Well, I think its official now. Everyone is bullish. On CNBC last week, Nouriel Roubini, aka Dr. Doom, the famous bear who allegedly predicted the financial crisis (stopped clocks and all that) pronounced that the bull may carry on for a while more.
I think tactically for the next few months equities could rise because corporate profits are still strong…. Usually there is not a one-to-one relationship between the stock market and the economy, but I would say this year, some things are going well. The economy is improving, emerging markets are doing well, the corporates are doing well so far.
Given that the last time I can remember Roubini saying something positive was back in January 2008 – not a particularly auspicious time to turn bullish – this is about as big a contrarian signal as we’re likely to get. Of course he isn’t alone; all the sentiment surveys show a surfeit of bulls and a paucity of bears. In addition, retail investors are back to chasing performance, pouring money into US stock funds after spending all of last year chasing the emerging market funds that are now in the midst of a correction. US stock funds and ETFs have seen inflows of over $26 billion just since the first of the year. That follows 8 consecutive months of outflows.
Stocks were up again last week (S&P up 1.04%) despite, well, everything. The Middle East is in the throes of revolution, oil is rising, gold is rising, the dollar is falling, European banks are borrowing in record amounts from the ECB, emerging market central banks are tightening, Obama’s budget laid an egg, the US government may be headed for a shutdown (alright, that one is probably a positive) and there’s a foreigner on the cover of the Sports Illustrated Swimsuit issue. Talk about a wall of worry!
One area that hasn’t been a source of much concern lately are the economic statistics. Roubini at least has that right; the economy continues to improve slowly. Retail sales were reported up 0.3% for January confirming the minor slowdown we’ve been tracking with the weekly Goldman and Redbook reports. Unfortunately a portion of that was due to higher gasoline prices but even ex gas and autos, sales were up 0.2%. Year over year retail sales are now up 7.8% – not bad for the supposedly cash constrained US consumer. Inventories rose but remain lean with an inventory to sales ratio of 1.25.
Import and export prices are both surging; import prices are up 5.3% and export prices are up 6.8% year over year. Monthly changes were 1.5% and 1.2% respectively. Not exactly deflation but I’m not Ben Bernanke so what the hell do I know. Producer prices were also up but not as strong, rising 0.8% in January. Prices are up 3.7% year over year. Again, still looking for that deflation the Fed seems so worried about. Consumer prices were tamer rising 0.4% and 1.7% year over year. Not exactly hyper inflation but not deflation either. With input costs rising and no ability to raise prices, profit margins would seem to be in jeopardy. That or companies will be going through another round of layoffs trying to get more efficient to maintain them. Either way, it doesn’t look like good news.
Housing starts rose 14.6% in January but don’t get too excited. All the gain was in multifamily while single family construction fell by 1%. Even worse, permits fell back. Housing starts are now at a nearly 600k pace so while they are still on the mat, they haven’t been counted out. Housing still has a long way to go to get back to normal and somebody should probably tell the Fed that the higher rates from QE II aren’t helping a bit; mortgage applications fell 9.5%.
The most positive reports of the week – by far – were the manufacturing surveys from the NY and Philly Feds. The Empire State version rose 3.5 points to 15.43. The details were a bit more mixed with new orders rising at a slower pace and the hiring component falling to 3.61. The Philly Fed survey was much more positive jumping to a record 35.9. About the only negative I could find was, again, rising input costs with everything else from new orders to backlog to unfilled orders to employment and a rising workweek positive. Industrial production was down in January but that was due to a drop in utility output; manufacturing was higher. Obviously, manufacturing is still the star in this expansion.
One area that still isn’t positive is the jobs market. Jobless claims rose back to 410k last week. Jobless recovery doesn’t even begin to describe this job market. Nearly every statistic on employment can be viewed in a negative light even if the market hasn’t yet done so this year. I’d love to tell you that I see this getting a lot better soon but I have my doubts.
As Roubini said on CNBC, the economy and the stock market don’t always move together so relatively good data today is not reason to buy stocks. It is the outlook, market expectations that matter. On that front, I am becoming increasingly pessimistic about a budget deal and tax reform this year. With gold and every other commodity on the planet rising in price while the dollar looks weaker, I think it is only a matter of time before the stock market wakes up to the reality that we haven’t yet addressed the underlying problems of our economy. Read this week’s other commentary for more detail.
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