Market Commentary – November 23, 2009

General Market Comment:    November 23, 2009

 While things should be relatively calm this week before Thanksgiving the government data mills will still spew data on Q3 GDP, Personal Income, Personal Spending, Durable Orders etc.  We will also get private sector updates on consumer confidence which of course the pundits will dissect for clues about the upcoming holiday shopping season.  All said, the tenor of the data, given what we already know from our sets of leading indicators should be one of recovery.

 Speaking of recovery, I have included some charts from Mark Perry’s Carpe Diem blog and the Calafia Beach Pundit – Scott Grannis, that not surprisingly speak to more evidence of recovering US and global markets.

 The first chart displays the number of shipping containers being handled in the Port of Los Angeles – the busiest container port in the US.  There is no surprise here – the number is going up and is no where near the highs in recent years past.

ScreenHunter_19 Nov. 23 10.59

The second chart comes from Scott Grannis.  It gives us a view of the trend in global industrial production.  The thing to keep in mind is that these data sets are the quintessential “large numbers”.  They tend to change slope very infrequently.  When they do you can usually expect some durability in the direction of the change – it’s a momentum thing –eh?

 Given the global concert of central bank stimulus and fiscal spending, this upturn should persist for a time frame defined in years.

 ScreenHunter_20 Nov. 23 11.00

Of course if production is going up – so too should the prices of stuff used in production.  Indeed that is exactly what is occurring.  I wish to make a point that the increase in prices is not exclusively about the US Dollar – it is also, and perhaps more so, about a recovery in raw demand.

 ScreenHunter_21 Nov. 23 11.00


While one can become confused looking at stock charts or the changing levels of a particular stock index I find it useful to consider the aggregate value of markets.  Sometimes the “macro” numbers are better indicators for some of the “micro” components.  Mr. Grannis provided the following chart of the global equity market capitalization.  Ask any 10 year old what the direction of this chart is and they will innocently and accurately respond- “its going up Daddy” . . . sometimes it is just that simple.

 ScreenHunter_22 Nov. 23 11.00


The earnings season just ended illustrated that corporate America adapted well to the financial calamity of the “Great Recession”.  They produced outstanding earnings relative to estimates.  Logically, stock markets around the world have just experienced a price recovery of near historic proportions.  There are plenty of market players still in disbelief of the economic recovery and therefore the earnings recovery and therefore the equity price recovery . . . of well . . . we need pessimists as well as optimists.  The presence of bearish analysts and the earnestness of their arguments are healthy signs of early phases of recovery – not the middle and not the end.  Mind you – corrections of as much as 10% or more will be normal to expect.

 We are in a historically benign time for the market.  It only occasionally drops leading into Thanksgiving.  Remember that November is the best month of the year for the S&P 500 and the 2nd best for the NASDAQ.  December is typically the 2nd best month of the year for the S&P 500.  It is the 3rd best for the NASDAQ.



Market Commentary – November 16, 2009

General Market Comment:    November 16, 2009

 Earnings season is drawing to a close.  As of last week, 80% of the 463 S&P 500 companies who had reported beat earnings estimates. Here is an update of the number of companies beating the estimates as prepared by Thomson Reuters.  You will note how strong technology and healthcare – our areas of focus – performed.  Given that 93% of the companies have reported it is increasingly probable that Q3 will see the biggest margin of companies beating estimates on record.

ScreenHunter_15 Nov. 16 13.44 

 Of course analysts have been adjusting their estimates upward.  Here is what the next 12 months look like for the S&P 500 earnings as displayed by

ScreenHunter_16 Nov. 16 13.44 

The estimates for earnings over next 12 months are strongly suggesting operating earnings (adjusted for write offs etc.) will start to turn upward – and steeply at that.

 One newsletter I monitor is the Changewave letter by Toby Smith.  His chief asset is a network of several thousand active operators at technology companies that respond to periodic surveys on business conditions in the tech sector.  I have excerpted comments and a chart addressing the outlook for software purchasing.

 Our confidence is reinforced by the 90-day spending outlook for corporate software. It’s the best we’ve seen in two years and is occurring across most major software categories. . . . the results show corporations are more willing to spend on what is, in fact, largely discretionary for them . . . , the outlook for corporate software buying is improving. And that’s further confirmation that confidence is building about a return to sustainable economic growth

 ScreenHunter_17 Nov. 16 13.44


 Software is essential in our knowledge based economy.  We need to see the blue line head toward 20% in the next 90 days.  Fresh 2010 budgets should have plenty of room.

 The next chart comes from the The Liscio Report.  They track state sales tax revenue among other things to monitor the economy.  I particularly liked this view on the status commercial & industrial loans.

