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We haven't looked at the new high list for some time, so I took a quick look to see what's cooking.
There were quite a few American Depository Receipts (ADRs) for Israel-based companies on the list last week, as well as a lot of U.S. retailers and apparel wholesalers. J Crew Group Inc. (NYSE: JCG) surged to a big new one-year high on Thursday, up 15%, as did shoemaker Skechers USA Inc. (NYSE: SKX), up 14%; and Brown Shoe Co. Inc. (NYSE: BWS), up 3% to a new high. Another new high, with an 18% gain, was recorded by HNI Corp. (NYSE: HNI), which makes office furniture. And of course you know about Amazon.com Inc. (NYSE: AMZN).
What happened to the missing-in-action consumer that the bears have complained about? Makes you wonder.
This is not a small matter: It takes a lot of buying power to move stocks like this up to new highs.
Institutions are coming on board the financials in a big way, validating our point of view – expressed for the past six months – that the Standard & Poor’s 500 Index is likely headed to the 1,200 area, which is where stocks were trading when Lehman Brothers Holdings Inc. (OTC: LEHMQ) collapsed and the most acute phase of the financial crisis began last year. The more often we see days like Thursday – where stocks surge following the most minor of dips – the more likely this is likely to happen.
Retailing Rebound is for Real
I realize it's a little bizarre to see retailers performing so well, but all the data that I see supports this move at the most fundamental level. Analysts atin New York have done a weekly survey of retailers for two decades. They reported last Monday that over the prior two weeks, their retailer survey results have surged 15%. U.S. retailers are even doing better than ISI's surveys of Chinese sales.
They believe it's likely that chain-store sales, after rising 0.1% year-over-year in September, will rise by a much more than expected 3% in October. And because chain-store sales plunged month-over-month in November and December last year, they're on track to rise 6% year-over-year in December this year – which is way more than expected. Keep in mind that in September, they were already up 5% from their December 2008 low.
ISI reports that there is a correlation of 88% between holiday sales and stock-market performance. The S&P 500 is now up 4% from September, which suggests that holiday sales will advance at a 5% quarter-over-quarter annualized rate.
How can that happen with employment trends so rotten? Well, maybe they're not so rotten. Data continues to show improvement, with temp employment company surveys, manufacturing employment surveys and the Empire State manufacturing reports all moving higher in the past three weeks.
As ISI points out, keep the chronology in mind: At the worst of the recent recession, there were fears of a depression. So companies cut employment more than the gross domestic product (GDP) decline suggested was necessary. If conditions keep improving, managements are likely to feel compelled to lift hiring more than normal. Employment is already increasing in six major economies outside the United States, including Japan, Canada, Korea and Brazil.
Considering that declines have been moderating by around 100,000 jobs per month, ISI analysts say, figure that jobs will decline by 163,000 in October and 63,000 in November, followed perhaps by 37,000 in December and 137,000 in January.
This would further crush arguments by the bears that the U.S. stock-market advance is not supported by fundamentals. If this starts to come into view in a major way in November, once the October jobs figure is announced on Nov. 6, we could be in for a very positive November and December as underinvested managers pour into the market from the sidelines.
I know you've heard this from me for months, but now we're coming to showtime. If it's going to happen, it's going to happen soon. There's probably one more semi-scary decline ahead to shake out the weak hands before the next phase begins.
I'm not saying it's right for this to occur. And I'm not saying I agree with it. But I am saying that it could happen.
And because the public thinks it's impossible, it really has a strong potential to occur.
Tears for Fears
In summary, let me quote from Paul Desmond over at Lowry's Reports, who's been around a few bear and bull cycle in his time. Here's what he told his institutional crowd late last week as they headed into the weekend:
"The media is filled these days with 'expert' opinions on a plethora of potential problems such as inflation, deflation, excessive debt, over-valuations, and a weak economy, to name just a few, that will 'undoubtedly' bring the stock market to its knees any day now. These cumulative opinions comprise the current version of the Wall of Worry that the stock market has perpetually climbed during the early stages of every extended market advance since the stock market was formed under the Buttonwood Tree. Each new major market advance has had its own list of worries which served to keep many investors on the sidelines fretting about problems that rarely materialized."
