America is unimpressed by the rebound in the equity markets. Why? The economic data, no matter how heavily massaged, indicate many consumers and businesses are increasingly strapped and insecure. In light of that, the average American neither trusts the markets nor the public officials overseeing them. I make that statement with no sense of malice. I view that as reality.
Lack of trust and credibility is ultimately nothing more than a measure of increased risk. Let’s factor that in while we navigate the economic landscape and review the month to date performance of the markets.
Are we witnessing signs of a double dip in the economy? As government stimulus wears off and the reality of the underlying economy is reflected, I do not believe we will experience a double dip simply because I do not believe the real economy has ever truly bounced. Let’s navigate.
1. Retail Sales: reported as a 1.4% increase versus a .9% expectation, but analysts failed to share that September’s report was revised from an initial reading of -1.5% to -2.3%. The overall trend lines over the last three months indicate no bounce. Expect serious price discounting for the upcoming holiday season.
2. Producer Price Index: increased .3% versus an expectation of .5%. The real news, however, is in the core rate (that is, excluding volatile components of food and energy) which registered a very surprising -.6% reading versus expectations of a .1% increase. Can you say deflation?
3. Industrial Production: increased by .1% versus an expected increase of .4%. This number indicates 4th quarter growth is slowing relative to the 3rd quarter when government stimulus provided its maximum benefit.
4. Housing Starts: declined by 10.6%!! This report took all the wind out of the sails of those who were calling for a V-shaped recovery. Mortgage delinquencies, defaults, and foreclosures continue to increase. There is no way housing can stabilize and recover until those figures stabilize.
Let’s move along to market performance. The figures I provide are the weekly close and the month-to-date returns on a percentage basis:
$/Yen: 88.86 versus 89.99, -1.3%
Euro/Dollar: 1.4864 versus 1.4717, +1.0%
U.S. Dollar Index: 75.58 versus 76.39, -1.1%
Commentary: the overall U.S. Dollar Index improved marginally on the week, while the dollar gave ground versus the Japanese yen. The improvement in the greenback coincided with a decline in the equity markets once again highlighting the high degree of correlation between these markets.
I continue to reiterate my comment from previous weeks: while I think Washington is not disappointed in a relatively weak dollar, although they should be (”Dollar Devaluation Is a Dangerous Game”), other countries are not overly keen about further dollar weakness. Why? A weak dollar puts those countries in a marginally less competitive position in international trade.
Although Fed officials play up the lack of inflation as a positive and an overriding reason for its easy money policy, they provide no commentary on deflationary pressures at work in large segments of the economy. I firmly believe these deflationary pressures are the Fed’s gravest concerns and they hope the weak dollar creates hints of inflation to offset these deflationary pressures. Can rising asset valuations support underlying economic fundamentals which provide little to no pricing power for many companies?
Oil: $77.00/barrel versus $76.95, +.1%
Gold: $1151.2/oz. versus $1045.7, +10.0% !!!!!!! HOT HOT HOT
DJ-UBS Commodity Index: 134.904 versus 131.862, +2.3%
Commentary: a solid rebound in commodities in general but all eyes remain fixed on the enormous returns in gold. What is going on there? Concerns of a meltdown in sovereign currencies, primarily the greenback.
The Baltic Dry Index continues to move gradually higher with indications of increased shipping activity, primarily in Asia. That said, it remains within the range going back to this past summer.
DJIA: 10,318 versus 9712, +6.2%
Nasdaq: 2146 versus 2045, +4.9%
S&P 500: 1091 versus 1036, +5.3%
MSCI Emerging Mkt Index: 965 versus 921, +4.8%
DJ Global ex U.S.: 197.18 versus 192.02, +2.7%
Commentary: I reiterate my commentary from last week. Why? Review this week’s decidedly negative economic reports. How did these reports impact equity markets? The markets gave little to no ground over the course of the week. Thus, I repeat:
In short, you’ve ‘got to be in it to win it.’ While I could expound on fundamental issues, I may bore you in the process. This market has not been about fundamentals in a long time. I think we are beginning to enter into a blowoff phase in which investors who have missed the market move to get in while those who are outright short the market are forced to cover. I view the current price action more akin to gambling than anything else.
2yr Treasury: .73% versus .90%, -17 basis points or .17% (rates down, prices up)
10yr Treasury: 3.37% versus 3.40%, -3 basis points or .03% (rates down, prices down)
COY (High Yield ETF): 6.37 versus 6.20, +2.7%
FMY (Mortgage ETF): 17.35 versus 17.90, -3.1%
ITE (Government ETF): 58.15 versus 57.96, -0.3%
NXR (Municipal ETF): 14.22 versus 14.79, -3.9%
Commentary: Please review my Friday commentary, “The Message of the 2yr Treasury, Deflation, and Japan,” in which I highlight how I believe deflationary pressures are growing in our economy.
Away from the Treasury market, the municipal sector and Jumbo mortgage sectors have been giving ground as risks of defaults and foreclosure increase. Please see my piece, “What Do CA, AZ, FL, IL, MI, NV, NJ, OR, RI, and WI Have in Common?”
American anxiety and rage are boiling. We now see evidence of this in the demeanor of our elected representatives. The simple fact is our banking institutions remain loaded with loans that are increasingly likely to default. The Fed is bound and determined to flush the system with liquidity to create inflation and support the banks. Our officials believe it is in the public interest not to share the dire straits of the banking industry. Expect more pandering, but will we see any real change on Wall Street or in Washington?