Jobless Claims figures for the week ended February 20th. As we brace for another disappointing Employment Report, all eyes are on the weekly claims figures. The consumer is telling us that things aren’t as good as the corporate data might make them appear, yet expectations were originally for a close call on the jobs number, due out this Friday. February started out with a positive surprise, falling to 442,000 from 483,000. Immediately, expectations were for February to hold right around 450,000, which roughly equates to a “zero” number on monthly jobs. The past two reports have been extremely disappointing, first jumping to 474,000 and then up to 496,000. Already the consensus has gone from near zero job losses to -50,000 jobs for February.
The negative implication of these two reports, consumer confidence and jobless claims, took the wind out of the sails of economic growth. In a way, that played right into the hands of Ben Bernanke. The Federal Reserve moved to increase the discount rate last Friday, a move that many took as a signal that the Fed had initiated its “exit strategy”. This could only mean more rate increases would be on their way. However, the Fed unleashed an onslaught of presidents and governors to reassure the markets that the move was not intended to signal the start of the Fed backing away from its plan to stay accommodative until the economic recovery is in full swing and unemployment was on a steady pace lower. With one week’s data, the market was convinced that the economy was definitely not on sure footing and that last month’s surprise drop to an unemployment rate of 9.7% was tenuous at best.
The bulls focused on the big picture. Aircraft orders may have bolstered the Durable Goods Report, but the Chicago Purchasing Managers’ Index unexpectedly rose to 62.6 from 61.5. Things did slow down a bit in February, as is typically anticipated due to seasonal factors. However, growth is still evident, as the component data are still above the 50 level. Production was at 65.2, New Orders at 62.2, Backlogs were at 58.5 and Employment held in there at 53.0. One number that hasn’t recovered is Inventories. They slipped from a significant jump in January to 48.7 from 38.6 in December, only to fall back to 42.4 in February. This may just be in the Chicago Fed’s survey, and we will look closely to see if the data are confirmed by the national ISM Index, but it suggests that the higher level of production is not meeting demand. Companies are still extremely conservative. They know the economy is doing only slightly better and they are not willing to ramp up for something more sustainable. Therefore, inventories are still below 50, meaning manufacturers are still having to dip into an already thin inventory supply to meet orders. That’s excellent news on several fronts. Profit margins in Q1 will stay high. Despite the fact that first quarter gross sales are seasonally down from the robust consumer selling season in the fourth quarter, the year-over-year numbers should have an easy comparison. Add the impact of poor first quarter 2009 gross margins to awesome 2010 gross margins, and profits should be a pleasant surprise for the bulls.
The bulls are focusing on 1st quarter earnings, and we feel that earnings will provide the catalyst for a better and sustainable short-term bounce starting in late March. However, we have two to three weeks to wait, and it is the waiting that could be painful. The ISM manufacturing and non-manufacturing data are out early this week. We need confirmation that “orders” are still positive. Then, all eyes will have to be on jobs. We’ll get ADP on Wednesday, Initial Jobless Claims on Thursday, and then end it all with February’s Employment Report on Friday. There is an uncertainty hiding in this report. All of this bad weather in the Midwest and East is creating demand for specialty jobs. It will be interesting to see how many jobs were created to remove snow and repair lines. Meanwhile, a far greater number likely suffered lost jobs or, more importantly, lost hours. Those are hours that are never recovered. Remember, the average weekly hours have just recently bounced off of an all-time record low or 33.0 hours. Each 1/10th of an hour equates to approximately 400,000 jobs. January showed hours were back up at 33.3. This number could take a hit due to the weather over the past month.
Technically, the internal action in the market has been very positive. Volume has been light and we are struggling with the lower end of overhead supply. However, breadth has been good and leadership has been impressive. Keep an eye on the leadership in Technology and Financials. They have led higher and would likely lead lower. The Dollar is bouncing around, with the index up over 80. If it goes above 81.43, it will spell trouble. Meanwhile, the focus should shift to jobs, and that’s a report that we fear more than we are looking forward to.
It was a busy week, and a very telling week. What moved the market down were housing data, jobs, and consumer confidence. What brought the market back was the implication that core business was holding firm. First and foremost, housing was hammered. New Home Sales fell 11.2%. Existing Home Sales fell 7.2%. Home prices fell 1.6%. Mortgage applications were off by 8.5%. To top it all off, there was a report from CoreLogic saying that 11.3 million mortgages were now underwater. We know that the data were skewed by the weather, but that isn’t enough to account for the problems across the board of these data. We also know that January sales may have been impacted by that period of time when the government wasn’t quite sure they were going to extend the tax credits. Since new and existing home sales are based on closings, the November delay in the decision and the seasonal slowdown around the holidays led to very few closings in January. If the tax credits pulled forward sales that normally would have taken place in these winter months, the impact is rearing its ugly head now. The pressure is on come spring and summer. If there is no recovery, especially in price, another round of foreclosures is extremely likely. In other words, this round of housing data portend tough times ahead come summer.