 ScreenHunter_18 Nov. 16 13.45


You can see that the survey of banks tightening or easing lending standards logically leads the trend in loan growth.  It would seem reasonable to expect banks will return to loan growth as we move into 2010.  This will coincide well with the anticipated profit recovery and need to restock inventories.  All of this will lead the recovery in employment.  It also suggests we remain in the early phase of stock market recovery.

 I suspect we will see even more economic data in the coming weeks that point to a confirmed view of economic recovery in 2010.  The pending holiday spending season will be watched closely.  Early signs are encouraging.  Favorable retail sales reports would be consistent with an early “January Effect” favoring small cap stock as we move into December.

 We are in a historically benign time for the market.  It only occasionally drops leading into Thanksgiving.  The strong earnings reports, upward tilting survey and other leading indicators and the mountain of cash remaining on the sidelines suggest this year shouldn’t be an outlier i.e. fall.   Remember that November is the best month of the year for the S&P 500 and the 2nd best for the NASDAQ.


Market Commentary – November 9, 2009

General Market Comment:    November 9, 2009

 The market had a nice rally last week following the closing of October with the worst week it had experienced the panic lows of last March.  There was the usual flow of warnings that maybe the huge market rally since those lows in March was about to end.  That is unlikely.  While the news on the unemployment rate reported on Friday sells more advertising it was news about the continuing surge in leading economic indicators, productivity and earnings that are the better barometers of the proximate move in the market.

 The move in the weekly leading economic indicators published by the ECRI (Eco. Cycle Research Inst.) remains breathtaking.  The increase over the last 6 months is in the 99.9th percentile and has only been this close once in 1983.  Back then the economy was recovering from the twin recessions of the early 80’s and emerging from double digit inflation.  Friends – to state the obvious – these are “leading indicators” – the sharpest rise in these indicators occurs at the beginning of economic recovery and, logically enough, the beginning of sustained bullish phases in the stock market . . . that would mean – NOW – eh?

ScreenHunter_07 Nov. 09 10.14 

There was additional “leading” economic and market correlative data last week.  The ISM (Inst. for Supply Management) issued their monthly reports on manufacturing and non-manufacturing business activity.  No surprises – both reports pointed to continuing improvement.  I have chosen to focus on the new orders indicators below as they have good correlation with future job growth and earnings growth.  The following chart shows the diffusion index for both manufacturing and non-manufacturing sectors have turned sharply above the threshold of “50” signifying growth.

ScreenHunter_14 Nov. 09 10.23 

The following chart allows you to see that the ISM employment measure also turns up following an upturn in new orders – perfectly logical.

ScreenHunter_09 Nov. 09 10.15 

  For the doubters in the crowd I have also shown that actual reported persons employed do in fact grow following an upturn in “new orders” as reported by the ISM.  While it is undeniable that there are more people out of work today than anytime since the early 80’s, the ISM data suggests the situation is on the cusp of improvement.

ScreenHunter_10 Nov. 09 10.15 

Here is what the folks at ISI Group, run by Ed Hyman, recently displayed about the relationship of good ISM numbers and employment.  They refer to “PMI” which is stands for “purchasing managers index” and is a measure of overall activity, including the “new orders” data shown above.   The “PMI” index rose to 55.7 in October for the first time since June 2007.

 ScreenHunter_11 Nov. 09 10.15


 So friends . . . help looks to be on the way for the unemployed.  And, by the way, what’s good for the unemployed is obviously good for recovery of consumer demand and corporate earnings . . . it’s that “virtuous cycle” thing –eh? Speaking of which . . . let’s consider productivity for a moment.  Without growth in productivity you can’t get sustained GDP growth or earnings growth.  It follows that after businesses reduce employment in response to a shock to demand such as we experienced in 2008/2009 that they wait to return to prior levels of employment until – you guessed it – new orders pick up.  As orders rise and are filled by the reduced workforce productivity goes up and also profits.  Here is a picture of what was reported last week on the change in output per hour per person i.e. “productivity” courtesy of Brian Westbury at First Trust.

 ScreenHunter_12 Nov. 09 10.15

Brian stated the following . . . “ you have to go back almost 50 years to find two straight quarters where productivity has boomed as rapidly as it has in Q2/Q3 of 2009”.  A boost in productivity is always a precursor to a pick up in employment . . . and PROFITS.

 Here is a nifty chart by Ed Yardeni at Yardeni & Co. that takes the ISM new orders data series I have discussed and ties it to earnings growth as illustrated by the earnings of the S&P 500.  Ed combines the new orders data with the “prices” index also included in the ISM data.  It measures not just prices paid but is a barometer of prices received.  You don’t need to be a “quant” to see that new orders and prices lead earnings.  If new orders and prices are rising earnings are going to follow.

