Stock Rally in Beginning of Month Ignored Economic Reality

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


U.S. stocks had an impressive rally the first four days of the month and this is generally a bullish indicator.  The rally took place with a backdrop of really ugly economic news however and that is not bullish. Weakness has a way of coming back to haunt the market as European bank news is demonstrating today.

U.S. economic reports for the last few months have been generally bad to awful. Nothing changed last week. While the ISM manufacturing index went up, this supposedly occurred because of a big increase in manufacturing jobs (the inflation component of the report was the actually the biggest gain, but the mainstream media somehow didn't report this negative news). This gain was not corroborated by the government's August employment report, which showed a drop in manufacturing jobs, nor by anecdotal evidence or anything else taking place on the planet earth. The stock market of course rallied strongly on the news.

The ISM non-manufacturing index, which measures the almost four times bigger service sector, didn't get nearly as much media coverage. It barely remained in positive territory. The inflation component, also the highest number in this report, was chiefly responsible for the number not going negative and indicating contraction.  Two components of the report were clearly in contraction however - exports and employment. The service sector losing jobs is a big negative for the overall U.S. economy.

Also lost in the stock buying frenzy was August car sales. They were down 21% year over year. This followed the 27% monthly drop in existing home sales in July and the 33% drop in new home sales in May. Last August was the peak of the Cash for Clunkers program. The numbers for car sales and home sales both demonstrate what happens when government incentives are no longer available in a market. While new homes sales fell to the lowest level ever recorded, August car sales were only at a 28-year low. For those who don't recall, 1982 was when the previous double-dip recession took place.

Government stimulus programs didn't fix the housing and car markets, but merely made them look better. This works for a while, but reality eventually rears its ugly head. A report from Europe today said that "the continent's major banks have more potentially risky government debt on their books than was disclosed during stress tests earlier this year." This wasn't exactly a piece of information that required the skills of Sherlock Holmes to uncover. At the time of their release, the stress tests were roundly criticized as being a phony PR gambit that set the bar so low that any bank not declaring insolvency in the next week would pass. Stocks of course went up on the news back then and today they are going back down.

Economic reality will eventually be reflected in the stock market. As I have said many times however, it's not the economy that drives the stock market in the short term, but liquidity. The Fed obviously kept pushing the 'flood the financial system with liquidity' button in early September. What happens when they stop doing this? See the homes sales and car sales numbers for a hint of how stimulus withdrawal impacts a market.

Disclosure: No positions.

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

An Analysis of Retail Sales Media Coverage

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


Retail sales look like they increased 8% to 10% in March 2010 according to the International Council of Shopping Centers. Assuming the numbers are correct, and this is perhaps a very big assumption, a number of mitigating factors led to the unusual rise, including an Easter holiday that fell right in the beginning of April and very mild weather in March after a February filled with snowstorms. Nevertheless, mainstream media reports heralded that "consumers are finally coming out of hiding" and that happy days are here again.

Today's New York Times had some of the most positive reporting stating that the U.S. consumers' mood has gone from panicked to cautious to "almost a bit giddy" - a quote from Mark Zandi, chief economist for Moody's Economy.com. In coverage elsewhere, Jackson Bros., Boesel & Co. noted that this is season when chain store sales increase and that they saw interesting possibilities in Woolworth, Grand Union, and J.C. Penney.

Today's coverage in the Times noted that "import cargo volume in March also suggested a strong month for retailers", having risen for four months in a row and being up an estimated 6% in March according to the National Retail Federation.  Other publications reported that rail freight loadings in the week that ended March 21st gained more than they usually do in March and had hit a new high for the year. The implications are of course that this indicates that retail sales will be getting better in the future.

The Times upbeat coverage also included "sales are simply much stronger than companies had expected,” and the improvement extends to some of the most costly items including autos with Ford, Toyota and General Motors having robust sales increases in March. The Times did concede that incentives such as no-interest loans may have been responsible. Other sources reported that one major automaker had its third straight monthly gain of around 50% and its highest sales since last June. Dodges, De Sotos, Plymouths, and Fargos were apparently flying off the lot in March... March 1931 that is.

While the New York Times article was published on April 7, 2010, the other articles cited were published 79 years ago in early April 1931 - two years before the economy hit bottom during the Great Depression and many more years before the U.S. managed to crawl out of the economic devastation that the downturn had caused. Rosy media reports in 1931 did not mean that the economy was getting better and it is quite possible that don't indicate that in 2010 as well. Mainstream media wants to tell the 'everything is getting better' story and managed to do so in 1931 when the U.S. economy was actually falling off a cliff. Investors should assume little has changed with media reporting since that time.

What has changed since the 1930s is that the Federal Reserve is pumping huge amounts of liquidity into the financial system and the government is spending huge amounts of money it doesn't have to keep the economy functioning. Retail ETFs, such as RTH, XRT and PMR, are trading at two-year highs. While a realistic analysis of the macro picture may not justify such high stock prices for retailers, liquidity is responsible for the ongoing rally. The party should continue as long as the Fed continues to supply free booze. One it stops doing so, expect one big hangover.

Disclosure: None

NEXT: Why China is About to Change Its Currency Policy

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.