WHERE IS THE GROWTH? From David Rosenberg, chief economist and strategist, Gluskin Sheff
This has certainly become a more discerning market — just having headlines that three in four S&P 500 companies have beaten their estimates are not good enough. (A year ago, bank earnings improvement on the back of lower loan loss provisioning was being treated with glee, but now investors are demanding that they see signs of top-line growth.) All the more so when a proxy for nominal GDP — G.E.’s revenues — was off target and down 4.3% from year-ago levels. Gannett, the country’s numero uno newspaper, also posted a 6% slide in print ad revenue. Citi's top-line was crushed 33% and also missed analyst views (BoA's revenues also fell 11% YoY), and the Basel Committee on Friday also issued a report stating that global banks need a further capital raise ... hardly music to the ears of anyone still long the sector. In a classic reminder that we are in a deflationary environment, Sanford Bernstein cut Wal-Mart’s sales and profit outlook. Mattel, the world's largest toymaker, missed on its bottom line and issued cautious guidance over the sales outlook.
A Weakening Recovery, From Stephen J. Huxley. Ph.D., chief investment strategist, Asset Dedication
Recent figures released by the American Institute of Economic Research (AIER) suggest that while the economy’s expansion appears to be continuing for now, its pace may be weakening. Most of the leading indicators were up, but a few declines have begun to show up, and still others are mixed.
Consumer spending continues to cause the most problems for the leading indicators. The worst declines were in housing. New housing permits dropped 16 percent since March, and sales of new homes fell 33 percent. The lapse in the federal home buyer tax credit, which expired in April, is the likely explanation. Spending on consumer goods also declined 0.5 percent in April. The change in consumer debt remains negative, meaning consumers are still paying off debt rather than loading up more, suggesting they are still worried about the economy. Expectations play a major role in any economic recovery and worry about the future is clearly prevalent among the general public. One good piece of news this week was the successful plugging of the Gulf oil leak, but much more good news is needed to swing the national mood from pessimism to optimism.
Coincident indicators, those that coincide with economic activity, show a better picture than the “leaders,” meaning we are in an expansion right now. All the coincident indicators were up, with the lone exception of the ratio of civilian employment to population. It dropped to 59 percent, its lowest level since the early 1980’s. Before the recession began, more than 63 percent of the working age population was employed.
Lagging indicators, those that lag economic activity, are sending mixed messages, similar to the leaders. Theoretically, positive values among the lagging indicators provide confirmation of the strength of the recovery. Based on the AIER report, most continue to show negative values. The worst of the “laggers” is average duration of unemployment, which reached 34 weeks, a record high. This may mean that employers prefer to give more hours to current workers, who are still working a shorter average workweek than before the recession, than hire new ones. If so, it could be awhile before hiring starts.
So what is to be concluded? Are the indicators signaling a faltering recovery or simply a slow one? That is the question everyone would like to have answered. Unfortunately, only spin doctors with other agendas are willing to answer it.
WHERE ARE THE BUYS, From Ron Muhlenkamp, founder and president, Muhlenkamp & Co.
In 2008, stock and bond prices got cheap, and then got cheaper. We believe forced selling by hedge funds and other investors played a major role in the selloff. As a consequence, in monitoring the markets, we now ask "Who might have to sell, and how much?"
There may be some forced selling of securities by European banks, although it's hard to get good numbers on the amounts. We do know that they're in a squeeze and we're monitoring a number of the "street signs," including LIBOR (London Interbank Offered Rate) and bond yields. So far, the rates are still increasing; we are monitoring for signs of abatement.
We do see signs that the European political leadership is attempting to deal with their problems (many years of spending more than they're earning - sound familiar?), but we don't yet know whether their proposals will be accepted by the public. In the U.S., our politicians seem to think that past European actions should be emulated, and we continue to spend far more than we take in. And we're seeing more signs that our government is looking to tax or otherwise penalize any company that it thinks is making too much money.
