The Nvest Market Blog, our current thoughts on the Street

Final Days of November in Stalling Pattern - Week Ended 11/27/09

posted 11.30.2009 at 10:14 a.m. by steve

The holiday shortened trading week was marginally negative for investors. Generally, more dismal economic data and bad headlines caught the attention of investors. GDP for the third quarter was revised significantly downward to +2.8% from its initial reading a month ago of +3.7%; and Dubai World (a large conglomerate government sponsored bank of the Middle East emirates) told creditors that it would need a six-month standstill on its debt obligations. For the week the S&P declined just -0.31% while the NASDAQ slid -1.41%; further evidencing recent emphasis on quality and solid balance sheets, the large-cap Dow Jones Industrial Average (Dow) continued to outperform broader indices dipping just -0.08%. Not all news was bad however. Better home sales data helped send stocks higher early in the week and the Labor Department reported that the number of people filing first time claims for unemployment benefits dropped 30,000 BELOW the consensus, suggesting that the employment picture is clearly improving (although there has been a lack of hiring announcements). Additionally, early reports suggest that holiday shopping (Black Friday) has started off better than last year. As is typical for the week of Thanksgiving, trading volume was well below average in the US, making daily price moves less insightful.

News continued to be mixed. Clearly, the significant downward revision to 3Q GDP was a front-and-center reminder that the current economic recovery is likely to be slow compared to those of the past. Recovery is not a V-shape, and is likely to be choppy. Additionally, the news surrounding Dubai World serves as another reminder of what problems may loom with regard to commercial real estate which is only now beginning to face the struggles of residential real estate over the past two years. Still, while there was much attention given to the issue over the weekend, it is worth noting that even the Wall Street Journal (the media is generally the first one to focus on the bad side of news) suggested that the Dubai panic is overdone and that it is a regional problem being overblown. Perhaps the better insight to be gained from the development is that while it has been very easy to be perpetually bearish on the US dollar in the face of rising deficits and a weak economy, it is increasingly difficult to make a bullish case for other currencies as well (in order to sell a currency, you must implicitly buy another). With the exception of emerging markets, it is difficult to rationalize that they are in any better shape from a fiscal standpoint. This week could start on rocky ground as investors continue to absorb the implications of Dubai and a slower than previously thought economic recovery, but there is plenty of fresh economic data due out this week that could again turn the tide higher.

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Housing Data Sours Otherwise Sweet November - Week Ended 11/20/09

posted 11.23.2009 at 2:46 p.m. by steve

It was another teeter-totter week for investment markets. Despite beginning the week solidly in positive territory, the major US indices ended the week virtually unchanged. The broad market S&P declined -0.19% while the large-cap focused Dow managed to post a slight gain of +0.46%; the tech-heavy NASDAQ experienced the most notable change at -1.01%, in part due to pressure stemming from much worse than expected earnings results from PC manufacturer, Dell. Two trends that appear much more entrenched are the ongoing ascent of Gold and the decline of the US dollar; trades based on the thesis of ever increasing and complex dilemmas for the US government fiscal health. Still, while the overall week was slightly negative for stocks as a whole, technicals told a more favorable story, particularly on the down days. Stocks managed to battle their way back each day to finish well above their daily lows; a good sign that there is not an overabundance of bears.

Meanwhile, economic data soured a bit from the first weeks of November. Notable was housing starts, which fell to their lowest level in 6 months. And, jobless claims came-in as expected: an unfortunate contrast from what has recently been positive surprises in that data. Still, while bad news seemed more prevalent in the latest week, most of it seems easily explained and almost expected. For instance, one could have guessed that housing related data would take pause from its recent recovery given the uncertainty that surrounded extension of the first-time homebuyer tax credit set to end this month (it has been extended through 2010). Secondly, we have said on several occasions that we do not expect the recovery in employment to happen immediately, or be a straight line; the situation is not likely to be remedied as quickly as past recovery experiences. What resonated more loudly with us last week was that retail sales rebounded more than expected during the month of October. And, while much of the positive surprise was due to a rebound in automobile sales, it means that consumers are spending on some very big-ticket items because they need them. Additionally, the purchases are being made without any government incentive (cash for clunkers expired over two months ago). In addition, the Leading Economic Indicators (LEI) rose +0.3%; the 7th consecutive monthly increase.

This week, expected to be very light in terms of trading volume given the Thanksgiving holiday, will offer investors insight into the housing market and consumer confidence. Black Friday, the notorious after-Thanksgiving shopping holiday, could give retailers and investors reason to be merry during the current Christmas shopping season. We would not be surprised to see preliminary sales data from the coming weekend beat consensus expectations (very subdued) as consumers rush out to take advantage of deals and take care of shopping early this year (especially after having been very frugal last year during the peak of the financial crisis and destruction in consumer net worth). This holiday shopping season will be perhaps the best gauge of consumer sentiment to-date. Have a Happy Thanksgiving!