Stocks were also hit by a “double whammy” with falling consumer confidence to 46.0 from 56.5. Both current conditions and expectations were significantly lower. The outlook by the consumer had fallen off of a cliff in February. That dire expectation was bore out in the weekly Initial Jobless Claims figures for the week ended February 20th. As we brace for another disappointing Employment Report, all eyes are on the weekly claims figures. The consumer is telling us that things aren’t as good as the corporate data might make them appear, yet expectations were originally for a close call on the jobs number, due out this Friday. February started out with a positive surprise, falling to 442,000 from 483,000. Immediately, expectations were for February to hold right around 450,000, which roughly equates to a “zero” number on monthly jobs. The past two reports have been extremely disappointing, first jumping to 474,000 and then up to 496,000. Already the consensus has gone from near zero job losses to -50,000 jobs for February.
The negative implication of these two reports, consumer confidence and jobless claims, took the wind out of the sails of economic growth. In a way, that played right into the hands of Ben Bernanke. The Federal Reserve moved to increase the discount rate last Friday, a move that many took as a signal that the Fed had initiated its “exit strategy”. This could only mean more rate increases would be on their way. However, the Fed unleashed an onslaught of presidents and governors to reassure the markets that the move was not intended to signal the start of the Fed backing away from its plan to stay accommodative until the economic recovery is in full swing and unemployment was on a steady pace lower. With one week’s data, the market was convinced that the economy was definitely not on sure footing and that last month’s surprise drop to an unemployment rate of 9.7% was tenuous at best.
The bulls focused on the big picture. Aircraft orders may have bolstered the Durable Goods Report, but the Chicago Purchasing Managers’ Index unexpectedly rose to 62.6 from 61.5. Things did slow down a bit in February, as is typically anticipated due to seasonal factors. However, growth is still evident, as the component data are still above the 50 level. Production was at 65.2, New Orders at 62.2, Backlogs were at 58.5 and Employment held in there at 53.0. One number that hasn’t recovered is Inventories. They slipped from a significant jump in January to 48.7 from 38.6 in December, only to fall back to 42.4 in February. This may just be in the Chicago Fed’s survey, and we will look closely to see if the data are confirmed by the national ISM Index, but it suggests that the higher level of production is not meeting demand. Companies are still extremely conservative. They know the economy is doing only slightly better and they are not willing to ramp up for something more sustainable. Therefore, inventories are still below 50, meaning manufacturers are still having to dip into an already thin inventory supply to meet orders. That’s excellent news on several fronts. Profit margins in Q1 will stay high. Despite the fact that first quarter gross sales are seasonally down from the robust consumer selling season in the fourth quarter, the year-over-year numbers should have an easy comparison. Add the impact of poor first quarter 2009 gross margins to awesome 2010 gross margins, and profits should be a pleasant surprise for the bulls.
The bulls are focusing on 1st quarter earnings, and we feel that earnings will provide the catalyst for a better and sustainable short-term bounce starting in late March. However, we have two to three weeks to wait, and it is the waiting that could be painful. The ISM manufacturing and non-manufacturing data are out early this week. We need confirmation that “orders” are still positive. Then, all eyes will have to be on jobs. We’ll get ADP on Wednesday, Initial Jobless Claims on Thursday, and then end it all with February’s Employment Report on Friday. There is an uncertainty hiding in this report. All of this bad weather in the Midwest and East is creating demand for specialty jobs. It will be interesting to see how many jobs were created to remove snow and repair lines. Meanwhile, a far greater number likely suffered lost jobs or, more importantly, lost hours. Those are hours that are never recovered. Remember, the average weekly hours have just recently bounced off of an all-time record low or 33.0 hours. Each 1/10th of an hour equates to approximately 400,000 jobs. January showed hours were back up at 33.3. This number could take a hit due to the weather over the past month.
Technically, the internal action in the market has been very positive. Volume has been light and we are struggling with the lower end of overhead supply. However, breadth has been good and leadership has been impressive. Keep an eye on the leadership in Technology and Financials. They have led higher and would likely lead lower. The Dollar is bouncing around, with the index up over 80. If it goes above 81.43, it will spell trouble. Meanwhile, the focus should shift to jobs, and that’s a report that we fear more than we are looking forward to.