As Desmond points out, bull-market cycles don't end on bad news. They end after very long stretches of good news that make people forget their worries. Up cycle finishes are marked with a four- to six-month divergence between a top in the advance/decline line and the major indexes. That is, the A/D line has typically been declining half a year before a final top in the major market indexes is made. At present, the A/D line just made a new high a few days ago. So a top is likely at least four to six months away.
We can't know exactly how long the current advance will last, but just keep in mind it will almost certainly not end when everyone is still freaked out about unemployment, earnings and banks. The end will come amid sunny skies and smiles.
To participate in the advance in the simplest way, you only need to own an exchange-traded fund (ETF) that covers the world's stock markets, such as Vanguard Total World (NYSE: VT). Ideally, try to buy around $41.50. Set a $37.50 stop just in case my thesis is wrong.
Conclusion: From a positioning standpoint, this is no time to go out and get all contrarian. When the next upswing begins, stick with materials, tech, large caps and emerging markets.
Week in Review
Stocks slipped lower on Friday as the sellers shrugged off better-than-expected earnings results and focused instead on a strengthening U.S. dollar.
The Dow Jones Industrial Average lost 1.1%, tumbling back below 10,000, the S&P 500 lost 1.2%, the Nasdaq Composite Index lost 0.5%, and the Russell 2000 lost 2%. All the major sector groups participated in the decline with six out of nine posting losses larger than 1%. The dollar rise 0.5%.
Materials and energy were weakest, with gold down 0.5% and crude oil down 0.8%. One anomaly: the PowerShares DB Base Metals Double Long ETN (NYSE: BDD), my preferred base metals vehicle, jumped 1.4% to a new one-year high due to strength in copper and lead.
Losses in tech and retail indexes were limited by strong third-quarter earnings reports from Amazon and Microsoft Corp. (Nasdaq: MSFT). The Retail Holdrs (NYSE: RTH) ETF rose 1%, entirely because Amazon has grown to be the nation's third-largest retailer, after Wal-Mart Stores Inc. (NYSE: WMT) and CVS Caremark Corp. (NYSE: CVS); that's pretty amazing, if you think about it a moment, as it's only been around a dozen years.
Last week highlighted the fact that advances in the stock market precede improvements in earnings growth, and that conventional wisdom is seldom right about either. Consider: Nine months ago, most people thought that third-quarter corporate income would be horrid due to wiped-out consumers and retrenching businesses, and that all stocks should be sold as result. The March low occurred amid a panic attack over 2009 earnings and the health of banks.
Now it turns out that consumers aren't in such bad shape after all, and while revenue growth is tepid, agile companies for the most part have cut enough costs to remain profitable. According todata, two-fifths of S&P 500 companies have reported their third quarter earnings and 82% of them have beaten estimates. Income is tracking 18% lower than last year, but that's a huge improvement from a year ago and far better than the 25% slide expected as recently as late September.
Looking forward, earnings growth in the fourth quarter now has a chance of marking another surprise as sentiment for both earnings and stocks is still lousy. Remember it's all about expectations. After some consolidation in prices, we expect the indexes to press forward by mid-November to anticipate continued fundamental improvement in the first quarter of 2010.
Let’s take a look at what happened last week:
Monday: The National Association of Home Builders/Wells Fargo & Co. (NYSE: WFC) dropped to 18 in October from 19 the previous month — falling below expectations of an increase to 20 — as the "prospective buyers" sub-index dropped three points to a three-month low of 14. This is the largest decline since November 2008. Gluskin Sheff & Associates Inc. economist David Rosenberg finds that the sub-index has a 75% correlation to new home sales, which indicates the potential for renewed weakness ahead.
Brazil's finance ministry announced that the country will impose a 2% tax on foreign capital inflows into the country's stock and bond markets as policymakers try to stem the rise of their currency, the real, in an effort to protect its exporters.
Tuesday: Housing starts came in weaker than expected at an annual rate of 590,000 units, under the consensus estimate of 615,000 units. August was revised downward to 587,000 units from 598,000 previously. A look into the numbers showed the single-family component did well, rising 3.9%, while the multifamily component dropped 15.2%, reflecting ongoing weakness and high vacancies in the apartment business. There has been no growth in housing starts since June.
