A well-balanced retail sales report and a higher-than-expected University of Michigan consumer confidence reading for December both helped to boost stocks. (This UofM confidence reading is a preliminary number, we’ll get the final reading later in the month. I’ll note that the trend over the past two months has been a downward revision. Plus the reading remains at past recessionary levels. So, the increase in stocks was likely all due to the retail sales reading.)
Utilities was the best-performing sector. Consumer discretionary and industrials were not that far behind. Tech and health-care were the only two of the major 10 groups that closed lower on the session.
Utility shares continue to enjoy a momentum trade that began in early November; what kicked it off were events that virtually happened in succession. First was the G-20 meeting at the end of October in which the members pledged to keep government stimulus plans in play, which was followed by the same pledge from APEC (Asian governments), followed by the Fed’s November 4 meeting and the FOMC’s statement that ZIRP will remain in place for an extended period. All of these comments showed that rock-bottom interest rate will remain in place – and there was some uncertainty in this regard by in mid-October – and that drove money into higher-dividend paying utility shares. The index that tracks utility shares is up 12% since November 4, double the move for the broad market.
Advancers beat decliners by a two-to-one margin. Volume was punk again as just 950 million shares traded on the NYSE Composite.
Market Activity for December 12, 2009
Retail SalesThe Commerce Department reported November retail sales rose 1.3% (double the expectation) after October’s 1.1% increase. That’s a strong two-month rise; it is unusual to see back-to-back 1%-plus readings. That said, the October reading was all auto-related (strip out autos and the figure was virtually unchanged, up just 0.01% -- as we commented on when it was released last month) and hardly an impressive report. However, this report for November was impressive, showing widespread gains – every major component with the exception of furniture and clothing was up nicely.
The ex-auto reading for November jumped 1.2%; excluding autos & gas, spending rose 0.6%; ex-autos, gas, and building materials (the figure that flows straight to the personal consumption reading of GDP) rose 0.5% - and is up 5.1% on a three-month annualized basis, which means we’re going to see Q4 GDP estimates boosted.
The caveat: this retail sales report was based upon a new sample – the sample is changed every 2 ½ years in an attempt to more closely reflect buying preferences. So, GDP estimates are being boosted and rightly so. We’ll see though if this new sample resulted in an overstatement of activity when the revision is released next month and more closely reflects what actually occurred rather than substantial estimations which are present in this first look.
Unless the spending figures are revised much lower, or the December reading is a complete flop, we can now expect a 3.0% GDP reading for Q4 even if the inventory segment doesn’t help out much. If inventories provide a good boost, we’ll probably see 4.0%.
This is what we’ve been talking about, even as my pessimism on several other fronts has surrounded these moments of optimism. A couple of months back we talked about the high possibility of above-average GDP readings for a couple of quarters, but the numbers won’t be as strong as they are historically coming out of a severe contraction, nor are they likely to be sustainable. (Recall, as we’ve explained, the economy has averaged growth of 7.8% in the year following the worst recessions in the post-WWII era – actually, to be specific this is true for the year following one quarter removed from the end of those recessions. So, if we are to get a couple of quarters of 4% growth it is still weak by comparison. We’ll take 4% though considering the headwinds the economy continues to face.)
By segment, autos were up 1.6%; electronics up 2.8% (boosted by post-Thanksgiving weekend door-buster sales, we’ll watch for follow through in December); building materials up 1.5% (I don’t believe this segment has a prayer at sustainability); food & beverage up 1.0%; health & personal care up 0.6%; gasoline stations up 6% (strange reading as this is not what the weekly energy reports have shown, some of it may be due to price increase, but most of that occurred in October); general merchandise up 0.8%. Again, furniture and clothing (each down 0.7%) were the only components to register a decline.
Import Prices
The Labor Department report November import prices jumped a higher-than-expected 1.7% -- up 3.7% year-over-year and the first positive y/o/y reading in 13 months. We have been expecting the inflation gauges to exhibit a pronounced change beginning in November, as the y/o/y comparisons become very easy -- heretofore, the year’s price-level readings have been matched against the highs in the inflation indices that resulted from that commodity-price spike back in the summer of 2008 -- $140/barrel oil etc. That has now changed.
I have begun to reassess my inflation expectations over the past couple of months, however. We should still expect relatively high y/o/y readings for a few months based on year-ago low levels, but banks are in bad shape (much more troubled than the market currently seems to acknowledge.) and if credit continues to contract a sustainable pick up by way of harmful levels of inflation could still be a another year to 18 months off. We’ll continue to keep a close eye on this story. The main point I want to get through here is while the inflation trade (commodities and commodity-related stocks) has proven a successful one for those who got in at the right entry point – had to be ahead of the momentum trade – I would caution against myopically charging at this trade right now.
Business Inventories
Business inventories rose 0.2% in October (a decline of 0.2% was expected, so this jibes with the larger-than-expected increase by way of that wholesale inventory figure on Wednesday) – this is the first increase in 14 months. Although, the increase was largely boosted by autos and thus still shows some clunker-cash boost. I bring up the clunker program because stockpile increases driven by this program don’t exactly offer the suggestion that firms are re-stocking as a result of a boost in confidence but rather via the large car sales that resulted in August – it’s fantasy to believe car sales will return to 14 million units at an annual pace, as occurred in August; something closer to 10 million is more likely and that means auto production can’t be leaned upon for too much longer. Excluding autos, business inventories fell 0.2%, down for the 13th month.
On the more positive side, business sales have increased for the fourth-straight month – up 1.1% in October. As a result, it shouldn’t be too long here before we see at least a mild trend higher in inventory levels.
The business inventory-to-sales ratio slipped to 1.3 months worth (the time it would take to sell off all stockpiles at the current sales pace) from 1.31 in September. This is a vast improvement from just nine months back when the reading hit 1.46 months worth. The inventory slashing of the two quarters that ended June 2009 were without precedent in the postwar era.
On a three-month annualized basis, business inventories are down $101.2 billion. That’s an improvement from -$174.1 billion in September and -$224.5 billion in August. All it takes is for stockpiles to fall at a slower rate in order to add to GDP. Again, based on the violent slashing of stockpiles earlier this year we should see some actual rebuilding. If we fail to see even a mild level of absolute re-stocking over the next couple of months, it will provide a clear signal that businesses remain very cautious and confidence has yet to improve.
Futures
U.S. stocks futures are up strong this morning, fueled by the news that Abu Dhabi will send Dubai a $10 billion check, $4.1 billion of which will be used to avoid defaulting on a bond payment that is due today. When this news was hitting the headlines around Thanksgiving we stated that December 14 will be the date to watch. That’s because Dubai World’s real-estate arm Nakheel has a bond coming due (Dubai World is the emirate’s corporate flagship). Well, what this shows is just another sign that things are not in the shape that equity markets world-wide appear to be pricing in. Another government bailout means that the global economy is far from out of the woods. Nevertheless, stocks look ready to revel.
Have a great day!
Brent Vondera, Senior Analyst
No comments:
Post a Comment