Another week of depressing economic reports was capped by the report of another 500,000+ jobs loss in December. The stock market fell roughly 5% in its worst weekly performance since November. All in all, not a good week. There were some bright spots in the economic data but overall, there wasn’t much for a bull to hang his hat on.
The jobs report Friday was about as ugly a report as it could be. Employment and hours worked fell. Discouraged and part time workers increased. Including discouraged workers (those who have given up on finding a job) and part timers who want to work full time the real unemployment figure is about 13.5%. The only bright spot was the rise in average hourly earnings, which when combined with negative inflation readings, means that real earnings are rising fairly smartly. Expect a good portion of the rise in earnings to be saved as consumers continue their retrenchment. The Fed reported that consumer credit contracted by $7.9 billion in November, a drop of 3.7%. While most take that as a negative, I tend to think of it as a positive. This is exactly what needs to happen for our economy to get back on a long term growth path. Paying down debt may be a negative for the economy in the short term, but the sooner people get their balance sheets in order, the sooner they will feel confident enough to start spending again.
Also in the positive category were new jobless claims that fell 24,000 but remain high at 467,000 for the week. There was also some positive news buried in an overall negative Factory Orders report as capital goods orders rose a surprising 3.9%. It is good to remember as well that these reports are not adjusted for inflation, so as prices fall, the numbers will look negative even if the volume of goods stabilizes. The ISM Services index also improved, rising to 40.6. The new orders and employment indexes within the report were higher.
Markets this week were dominated by a continuing reversal in the US dollar.
The strength in the dollar pushed down oil prices and oil stocks which had been leading the recent rally:
For now, I would classify the recent rise in the dollar as a correction in a developing bear market. The converse is true of the oil and other commodity sectors. The other notable losers on the week were bank shares as Meredith Whitney, the Oppenheimer analyst who was early to identify their problems last year, put out another negative report:
Apparently the big banks are still having problems, especially Citigroup which announced the resignation of Robert Rubin (whose reputation has been permanently tarnished by his experience there) and the potential sale of its brokerage division (the old Smith Barney) to a joint venture that would combine the brokerage units of Citi and Morgan Stanley. It looks increasingly like Sandy Weill’s creation of Citigroup will be returned to its previous status as Citibank.
Overall, the uptrend in the stock market since late November is still intact – barely. The week’s losses dropped the S&P 500 to just above its 50 day moving average:
Commodities are trying to put in a bottom, but with the dollar rallying late in the week, the Goldman Sachs Commodity Index pulled back:
If the dollar rally last week is what I think it is – a correction in a developing bear market – then the GSCI will probably hold its lows. Interestingly, several sectors of the commodity complex actually performed pretty well last week. Copper had its best week in a long time:
Aluminum appears to be stabilizing:
The agriculture complex is also trending up:
To me, these are positive signs that the deflation of the last couple of months is coming to an end. A bottom in the base metals (copper, aluminum) may mean that the economy is hitting its trough now. We’ve seen a lot of production shuttered over the last several months and if demand picks up, prices could move higher rather quickly. Investors can benefit from this by purchasing commodity ETFs or investing in the stocks of companies that will benefit from higher demand. Alcoa announced more layoffs last week and while the stock reacted negatively, the uptrend from the lows appears intact:
On the agriculture side, companies such as Monsanto and Deere would seem to be obvious beneficiaries. Monsanto reported excellent earnings this week and the stock moved higher before giving some back on Thursday and Friday:
Deere has already had a tremendous rally and I would wait for a decent pullback to start buying:
The last week’s action leaves the stock market rally off its November lows intact – barely. If the S&P 500 breaks under its 50 day MA, that would seem to open the possibility of a return to the lows. Commodities are trying to put in a low but that will likely depend on the course of the dollar. And that is what you should be watching in the week ahead – the dollar.
Disclosure: Alhambra Investment Management and its clients have positions in: GSG,MON and the S&P 500 (via ETFs IVV and SPY)