ScreenHunter_13 Nov. 09 10.16 

 Despite recently voiced concerns about the sustainability of the market rally and the surge in corporate earnings the data suggest we are entering a sweet spot in the economic recovery where earnings growth is strongest, most widely distributed and – interestingly – the least anticipated or reflected in Street estimates and management guidance.  With 88% of the S&P 500 companies already reported, 80% of the companies have beaten estimates.  This compares to the next highest percentage of companies beating estimates of 73% that occurred in Q2 09. 

 As always, you are welcome to disagree with any or all of the above sentiments.  The facts as I continue to see them still persuade me the market has more upside than downside.  Pullbacks in stocks where you have a competitive knowledge advantage should be exploited.


Market Commentary – November 2, 2009

General Market Comment:    November 2, 2009

 So the history books will say that October was the first loss month in the market since the dreadful days of February 2009.  That said, 7 consecutive up months was quite an accomplishment.  In fact – we haven’t seen that many consecutive up months since 2003.  Back then – when we were also recovering from a deep bear market as I am sure you can only painfully remember – the market (NASDAQ in this example) went straight up from the end of January till the end of August – had a minor correction in September and then went on to rise another 4 straight months.  Of course now pundits far and wide are all asking if this means we are at a significant top or if October was only a pause in the market recovery.  My guess is markets don’t top when earnings are improving, when interest rates are not rising and when investors are yanking money out of equity mutual funds and buying bond funds instead.  Can there be a correction? Sure . . . but not a meaningful top.

 Here are some lines from Barron’s this weekend that capture the sentiment well, I have highlighted parts of interest . . .

 A Brutal Ending for a Bitter MonthDespite a lights-out GDP number, indexes suffer 4% selloff as other doubts pile up

October dealt investors their first monthly loss since February. Is the market now anticipating a departure of the very economic expansion that has just arrived? Traders believe — cheesy phrase alert! — “the trend is your friend until it hits a bend,” and after an almost non-stop seven-month climb, everyone is on prickly watch for the first sign of that turn.

There was unmistakable evidence the market was no longer as enamored by good news. Companies reporting better-than-expected profits barely eked out gains, while those missing their targets were socked. Selling was exacerbated by money managers anxious to protect their gains as their fiscal year drew to a close Oct. 30, and the impulse to “sell on the news” grew so pronounced some traders began to unload even before companies had reported said news.

  . . . personal savings jumped from $179 billion in 2006 to $450 billion this year. “Some of that savings is already being used to fuel a fresh round of spending,” he notes, and argues that the odds of a double-dip recession have shrunk to less than 20%.

 . . .  Over the past two months, investors have yanked roughly $19 billion from equity mutual funds, even as they plowed some $90 billion into bond funds. In fact, money has flowed out of stock funds in 2009, but the big grab of bonds has lowered yields and could hurt performance ahead. Says O’Rourke: “If people are long-term investors, as everyone says they are, they shouldn’t be net sellers of stocks in a year that could be a generational bottom for the market.”

 Now keep in mind that November is usually a very good month for stock markets.  In fact, it is historically the single strongest month of the year for the S&P 500 and the second best for the NASDAQ.  It also marks the beginning of the best string of months out of 12 months – namely Nov, Dec and Jan.

 So what could ruin the party?

 One item that could spoil the party would be a prospect for weakening earnings.  The markets would have to be discounting a sustained decline in earnings growth.  That isn’t happening at the moment.  The earnings season continues beat estimates . . . 80% of the 344 S&P 500 companies that have reported have beaten estimates.  There isn’t an apparent deterioration in that “beat” rate as now more than half of the S&P 500 have reported earnings.  The number of companies beating estimates as well as the margin by which they are beating estimates are setting records.  We have seen a similar outcome with our companies – they have all beaten estimates and raised their outlooks.

 What about rising interest rates?  There are some pundits pleading for the Fed to raise the Fed Funds rate.  Whether they should or shouldn’t is beyond the scope of thus note but I will like to point out that perhaps contrary to popular belief the markets in most cases rise – not fall – when the Fed raises rates – particularly when the Fed is just starting to raise rates.  You see – the economy is usually growing when rates rise.  You usually don’t get falling earnings and rising rates.

 Of course inflation could disrupt things.  There has been plenty of attention paid to rising commodity prices of late.  Clearly the government stimulus packages and the sharp increase in the monetary aggregates could point to a material uptick in inflation.  There are many purveyors of gold out there happy to accommodate your worst inflation fears – eh?  I won’t be able to persuade or dissuade any of you in this note about your views on inflation.  I only observe that the inflation metrics are – so far – benign.  That may all change but my sense is that will occur at a point when the stock markets are higher.

 Of course there will be gobs of news to digest this week not the least of which will include key gubernatorial elections in Virginia and New Jersey. 

 So there you have it . . . As always, you are welcome to disagree with any or all of the above sentiments.  The facts as I continue to see them still persuade me the market has more upside than downside.