I’ll begin this week’s market/economic update by pulling from my journal entry from last Tuesday:
Today’s ISM MANUFACTURING PMI FOR AUGUST came in very strong as well. The ISMs are a more established and more respected source of information/sentiment than Markit’s surveys. They, as you’d expect, tell similar stories. Consistent with Markit’s survey, the August ISM PMI showed a very strong pickup in new orders, that component rising to 66.7 vs a strong 63.4 in July. The production and employment components showed strong numbers as well. Input prices showed moderate increases. This report is yet another indicator that the U.S. economy is picking up considerably in 2014. Which, as I’ve maintained throughout this year, validates 2013’s stock market results. In other words, the stock market accurately discounted what “it” saw coming in 2014.
Plus—fear over Fed tightening as a result notwithstanding—these sorts of results are an absolute must if the bull market has more hay to make going forward. Last year’s run up essentially stretched valuations to what I view as pretty close to fair value, on balance (some sectors over extended, some still attractive, some right there). Should all this good news translate to better earnings going forward, we could see higher highs in the months to come. That said, let’s pray for a really good correction (a healthy 10% or so pullback) along the way—that would be a very healthy break in my view.
Lastly, and perhaps most importantly, these PMIs show a real pickup in business cap-ex spending (expanding operations [plant & equipment]). Which, as I’ve reported since the beginning of this year, has been this recovery’s missing ingredient. And explains why job growth had, until recently, been relatively anemic.
Notice I wrote that good “results are an absolute must if the bull market has more hay to make”. Well, interestingly, Friday’s jobs number was shockingly bad—relative to expectations that is—and, lo and behold, the stock market rallied and wiped out what was going to be a modest decline on the week. So, apparently, there is no small contingent of traders who entirely disagree with my thought that good economic results are a must if we’re to see higher highs. Based on Friday’s action, you’d think the opposite, or, if not the “opposite”, perhaps somewhere between good and the opposite (bad). Meaning, mediocre news, to them, is good news. Why? Well, because of the Fed of course. Mediocre growth presumably means no need to raise interest rates anytime soon, yet no need to be worry about a recession anytime soon either.
Now, note where I say “a really good correction (a healthy 10% or so pullback) along the way” would be a very good thing. Based on Friday’s action, if the jobs number had come in at, say, 250,000+, we might assume that the market would’ve dipped, rather than rallied. If so—thinking like a long-term investor who believes the market needs to stop feasting and digest a little every now and again—good news, being (short-term) bad news, is, therefore, absolutely good news. Got it?
All that said, there was another event that occurred Friday that may indeed have inspired optimism in the hearts of traders (maybe good news, even for traders, is good news after all??): Following Thursday’s rumor that Putin and Poroshenko came to terms on a cease-fire agreement, Ukraine and the separatists actually signed one. From day one I’ve expressed my belief that Russia has become too much of a global commerce player to threaten its economic future with an all out foray into Ukraine. However, I’ll confess, there have been many moments during this conflict when I began to doubt that thinking. And, of course, whatever yesterday’s agreement entails could be undone faster than it takes the ink to dry—so, certainly, the jury is still way out on this one.
Here—also from last Tuesday’s entry— is one more comment regarding good vs bad news and the impact on markets, the dollar’s impact on commodities prices, and my thoughts on a few sectors:
So, all that good news and the Dow was off a bit (-30) today. What gives? No doubt some will speculate that good news is bad news due to the Fed. That’s been my view, with regard to short-term traders, for some time. However, today’s news sent bonds down noticeably, confirming that view, and the market barely budged. In fact the NASDAQ was up nicely on the day. If it’s risk-off on good news, we should have seen the Dow down a lot more than 30 points. For just today, the small sell-off appears to be about a drop in oil prices, on a strong move up in the dollar, and a sell-off in energy stocks. It makes sense that the dollar would rally here, amid a loosening ECB and a tapering (of QE) Fed that is looking to increase the fed funds rate sometime next year. Throw in easy Japan and China and you have the recipe for a rallying dollar, and, therefore, falling commodities—like oil and gold. All that said, the energy sector looks very attractive to me these days, from a relative valuation standpoint, and it tends to be a good late-cycle place to be. I’m a holder, and a buyer in underweight portfolios, here. Materials also took a hit today, albeit not nearly the hit energy took, but I particularly like materials based on their cyclicality (valuations are okay too), which has been confirmed of late by the pickup I’m seeing in manufacturing input prices. My only hesitation is that I may be a little early on these later-cycle themes, particularly energy. The economy is just now beginning to pick up some steam, which means we may not be that far along after all. Which, historically speaking, makes a better case for sectors like tech and industrials, which we own healthily as well…
The following are highlights from my economic journal for all of last week. On balance, the U.S. economy continues to improve. The big concern going forward has to be the economies of our trading partners, which, ironically (and obviously), is where I’m finding better values (cheaper stocks). Most pundits are advising that the U.S. market, based largely on an improving U.S. economy, is the best place to invest these days—and I understand. However, it’s been my experience that the best places to invest are often the areas that don’t look so hot going in, for that’s generally where you find the best values. But you gotta be patient!
