Tuesday, July 16, 2013

A Not So Handsome Devil

We winked at ourselves in the mirror after slapping on the Old Spice the other morning and declared “You've got what it takes, young man.” All this despite not being young and missing a goodly number of teeth. The American commonweal appears afflicted with a similar self-delusion.

Previously, we had been relatively sanguine, but our new back-of-the-envelope calculation for second-quarter gross domestic product growth comes to a meager 0.5% seasonally adjusted annual rate, compared with a 1.8% annual rate in the first quarter. Granted, our estimate could be too pessimistic if exports reverse recent declines and imports continue to fall.

But make no mistake, growth appears weak and could enter contraction territory if the Federal Reserve dares to start squeezing the money spigot. Some are expecting a pullback in the Fed's quantitative easing program come September. We doubt it, even if inflation inches higher. Growth is simply too anemic to risk taking the punch bowl away before the party has started.

Increasing our concern was news yesterday from the Commerce Department that retail sales in June rose just 0.4% and that the gain was almost entirely due to auto sales (a good thing) and gasoline sales (a bad thing because it reflected higher prices). Economists had expected a 0.9% gain in June retail sales.

And today the Labor Department said the consumer price index rose 0.5% in June, again largely the result of higher gasoline prices. That number was in line with expectations and shouldn't worry the dovish majority of Fed policy makers.

We think the sequester and higher fuel prices are big hurts that behooves the Fed to continue using its jaws of life policy tools to keep economic activity above water. Whether that's enough to keep stock market bulls in charge is beyond us, but trimming positions in winners wouldn't be a sin.

Saturday, July 6, 2013

In the Short Grass with Jobs and Money Data

With apologies to Wordsworth, a schoolboy favorite, the world has been too much with us.

It irritatingly remains on our shoulders, but the yoke is easier now. Just as the American economic engine misfires on occasion, we have yet to hit every fairway; nevertheless, driver, wedge and putter are often all we require on short par 4s.

The upshot for investors is that we remain committed to the trade we recommended March 4 (see here). We advised selling homebuilders, which, despite a steady drumbeat of positive housing data, have underperformed the market. The three names we took profits on – Pulte (PHM), D.R. Horton (DHI) and Lennar (LEN) – are essentially flat since that call. We reasoned they were priced for perfection. Turns out they were. Conversely, we recommended buying retailers JC Penney (JCP), flat; Macy's (M), up 19%; Gap Stores (GPS), up 27%; Rue 21 (RUE), up 56%, and Barnes & Noble, flat. We believed they were too cheap given solid consumer buying power. Over the same four-month period, the S&P 500 is up about 6%.

According to the Bureau of Labor Statistics, some 195,000 nonfarm jobs were added in June and previous months were revised upward to that approximate rate of payroll expansion. We acknowledge that this spring has been springier than we expected. We were convinced that the sequester would hurt more than it has. It still might, the lag between cause and effect being unpredictable, but evidence points to a respectable trot, if not carefree canter, into summer.

More encouraging to us than the jobs number itself was the uptick in wages, hinting that competition for workers has sharpened. Average hourly earnings rose 10 cents to $24.01 in June. Over the past year, hourly earnings have risen by 51 cents, or 2.2%, beating inflation. Speaking of which, that ancient result of profligate money supply expansion has yet to accelerate, putting off the date the Federal Reserve will begin moderating its security purchases.

The New York Fed's latest tally shows the M2 money supply measure has grown 6.9% in the past 52 weeks, a rate that has slowed to 4.9% in the last 13 weeks and 4.2% in the last four weeks. In fact, this broad measure of money fell in the latest week for which data are available. And M2 velocity, the ratio of nominal GDP to the money supply, or the rate at which one dollar turns over, continues to fall, according to the St. Louis Fed.

Given this nonthreatening monetary backdrop,, the large number of involuntary part-time workers and the sequester challenge, the chances of a tapering in the Fed's quantitative easing program any time soon appear slim.

In a way, the American commonweal resembles our latest golf excursion. Poised to break 90 for the first time in our career, all we needed was a 7 on the final par 4. Feeling the pressure, our tee shot careened into the wrong fairway. An attempt at rescue resulted in a thin dribble. The third shot was a beautiful cut through a grove of towering pines, the ball coming to rest some five yards from the front of the green but nestling in a rutted valley. Our chip was thin and shot past the green to the fringe in the rear. Shaking, we putted but one foot onto the green. Our next putt was too bold, ending eight feet past the hole. Two putts later and we carded the snowman. Obviously there is more work to be done, but we like our chances.
Note to our readers: This is the first entry in our new blog. All the good old stuff can be found at karousingwithkev.blogspot.com.