Market retrospective - week of 7 August

Contents: Overview; Tea leaf readings; Economic reports; Perspective, “This recession is OVER!”

“I have never known a concern to make a decided success that did not do good, honest work, and even in these days of fiercest competition, when everything would seem to be a matter of price, there lies still at the root of great business success the very much more important factor of quality. The effect of attention to quality, upon every man in the service, from the president of the concern down to the humblest labourer, cannot be overestimated.” - Andrew Carnegie, Scottish-American Industrialist, Philanthropist (1835-1919)

Overview

In my Perspective last week, I said that the market move was a long way from being done. Even after this week’s rather magnificent performance, I am still very much of that opinion.
As of Friday’s close – and after coming out of the cavern that existed up until 6 March – the Dow Jones is now up 6.8% for the year, the S&P 500 is up 11.9% and the NASDAQ – home of tech and newer growth companies – is up 26.8%. And yet, many (most?) people are still casting a wary eye on all this and waiting for “something bad” to happen. That’s evidenced by the fact that deposits in money market and other savings type accounts is still more than the value of the ENTIRE S&P 500. I’m sorry but that’s crazy – it can’t stay that way. Other than bad government policy gumming up the works, I really don’t know what that bad thing would be. Right now, the markets are saying the health care “reform” and cap and trade are dead deals. Once those are officially put to sleep or hugely modified, things will really light up.

I’m very much in the V shaped recovery camp. That is, we went down hard and fast and we’re going to recover a lot faster than the current conventional wisdom has it. We’re well past the green shoots phase and into the growth phase. I can bore you with lots of facts and data but the best proof is in the market itself.

Markets have always been anticipators – about 6 months ahead is what they suggest. Right now, the vote is a big thumbs up for stocks and a big thumbs down for bonds.

By the way, in the 36+ years I’ve been advising clients, each time we’ve had a recession, the subsequent recovery has always taken the stock market past the previous highs. After all the recovering we’ve done so far this year, we still remain about 30% below those previous highs.

The market train hasn’t left the station but you need to have a seat if you want to ride it
higher…

Tea Leaf Readings

(I use this term to describe quotes from a number of opinion leaders about current market and economic events – what they see happening now and their expectations.)

"Our propriety cyclical index says RECESSION IS OVER (his caps). All the encouraging global readings on manufacturing, including this morning's report from China, are consistent with the onset of recovery and some point to a strong recovery. We call July the first recovery month. The transition from job losses to gains could come as soon as August. Remember historically, once you have seen one month’s job increase, you are already in recovery." - Robert Brusca, Chief economist, FAO Economics

"What you really have is money that's been on the sidelines starting to gently come in and more of a willingness to take on some risk." - Pete McCorry, stock trader, Keefe Bruyette

A middle-income family with a child born last year will spend about $221,000 raising that child through age 17. Housing is the largest single expense, followed by food and child care/education costs. The $221,000 in expenses rises to about $292,000 when adjusted for inflation - USDA Center for Nutrition Policy and Promotion report

Barclays Capital raised its forecast of current quarter growth to a 2.5% real annual rate, with a 3.0% growth pace during the fourth quarter. Economists at JPMorgan Chase revised their third quarter growth forecast from 2.5% to 3.0%. - The Wall Street Journal (This is majorly better compared with a negative 6.4% in Q1 and a negative 1% in the just passed quarter.)

“I think we’re factoring in some pretty major inflation. There’s been a report that there has been $21 trillion of new debt that was recently put out. The Treasury has been printing money 24-7 and that’s got to have its toll. We will see markets go down some and we’ll have volatility but, all in all, we’re in a market that will go up much higher over the next 3 to 5 years.” - David Dreman, chairman and CIO, Dreman Value Management

"The economy is at the turning point from the recession as the labor market is starting to heal. If the job losses have halted, and this is a good first step in that direction, consumer spending could lift faster than the market is expecting. At the very least, today's (unemployment) report is additional evidence that the recession ended in the second quarter and the odds of a 3% real GDP recovery in the second half of 2009 are growing. Today is welcome news as it is likely to chase the doomsayers out of the market." - Chris Rupkey, economist, Bank of Tokyo-Mitsubishi

Treasuries lost 5% in market value this year and are on a pace to post an annual loss for only the third time since 1978. The index rose 14% last year. - Merrill Lynch & Co. and its US Treasury Master Index (The moral here is to NOT use what worked last year as the place to invest this year…)

Economic reports from the past week (with occasional translations…)

Pending home sales rose for the fifth consecutive month in June, easily topping expectations. The last time there were five consecutive monthly gains was July 2003. Pending home sales were higher in all four regions than last month and only the west experienced a decrease from a year ago. - National Association of Realtors

“Consumer spending was up in June and is up at a 2.5% annual rate so far in 2009, a marked contrast to the 6.6% rate of decline in the second half of 2008. However, for the time being, a revival in inflation is offsetting the gain in cash spending. Temporarily, we see the upswing in inflation as good news, in the sense that monetary velocity is returning and the recession is over.