SEPTEMBER 2, 2014
MARKIT’S FINAL MANUFACTURING PMI FOR AUGUST came in at 57 .9, vs 55.8 in July. This is a very good number and reflects new orders’ strength, as well as, once again, employment. Also, input prices rose which supports my position that materials are a good sector to own going forward. Surveys such as this one make a very strong case that the employment numbers will pick up measurably going forward (or at least maintain their recent strong pace)… I’m looking for well north of 200,000 new jobs this Friday…
Today’s ISM MANUFACTURING PMI FOR AUGUST came in very strong as well. The ISMs are a more established and more respected source of information/sentiment than Markit’s surveys. They, as you’d expect, tell similar stories. Consistent with Markit’s survey, the August ISM PMI showed a very strong pickup in new orders, that component rising to 66.7 vs a strong 63.4 in July. The production and employment components showed strong numbers as well. Input prices showed moderate increases. This report is yet another indicator that the U.S. economy is picking up considerably in 2014. Which, as I’ve maintained throughout this year, validates 2013’s stock market results. In other words, the stock market accurately discounted what “it” saw coming in 2014…
So all that good news and the Dow was off a bit (-30) today. What gives? No doubt some will speculate that good news is bad news due to the Fed. That’s been my view for some time. However, today’s news sent bonds down noticeably, confirming that view, and the market barely budged… In fact the NASDAQ was up nicely on the day. If it’s a risk-off on good news, we should have seen the Dow down a lot more than 30 points. For just today, the small selloff appears to be about a drop in oil prices, on a strong move up in the dollar, and a selloff in energy stocks. It makes sense that the dollar would rally here, amid a loosening ECB and a tapering (of QE) Fed that is looking to increase the fed funds rate sometime next year. Throw in easy Japan and China and you have the recipe for a rallying dollar, and, therefore, falling commodities—like oil and gold. All that said, the energy sector looks very attractive to me these days, from a relative valuation standpoint, and it tends to be a good late-cycle place to be. I’m a holder, and a buyer in underweight portfolios, here. Materials also took a hit today, albeit not nearly the hit energy took, but I particularly like materials based on their cyclicality (valuations are okay too), which has been confirmed of late by the pickup I’m seeing in manufacturing input prices. My only hesitation is that I may be a little early on these later-cycle themes, particularly energy. The economy is just now beginning to pick up some steam, which means we may not be that far along after all. Which, historically speaking, makes a better case for sectors like tech and industrials.
SEPTEMBER 3, 2014
THE ICSC AND JOHNSON REDBOOK RETAIL REPORTS released this morning both show very good year over year growth in retail activity. 4.8% and 4.9% respectively. Comfortably within the range that denotes economic expansion.
FACTORY ORDERS were skewed largely by Boeing’s huge July, coming in at +10.5%. Ex aircraft orders July was actually a little soft, but the details support the notion that the U.S. economy continues to improve measurably.
MORTGAGE APPS up .2% over last week.
THE FED BEIGE BOOK (a report on the 12 fed districts) report suggests the economy is expanding at a “moderate” in 8 districts, and “modest” in four, pace. Hmm…. I’ll have to look up the difference between moderate and modest… I’d say these results, while positive, are a little inconsistent—in that they’re not as robust—with what I’m seeing in the PMI’s.
This should be welcome news to fed-obsessed long (own stocks) traders. Not great news for those looking for jobs and earnings to really accelerate in the coming months.
My take is that, overall, the economy looks better than it has in years. Which, again, only validates last year’s great stock market returns. The problem with “really accelerating” is if it’s “too” fast, inflation could sneak up and catch the Fed way behind the curve. “Moderate” or “modest” growth presents kind of a goldilocks—not too hot, not too cold—scenario for the markets.
SEPTEMBER 4, 2014
CHAIN STORE SALES came in okay for August, on a year over year basis. Which is consistent with what we’re seeing in other retail reports. Back-to-school sales were said to be solid, led by apparel. This bodes relatively well for Q3 GDP.
