Anticipation of the rapture must have gripped Wall Street traders last week. That’s the only explanation I can come up with for the first day trading of LinkedIn. If the world had ended Saturday as expected, surely it wouldn’t matter that Thursday you paid 35 times sales for a company that expects to post a loss next year. Unfortunately for the aftermarket buyers of LinkedIn, the world didn’t end Saturday and now they are stuck with the red headed step child of social networking stocks.
The real chosen ones were the clients of Bank of America, Morgan Stanley and J.P. Morgan who were lucky or rich enough (or is that the same thing these days?) to be granted an allocation of LinkedIn stock at the IPO price of $45. With less than 8 million shares sold, first day trading volume of 30 million and a peak price of $122, most of them probably already achieved a level of ecstasy not seen since the latter days of the dot com boom. Who needs the rapture when you’ve got Ben Bernanke to spin your internet straw into gold?
I saw a headline on CNBC’s website last week: 6 Stocks To Own Into Next Week. Really? All the way into next week? If you’ve wondered about the effects of QE II that just about sums it up. Ben Bernanke has turned us into a nation of speculators – again. Bernanke probably didn’t intend to conjure the ghosts of irrational exuberance past but keeping the animal spirits on a short leash is tough when you turn the risk free asset into a sure loser. Who wants to hold T bills for a sure loss after inflation and taxes when you at least have the chance of hitting the jackpot with LinkedIn? Prudent investors might want to keep in mind that previous attempts to exorcise the speculative demons, while successful, have resembled the split pea soup scene from The Exorcist.
I have no idea whether this is the end, the beginning of the end or the end of the beginning of this Fed induced embrace of risk. The economic results of QE II so far have been neutral – at best – for the average American, unequivocally negative for poorer ones and positive only for those for whom higher gas and food prices are a mere annoyance. The market effects have pushed valuations for all risk assets to levels that give new meaning to the phrase “past performance may not be indicative of future results”.
Ironically, I don’t think the US economy is performing all that bad right now – even if it is peaking short term due to the effects of QE II – and I think there is a decent chance that the performance over the next few years could surprise many on the upside. Housing is awful right now but basically has nowhere to go but up and corporate balance sheets are flush. All we really need is a slight improvement in economic policy to push investment – and GDP – into a higher gear. There are plenty of things to worry about around the world from Europe’s debt problems to inflation in the emerging markets but better policy in the US might relieve many of those worries.
While we wait for better policy and the natural healing forces of the market though, I am not very positive about US markets. We are likely to go through a transition period as the Fed adopts a slightly – very slightly – tighter policy stance after QE II. The economic data, as I’ve noted repeatedly over the last few months, is softening and fears of another recession seem likely to seep into market prices over the next few months. If we can get through that period without the Fed panicking into QE III, buying opportunities will likely emerge on the other side. In the meantime, patience, cash and a resistance to the rapture enveloping the market appear to be the only investor assets that remain under-priced.
The economic data last week continued to point to an economy whose growth rate is peaking. The retail data from Goldman and Redbook were both negative but some of that has to do with the timing of Easter. The Goldman report is still showing a healthy 3%+ growth rate year over year. What’s really been happening in the retail sector is a bifurcation. With QE II overwhelmingly a positive phenomenon for the wealthy it shouldn’t be surprising that high end merchants – including Tiffany’s where Newt Gingrich apparently dropped a cool half mil on some bling in recent years – are doing just fine. Equally unsurprising is that lower end stores where the gas and food price constrained shop are struggling.
Of greater concern than retail for the economy is the weakening in various measures of manufacturing activity. The Empire State and Philly Fed surveys both showed significant slowing although both remain over the zero bound that denotes expansion. New orders and shipments are still growing but at a slower rate while unfilled orders and inventories both turned negative. Price pressures on both the input and output sides remain elevated. One major positive in the Empire survey was employment with both jobs and hours worked rising. Industrial production confirmed these reports coming in flat for April. A large part of the drop was due to a reduction in auto assembly which might have been impacted by parts shortages from Japan.
Housing remains moribund with both existing home sales and housing starts coming in less than expected. Permits were also down. Construction activity will have to pick up if the economy is to grow faster than the recent punk pace. That will happen eventually but when is frankly anyone’s guess.
Jobless claims fell back to 409k but remain too high to call the job market healthy. The spike over the last month may just have been an anomaly but it was enough to push the Leading Economic Indicators into negative territory for the first time in nine months. Other factors were also negative but the biggest factor was the rise in jobless claims.
The data continue to point to a slowdown but for now I see no reason to believe it will mutate into anything other than a temporary pause. That depends on a lot of factors though so it is subject to change at any time. If the US and Europe fail to address their debt situations in a positive manner, all bets are off. For now, I remain hopeful that the politicians will eventually do the right thing. Or is that just wishful thinking on my part?
If you’d like to receive this free weekly commentary by email, Click Here.
Weekly Chart Review, Click Here.