Investors have dealt with a tight roller coaster ride since last February, riding the ups and downs of a "sideways" market. Such volatility doesn't come as a surprise given we've weathered civil unrest in the Middle East, a 25% rise in gasoline, a falling U.S. dollar, economic disruption in Japan, QE jawboning, rising price inflation in raw materials and other input costs, a downgrade and an upgrade in commodities from Goldman Sachs, and funding uncertainty for Greece.
Many issues we’ve faced have been resolved, or at least, have become less of a focus. This week, the focus has now turned from Greece to the economy.
Dizzy, Whippy, Erratic Markets in Review
Let’s look at some of the issues that plagued the minds of investors since February and then let’s take a look at current trends. The February and March stock market correction was a result of high energy prices and the Japanese earthquake/tsunami. Crude hit $107.50 on March 7th before it began to correct in the wake of Japan’s earthquake on March 11th. On March 17th, the market started a near 100 point rise on the S&P 500 into the April 29th top as the earnings season sparked renewed interest in company fundamentals. There were many earnings beats, but CEOs started to lay out the sand bags by moderating their guidance for calendar Q2. Therefore, the market started to lose the positive breadth and participation we had seen thus far. On May 5th, the ECB put their rising rate policy on hold and the euro gave way to the U.S. dollar. Commodities already reeling from the correction in silver and a sell call by Goldman Sachs on April 11 broke down with copper trading near $4 for the first time since 2010 and crude oil trading near $100 for the first time since the Japan quake. Through all of this, the S&P 500 has been largely flat. The adjectives I’ve heard to describe the market are: dizzy, whippy, and erratic.
This Week
On Tuesday this week, positive comments from Jean-Claude Juncker voiced a resolution on additional aid for Greece would be decided by the end of June and that the European Union leaders have ruled out a total restructuring of Greek debt. As investors fear uncertainty, resolution sounded good enough to ignore bad economic releases on Tuesday, causing stock indices to break their May downtrend.
On Wednesday, however, focus turned back towards the economy and the horrible manufacturing ISM number of 53.5, a drop of 6.5 points from the previous month’s release. Of the 18 manufacturing industries included in the survey, 14 reported growth, down from 17 in April. Many noted demand was strong with possible softening, while others were saying that weather and rising costs were hurting retail. If you recall from my radio show interview two weeks ago, looking at industrial production and unemployment claims, a lot of the slow down can be attributed to non-reoccurring events such as the Japanese earthquake and flooding of the Mississippi. News the market didn’t focus on was that Toyota is revising its capacity estimates, up tremendously from previous reports. They expect capacity to ramp up to 90% by the end of June as part supplies come back online.
“The swift repair of chinks in the Japanese supply chain, which had hobbled Japan's car manufacturers since the massive 9.0 magnitude earthquake struck northeast Japan, means the country's largest auto maker is on track to reach 100% of planned production levels by August and boost output in the fall to make up for the shortfall in the spring. A person familiar with Toyota's latest production plan for the year through December 31 said the company now expects to match its global production last year.” WSJ May 31, 2011.
The construction numbers I talked about on the radio show two weeks ago largely reflected the weather problems that the manufacturers had voiced in yesterday’s ISM number. It was in the south that construction had ceased due to flooding and tornadoes. New construction is growing in the west and Midwest. When you think about it, a lot of the gyrations in commodities and commodity stocks have been as a result of weather issues since last summer in addition to a falling dollar. Let’s remind ourselves of some of those weather induced supply disruptions:
2010 Supply Disruption
- Russian Fires destroy wheat crops
- Drought destroys Chinese farm crops
- Storm flooding disrupts Australian coal production
2011 Supply Disruption
- Japanese earthquake disrupts third largest world economy – damages manufacturing abroad
- Tsunami knocks out Nuclear production in Japan, raising safety concerns on nuclear energy
- Cold snap causes low yields in corn in the Midwest
- Mississippi flooding disrupts construction and farm land crop
- 2011, a record year thus far in Tornadoes wrecking havoc on the economy and lives in the U.S.
Click image to enlarge
Reporter: “Hey Bob, you just got back from your flooding evacuation and your house is totaled. What’re you going to do now?”
Bob: “I’m going to Disneyland.”
Ok, not a likely scenario. How many economists are actually reading the news day to day and read about a weather-related event devastating a community? It’s a weekly event. Are you really going to shop at Nordies when you just got back to your home in shambles and mud due to tornadoes or flooding? No, it’s reconstruction mode.
Thursday, the drop in jobless claims was largely in line with expectations, but definitely helped versus yesterday’s ISM number. Retail same-store-sales were up 5.4% year over year, but decelerated from last month’s reading near 8.5% growth. Specifically, growth has been strong in luxury and wholesale clubs, up 10.4% and 12.3% respectively. The weakness was largely in apparel and discount stores. I think either way you slice it, sales continue to be strong despite what commentators say, and as I mentioned on the radio show two weeks ago, it’s a two-tier market between the haves and the have-nots. The haves who didn’t buy a home from 2004 to 2006 have their jobs, a portfolio that has risen two years in a row, and low financing. The haves are leasing or buying new cars, iPads, smartphones, 3D televisions, and TV set top boxes to watch HULU and Netflix.
Friday, we should expect the numbers for payrolls. Nonfarm payroll employment expanded 244,000 in April following a revised 221,000 advance in March and a 235,000 rise in February. Government jobs have been holding the index back over the past three months so it will be interesting to see if that trend continues, likely. Consensus is for a month to month increase of 170,000, but based on the ISM number, many analysts have revised their range lower towards 90,000 this week. In addition to payrolls, the joint IMF/EU/ECB team of inspectors in Greece are aiming to conclude talks on medium-term fiscal plans; although, we probably won’t hear anything official until June 20th at the next finance official meeting. The IMF have recently threatened it would not provide the next tranche of funding unless an agreement was reached between the EU, ECB, and Greece on funding needs and austerity measures.
Technical Take
The market has been whippy, erratic, and dizzy since February. Technical patterns and trends have been thrown out the window the very moment one can say Eureka. The S&P 500 broke out to a new high in April creating a head and shoulder bottom, only to whip back within the consolidation zone. Tuesday the market broke a month-long downtrend only to give gains back and then some on Wednesday. So we haven’t broken down and we haven’t broken out (and up). U.S. Treasuries have been a different story all-together. Despite the stock market gyrations on weather, commodity prices, economics, and earnings the U.S. Treasury bonds and bills have performed a rally from their April lows. That rally is hitting resistance here…
Click image to enlarge
…just as the major stock indices have been largely flat and whippy, erratic, and dizzy.
Click image to enlarge
Conclusion
The market has been erratic with 90% up days followed closely by 90% down days. The Tuesday rise in stocks was the first large volume buying day since March 18th based on a rising euro and firm commitment by Europe to resolve Greece funding. However, that was followed by a bearish engulfing trading day on Wednesday that eclipsed gains in stocks since Wednesday of last week due to a weak manufacturing number from ISM. It has been a U.S. economy versus Greece market over the past month. If you’re managing your own money, it might not be a bad time to starting taking some money off the counter until these issues get resolved. It’s my belief these are temporary issues and they should get resolved this summer as Japanese part supplies come back online and weather clears up to allow for construction and consumption again.