THE ADP JOBS REPORT came in at 204,000, which was below a 225,000 consensus estimate. The increase in manufacturing jobs is consistent with what I’m seeing in the surveys.
I’m looking for a well north of 200,000 number for Friday’s government report.
The U.S. TRADE DEFICIT declined in July to $40.5 bill vs $40.8 bill in June. This has to be the most misunderstood and politically abuse economic statistic. A trade deficit, in and of itself, is an utterly meaningless statistic. When the U.S. exports more goods to the rest of the world than it imports, the U.S. is enjoying goods and services from abroad without having to expend the same amount of resources as have the economies of its suppliers. The net results is greater net foreign investment as the surplus in U.S. dollars collected by our foreign suppliers are invested in U.S. real and financial assets. That said, there is one component worth paying attention, which is the imports number. Which gained .7% in July, after declining 1.1% in June. Which denotes a more active U.S. consumer…
WEEKLY JOBLESS CLAIMS came in at 302,000. The consensus estimate was 298,000… The continuing claims number improved, dropping to new post-recession low of 2.46 million (down 64,000). The four-week average is also down to its recovery low.
PRODUCTIVITY GROWTH for Q2 came in a little lower, at 2.3%, than expected (2.5%). Year-over-year productivity was up 1.1%. Unit labor costs were up 1.7% year-over-year. The surprisingly week Q1 economy (weather gets the blame) no doubt led to bouncing Q2 numbers. Therefore, we’ll need to see Q3’s results to assess a true underlying trend…
MARKIT’S SERVICES SECTOR PMI came in relatively strong. The following, taken directly from the press release sums it up nicely:
Survey respondents widely attributed the latest strong rise in business activity to improving domestic economic conditions and a corresponding upturn in clients’ willingness to spend. August data indicated a robust increase in new business volumes and the rate of growth accelerated from the three-month low seen during July. Service providers’ optimism towards the year-ahead business outlook also improved in August. Anecdotal evidence suggested that business confidence was boosted by rising underlying demand and hopes that the domestic economic recovery has become further entrenched.
The BLOOMBERG CONSUMER COMFORT INDEX CAME IN VERY STRONG, jumping to its second-highest market in a year. The personal finances component showed its best reading since April 2008…
The ISM NON-MANUFACTURING (SERVICES) PMI FOR AUGUST was nothing short of robust (well, mostly), given that it posted its highest reading ever (inception January 2008). The Business Activity Index (been around longer) posted its highest reading since December 2004. A big takeaway, for me, from this report comes from this common statement from folks in wholesale trade: “New orders, project business and backlog remain robust. Internal investment in capital remains positive.” “Internal investment” would be the capital investment that I’d been reporting as being the recovery’s missing ingredient. Business investing to expand their operations is where jobs come from… Another would be these comments from respondents, which supports the capital-investment-leads-to-jobs notion: “New hires in new office” and “Open positions are finally being filled.”
SEPTEMBER 5, 2018
Today’s BLS JOBS NUMBER was nothing short of shocking! The consensus among economists was an increase of 230,000, I was guessing at least that, and the number came in at 142,000. August has been the most volatile month in terms of later revisions, per the below, and I have to believe that while it is indeed a net increase in jobs—in the face of all that I’m seeing in the various employer surveys, etc., that this number will be corrected in coming revisions, or seen as a hiccup in an otherwise stronger trend. From CNBC:
Job growth cooled in August, with nonfarm payrolls adding just 142,000 even as the unemployment rate fell to 6.1 percent, according to the Labor Department. The fall in the headline rate came as labor-force participation fell, declining to 62.8 percent, or 64,000 workers, tying the 2014 bottom and remaining at the lowest level since 1978.
Economists expected payroll growth of 225,000 in August following July’s upwardly revised 212,000. The unemployment rate was forecast to drop to 6.1 percent from 6.2 percent.
August’s number are a notoriously volatile set, with 2013’s initially reported 169,000 ultimately revised up to 238,000. In 2011, the Bureau of Labor Statistics initially said net job creation was zero, only to push that figure up to 104,000 by the time all was said and done.
Friday’s jobs number notwithstanding, I am solidly in the camp that says the U.S. economy is, at last—despite all the distorting actions of politicians and central bankers—reaching escape velocity (although things can change in a hurry). The economies of several of our trading partners, however, remain suspect. I’ll be adding country-specific data for other economies over the next few days.