Moreover, yesterday’s data on auto sales show that real consumer spending will be substantially higher in July. With cars and light trucks (pick-ups and SUVs) being scrapped at a 13+ million annual rate, we expect auto sales to grow strongly over the next couple of years, with or without government incentive programs.” – First Trust

New orders received by US factories unexpectedly rose in June, advancing for a third straight month. Factory orders climbed 0.4% in June after increasing by a revised 1.1% in May, previously reported as a 1.2% rise. – US Commerce Department

The US Treasury said Wednesday it would sell $75 billion in debt next week in a record quarterly refunding and announced plans to gradually increase issuance of inflation-indexed notes as its borrowing to fight a recession grows. The bonds are commonly known as TIPS, which is short for Treasury Inflation-Protected Securities. First sold more than a decade ago, TIPS pay out a fixed amount above the change in the consumer price index (CPI). That makes them popular for investors who believe that economic growth or heavy federal spending will put upward pressure on prices. China, the largest holder of U.S. government debt, is among investors that have indicated they want to buy more of the securities. – Wall Street Journal

The number of US workers filing new claims for state jobless benefits fell last week. The four-week average of new claims, which aims to smooth volatility in the data, fell to the lowest level since January 24.

The pace of US job losses slowed more than forecast in July and the unemployment rate dropped to 9.4% from 9.5% for the first time since April, 2008. In addition, workers' hours and pay edged upward. – US Labor Department

Large US industrial manufacturers are far more optimistic about domestic and global economies than they were three months ago. 43% of respondents are optimistic about the U.S. economy over the next 12 months, up by a significant 27% from the first quarter. – PricewaterhouseCoopers consultancy quarterly survey

The government's results showed small cars as the top choice for shoppers looking for Cash for Clunker deals. But an independent analysis by Edmunds.com disputed those results and showed that two full-size trucks and a small crossover SUV were actually among the top-ten buys.
The discrepancy is a result of the methods used. Edmunds.com uses traditional sales measurements, tallying sales by make and model. The government uses a more arcane measurement method.

For example, the Ford Escape crossover SUV, instead of being the seventh-most popular vehicle under the program, as the government ranked it, was actually the best seller, according to Edmunds.com. (I’m “sure” the administration isn’t trying to stack the deck…)

The (real) Top 10 / Ford Escape SUV; Ford Focus; Jeep Patriot; Dodge Caliber; Ford F-150; Honda Civic; Chevy Silverado; Chevy Cobalt; Toyota Corolla; Ford Fusion – CNNMoney.com

Perspective
“This recession is OVER!”

Two items for disclosure, as they color this – and most other – of my perspectives.
First, politically, I’m a card-carrying, dyed-in-the wool Independent. Have been since we lived in Alaska and registered as one. Then, when it comes to the markets – and “conventional wisdom” – I’m a contrarian. According to the good folks at Wikipedia, that means I’m a guy who “seeks opportunities to buy or sell specific investments when the majority of investors appear to be doing the opposite, to the point where that investment has become mispriced.” You can substitute “market” and/or “economy” for investment and still be accurate.

As you can see from a few of the Tea Leaf quotes and some of the Economic reports, I’m not exactly the Lone Ranger here…there are some already noticeably positive things going on.

However, I’m a long way from the majority opinion either. Let me try and explain how I got to this.

There are still many “experts” – at least they were when brimstone was upon us – who can’t stop coming up with reasons why this is a head fake, a trap, etc. Many of them have a vested interest in doing so. One, because their workshops (and fees) are all based on an EOWAWKI (End Of The World As We Know It) premise of some sort. The other is because they are money managers who have stayed too long on the sidelines and are doing what they can to help drive prices lower so they can get in. Bottom line – they have a self-serving position that can’t become positive. They’ve been playing the bad guy too long…

Improving earnings are what make stock prices go up. We’ve got those in spades, right now. Of the 427 companies in the S&P 500 that have already reported their earnings, 73% have done better than expected, 8% were on target and just 19% missed – and many of them by a small amount. The trend is our friend…

The global markets – our vendors and our customers – are doing better. Shanghai, Germany, France, Hong Kong, Australia and the UK are all at yearly highs!

Here’s a biggie. Inventories for business have been driven to low levels not seen since the 80s. This means that with “stuff” in the stores and their nearby warehouses so low, manufacturing output has to pick up a lot and quickly to meet any new demand. A good example is cars. Even before the Cash for Clunkers deal, Ford, Chrysler and Government Motors have all had to increase production to meet the pent-up demand.

And finally, let’s add in interest and inflation rates at historic lows – and likely staying there for a while. Housing has stabilized and must pick up to meet the demand – we’re still making and importing more people and they need places to live.

Banks will reap major benefits from a resurgent real estate business. Techs will continue to lead with new developments and improvements on existing systems. Oil will probably continue to appreciate as the global economies pick up. Research and development will lead us to companies and products we don’t even know about yet.

It all seems pretty crystal clear to me. The only way we’re going is up. Please make sure that you’re included in this move…

All my best,

Mike

509-747-3323

Closing values as of 7 August 2009
Dow Jones 9370 S&P500 1010 NASDAQ 2000 Oil $70.78/bbl Gold $955.80/oz