Each weekend I review events and data from the past week and prepare for trading by thinking about the week ahead. While I always do the review, I do not always have the time to write about it. Like many other writers, I find that the process imposes a discipline and logic. It can be a helpful antidote for the temptation to lazily follow preconceived notions.
Last week I expected a focus on jobs with special emphasis in front of the Labor Day weekend. This was the right idea, and apparently a surprise to some. Art Cashin, a faithful reporter of the buzz on the NYSE floor, stated the following:
“There was great speculation overnight that the reason he scheduled a meeting was that maybe the employment numbers were going to be very bad, and that’s what caused an overreaction.”
Cashin said traders are hoping that the Obama administration will come out with a suspension of the payroll tax and give companies that are hiring further incentive to do so.
“If they don’t announce that…if there is no Christmas package coming at 10am, then people may rethink the rally a little bit.”
Traders look so deeply into the tea leaves that they often read what is not really there. There is always speculation about the President getting an early report on employment and tipping it off, despite repeated explanations about the timing of the release. Scheduling a brief appearance to comment on the employment news the day before Labor Day weekend is completely routine, requiring no further explanation. Finally, such an appearance would not be the way to introduce a new policy initiative. Some of the trading firms might benefit from hiring a few Poli Sci grads!
The lukewarm employment news sets the stage for next week, which will highlight politics rather than economic data. I have some specific predictions, but first let us review last week's key events.
Background on "Weighing the Week Ahead"There are many good services that do a complete list of every event for the upcoming week, so that is not my mission. Instead, I try to single out what will be most important in the coming week. If I am correct, my theme for the week is what we will be watching on TV and reading in the mainstream media. It is a focus on what I think is important for my trading and client portfolios.
Last Week's Data
While many were on vacation the data provided trading opportunities nearly every day. As I noted last week, the backdrop was so negative, that even modest data might be celebrated.
The Good
- The ISM manufacturing report surprised most with an uptick to 56.3. This is consistent with GDP growth of about 4.8%. It continues to be the most bullish economic indicator.
- State tax sales tax receipts, a good concurrent measure of consumption, continue to improve. Check out The Bonddad Blog for a comprehensive and readable analysis.
- Unexpected strength in China's PMI and Australia's GDP helped stocks to a big day on Wednesday.
- Sentiment remained negative despite these indicators. Todd Sullivan highlighted two good examples.
The Bad
- The ECRI WLI dipped after rebounding a tad in recent weeks. While still not predicting a recession, Lakshman Achuthan has upped the risk to about 50-50. (I think he uses a two-year horizon). This is higher than the risk seen by most economists, but still not as bad as some consumers of his data who think recession is a near certainty.
- The ISM Services Index was weaker than expected at 51.5. While still positive (signaling expansion) it is the lowest reading in eight months.
- Initial jobless claims were 472,000. While this is better than the 5-handle from two weeks ago it is nowhere close to levels needed for a solid recovery.
The Mixed
The employment gains exceeded the depressed expectations, including my own. (I did my regular monthly preview on Wednesday). In reality, it was a mixed picture, hardly worthy of cheering.
The payroll employment survey showed a small gain if you ignore the layoff of temporary census workers. The past two months were revised to show smaller pre-census losses, so the net private sector gain has been 133,000 over three months. While this is an improvement over last year, it is not even close to the net job creation rate that is needed. Total hours worked were revised higher in July and unchanged for August, increasing at an annual rate of nearly 3 percent. This is also a small positive, but not as good as new jobs.
The household survey, as noted by Gene Epstein, showed a gain of 848,000 jobs in the category that most closely represents private jobs. The household survey has a smaller sample and a larger confidence interval (=/- 400,000) so it is not wise to focus much on one month. Epstein points out that we have had a monthly growth rate of 328,000 for the January-April period and 285,000 since then. Despite these additional jobs, the unemployment rate moved slightly higher as people joined and re-entered the labor force.
Epstein conjectures that the household survey is doing a better job of picking up the self-employed and new small businesses. This would be nice, if true, but the most recent benchmark revisions for the payroll report moved the job estimates much lower.
The employment data may be confusing, but it is difficult to challenge the general perception: Employment remains the major economic challenge.
The Week Ahead
The four-day trading week will be even shorter with many market participants observing Rosh Hashanah on Thursday and Friday. There is little in the way of economic data. The Fed Beige Book comes out on Tuesday. Bob Pisani reported on Friday that traders were focused on whether the Fed would retain the same language on manufacturing activity. Wow!
I do not question Pisani's reporting (since he reports what he hears), but his report made no sense. The Beige Book is prepared before each FOMC meeting by a different regional Fed bank on a rotating basis. There is unique authorship and no reason to expect editorial consistency. It is in no way similar to the official statement accompanying the FOMC decision, which we all carefully parse after each meeting. Here is the content of the Beige Book:
Commonly known as the Beige Book, this report is published eight times per year. Each Federal Reserve Bank gathers anecdotal information on current economic conditions in its District through reports from Bank and Branch directors and interviews with key business contacts, economists, market experts, and other sources. The Beige Book summarizes this information by District and sector. An overall summary of the twelve district reports is prepared by a designated Federal Reserve Bank on a rotating basis.