Deflation is worrisome as the Producer Price Index (PPI) reported falling prices in September: The headline index is down 4.7% on a year-over-year basis on cheaper gasoline and a drop in the price of light trucks. The index has yet to account for the recent rise in oil prices, so watch for a return to low levels of inflation in the October numbers. Deflationary conditions allow the U.S. Federal Reserve and other central banks to maintain accommodative policy stances and ultra-low interest rates.
Wednesday: Adding to the week's disappointing housing data, the Mortgage Bankers' Association Purchased Applications Index dropped 7.6% for the previous week. The Fed’s latest Beige Book report on economic conditions noted widespread "stabilization or modest improvements in many sectors since the last report, albeit often from depressed levels."
An avalanche of selling occurred in the last hour of trading. The media erroneously blamed the jarring move lower on the downgrade of Wells Fargo by bank analyst Dick Bove on concerns over revenue growth in the face of mounting loan losses.
Thursday: The Conference Board’s index of leading economic indicators (LEI) jumped 1% for September, beating the consensus estimate of 0.9% for the sixth consecutive gain. Breadth was impressive as 80% of the components rose. The largest contributor was the yield curve component, which measures the difference between the very short-term Federal Funds rate and the interest rate on 10-Year U.S. Treasury notes. Over the last six months, the LEI index has gained 5.7%. This represents the largest increase since early 1983.
Friday: Existing home sales rose 9.4% in September thanks to a 1.4% drop in the median home price to $174,900. Distressed sales, such as foreclosures and short sales, made up 29% of total sales, down from levels of 50% earlier this year and 31% in August. The rate of sales moved to 5.570 million units on a seasonally-adjusted annual basis — the highest level since July 2007.
The Week Ahead
Monday: A quiet calendar with a few short maturity U.S. Treasury debt auctions. Dow Jones Industrials component Verizon Communications Inc. (NYSE: VZ) reports results before the bell.
Tuesday: An update on home prices comes courtesy of the S&P/Case-Shiller Home Price Index for August. Also, the Conference Board reports on consumer confidence for October. Last month, confidence slipped slightly as the index fell to 53.1 in September from 54.5 in August. Analysts are expecting a result of 54 for the current month.
Wednesday: September durable goods orders are reported. The consensus expects orders to have expanded by 1.5% for the month – an improvement on the 2.4% drop in August. In July, durable goods orders expanded 4.8%. New homes sales are expected to continue their impressive recovery: Over the last five months, sales have jumped a cumulative 29.2%. Sales rose 0.7% in August to a 429,000 annual rate. With help from the government's first-time homebuyer tax credit, analysts expect another 2.5% jump for a sales rate of 440,000 on an annual basis.
Thursday: The government's initial estimate of third quarter GDP growth is released. This is a pivotal moment, as the consensus estimate predict that the three months to September will mark the first quarter-on-quarter growth since the recession began (there was a brief blip of positive growth in the middle of 2008, but it was clearly out of step with the downward trend). Analysts predict a 3% expansion for the period – which would represent the largest expansion since the middle of 2007.
Friday: New data on personal income and outlays will be released. Analysts expect income to be unchanged in September after gaining 0.2% in both July and August. As a result, consumer spending is estimated to have fallen 0.5% in September from a gain 1.3% in August.
[Editor's Note: New Money Morning contributor Jon Markman is a veteran portfolio manager, commentator and author. He is currently the editor of two investment-research services, Strategic Advantage and Trader's Advantage. For information on obtaining a two-week free trial to the daily commentary of the Strategic Advantage, please click here. Anthony Mirhaydari was the research assistant on this column.]
News and Related Story Links:
- Money Morning Week Ahead Column:
High-Quality Stocks Ready to Take the Lead in the U.S. Market.
- ISI Group:
- Money Morning Analysis:
Will High Unemployment Strangle the Recovery?
- Money Morning News Analysis:
Tax on Foreign Investment Won’t Dent Brazil’s Currency
- Money Morning News Analysis:
Existing Home Sales Pop on Rush to Beat Tax Credit Deadline