It is fine to look at the Beige Book, which will be part of the FOMC decision process at the next meeting. It is a mistake to put too much emphasis on specific language.
Far more important is the political front, even (or especially) with Congress still on recess.
Your Move, Mr. President....
As we approach the mid-term elections, control of both Houses of Congress is at stake. This is the home stretch. Each side has staked out a position. (Note to new readers: Put your political opinions aside for a few minutes and consider my approach. You can and should do whatever you want in the voting booth, but you should join me as a political agnostic when it comes to investing. I call them as I see them on this front, and I have been doing it for over 40 years. Do not let your political viewpoint interfere with your investment decisions).
Republicans expect to make big gains, but they are also looking ahead to 2012. They are delighted with the Tea Party success, but struggling to cope with it. GOP leaders have mused that even Ronald Reagan, who appealed to a wide swath of "Reagan Democrats" might not get the GOP nomination in the current environment!
GOP stalwarts attack the Obama stimulus program as totally ineffective. They emphasize the growing deficits and dismiss Keynesian economics. At the same time, they seek to preserve the Bush-era tax cuts. While most observers see this as inconsistent, GOP leaders offer various arguments about why the cuts should be preserved, even for the wealthiest.
Democrats are stuck with a bad situation. Despite a stimulus program that most regarded as massive when it passed, unemployment remains stubbornly close to the 10% level. Since the package was advertised as something that would bring unemployment below 8%, it is viewed as a failure by nearly everyone. I was surprised and impressed by CNBC's Erin Burnett's strong performance with some roundtable heavyweights on Meet the Press. She aggressively and insistently noted that the conclusion from all of her reporting (economists and CEO's alike) was that the stimulus had averted a much worse situation. This conclusion is accurate, but it is also quite unhelpful to Democrats. Barney Frank has noted that no one ever won an election by campaigning against a counterfactual.
Dem stalwarts keep reaching back to Bush-era comparisons, but voters have long tired of that approach. The current economic results, the focus for most voters, are not encouraging. Democrats are unlikely to succeed in shifting attention to a new focus on the future.
Meanwhile, Republicans may win seats while losing a clear message for the future.
My Political Forecast
It is early, but here are a few fearless forecasts on the political front.
- Democrats will not propose anything called stimulus. The "S Word" is gone! The retiring Christine Romer emphasized this in her last official employment day CNBC interview. Stimulus has a bad name. She repeatedly avoided the label.
- Democrats will propose jobs programs. Christine Romer, in her final speech, will address these issues. The Wall Street Journal, missing the memo about stimulus (!??) headlined the story, Romer Calls for More Stimulus. The title aside, it is a good preview.
- There will be other new Obama initiatives, with a clear partisan challenge. This was obvious last week, and it is now confirmed in the Washington Post and also confirmed in the New York Times.
Briefly put, there will be some new ideas that can be pitched in November as well as some trial balloons.
As I have repeatedly noted, I expect some of the Bush-era cuts to be extended. If Republicans currently in Congress play their cards right, they could win an extension for the very rich as part of the deal. I cannot predict GOP strategy, but all of the various scenarios involve some extension of tax cuts.
This development, whenever it happens, will be bullish for US stocks, since there are so many skeptics.
Our Own Forecast
Our own indicators shifted to neutral two weeks ago. We are cautious, with most sectors in the penalty box. This is a recognition that we cannot have great confidence in most short-term prediction. When a sector is in the penalty box, we know that forecasting future moves will be challenging. As a result our vote was neutral in the weekly Ticker Sense Blogger Sentiment Poll. Here is what we see:
- 24% of our 55 ETF's have a positive rating.
- 95% of our 55 sectors are in our "penalty box," similar to recent weeks. This means that uncertainty remains high for short-term trading.
- Our universe has a median strength of -14.
For trading accounts, we have had 20-50% exposure during the past week.
[For more on the penalty box see this article. For more on the system ratings, you can write to etf at newarc dot com for our free report package or to be added to the (free) weekly email list. You can also write personally to me with questions or comments, and I'll do my best to answer.]
Investment Implications
I like to contrast the short-term trading perspective with the opportunity for investors, many of whom are missing the boat. Legg Mason's Bill Miller (no relation, despite sharing my dad's name) was a legend when he beat the S&P 500 year after year. Performance records vary with the times, but I have always admired Miller's methods.
He sees large-cap stocks as the bargain of a lifetime. In March of 2009 Doug Kass said that stock prices were at a generational bottom. By many valuation metrics, including those that I favor, stocks are as cheap as they were in March, 2009. It is something to think about. Investors who cannot find any good stock ideas in this market, should seek out some help.