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Junk Rally Fading; Quality Outperforming in Recent Advance - Week Ended 11/13/09

posted 11.16.2009 at 09:43 a.m. by steve

Stocks continued to recover last week, sending the S&P briefly above 1,100 and moving the Dow to its highest level this year. The S&P popped +2.26% while the NASDAQ and Dow gained +2.62% and +2.46%, respectively with most of those gains occurring on Monday. The strength in the most recent week was attributable the continuation of better than expected corporate news, merger and acquisition activity; and perhaps most important, improving economic data in the month-to-date. Still, while the data has been better than expected, it has more recently reinforced the consensus view that the economic recovery is going to be less robust than those in recent memory. In this vein, it has been interesting to see the market leadership begin to shift more toward quality. Recently, stocks of the largest, most durable and globally diversified businesses have been outperforming their smaller-cap brethren. This stands in stark contrast to the early innings of the stock market rally when the lowest quality, most high-risk businesses had outperformed the broader market. From the bottom, many have described the ascent as a junk rally; that trade appears to be concluding.

This week the market looks set to begin on higher ground despite retail sales that came in about as expected month over month, but a much weaker than expected report on the Empire State Manufacturing survey. Other potential market-moving data points this week include the producer price index and industrial production (tomorrow); housing starts and CPI (Wednesday); and another update on Jobless claims (Thursday). Still, after the recent run-up since November began, the market seems to be struggling to push on through to new highs. The S&P continues to flirt with the 1,100 level, but it seems that it will need a continuation of definitively better economic news in order to make the next jump higher. That better economic news may come in the form of positive surprises for the holiday shopping season; however recent plunges in consumer confidence measures signal that the season will be anything but predictable.

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November Begins on Higher Ground - Week Ended 11/6/09

posted 11.09.2009 at 09:28 a.m. by steve

Following the slew of difficult economic releases (and as a result, market performance) over the last two weeks of October, the first week of November offered investors some sources of renewed hope. And the markets moved higher as a result with the S&P climbing +3.19% while the Dow and NASDAQ advanced in similar fashion: up +3.20% and +3.29%, respectively. On the positive side, the manufacturing and service PMIs rose last week (indicating better productivity); consumer confidence has held steady; vehicle sales moved higher in October rising +13.5% over the level in September; retail sales (chain-store) improved; and housing appears to have stabilized. Those key items helped move the Dow back above 10,000 for the week; a level that was reached in mid-October but has since been evasive. However, not all news was of a rosy tint last week. Perhaps the news item that will receive the greatest attention from the press and government officials over the coming weeks and months is that the unemployment rate crossed into double digits. Now at 10.2%, the latest reading is a significant upward adjustment from what had been hovering around 9.5% to 9.8% for several months.

While unemployment is a lagging indicator and expectations are for the level to rise to 10.5% at its peak, it is likely that consumer confidence could take a slight hit. Unemployment is now at its highest reading in over twenty years. As we mentioned in our monthly commentary (published to the website on Thursday) we expect the economic recovery will be choppy (and slow). At times it will appear as if the economy is headed back to darker days. Still, it is important for investors to take note that with the unemployment level now above the politically important 10% level, it is less likely that the Government removes stimulus too soon. In fact, it is more likely that there will be calls for additional stimulus to help ease the rate of unemployment quickly. Additionally, retail and businesses closely tied to consumer confidence and spending have beaten expectations lately. That trend is likely to continue as the all important holiday shopping season has historically been very much tied to year-to-date stock market performance (which has been very strong). If holiday sales can beat expectations, we could very well see a positive feedback loop begin to develop.

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Final Week Correction Turns Month Red - Week Ended 10/30/09

posted 11.02.2009 at 09:39 a.m. by steve

The month of October was a bit like a roller coaster as volatility returned to the markets. The beginning of the month started off slowly ahead of a new quarterly earnings season, but rose sharply in the middle of the month as corporate earnings generally have come in better than estimates. The final two weeks of the month were less than friendly for investors as concerns re-emerged as to the sustainability of economic recovery. Despite a better than expected GDP report from the Department of Commerce last week (GDP rose +3.5% during the 3Q versus estimates of 3.2%), stocks did poorly on all but one trading day (Thursday). The tech-heavy NASDAQ skidded the most throughout the week by -5.08% while the S&P dropped -4.02%; the Dow, which consists of generally the largest US companies, slid by a more muted -2.60%. The severity of the declines last week, and in particular on Friday, was enough to put the month in the red for 2 of the 3 indexes and breaks the streak of 7 consecutive monthly increases for stocks as a whole since March. The Dow did manage to post an ever so slight gain for the month of October of +0.005% (keeping its streak -now at now 8 months- alive), while the S&P and NASDAQ slid -1.98% and -3.64%, respectively. Smaller company stocks fared worse than large during the month, despite having been the biggest winners since the rally began.

Even with generally positive corporate earnings announcements, the economic data has been decidedly more mixed recently. And, markets seem intent to focus only on the bad news. As such, the stocks have been under more pressure recently. However, as we have said in recent writings, we do believe that the path of least resistance for the markets continues to be in the upward direction as we do believe the economic recovery is sustainable, albeit at a much slower pace than in the past. That being said, we do feel that the easy money for investors has already been made. Against the backdrop of slow-to-return jobs and a more savings-oriented consumer, investors will need to be finding the higher quality companies to invest in. Those with stronger balance sheets and the ability to access rationed credit markets will be the winners going forward.

This week will continue to provide much in the way of fresh economic data for investors to digest. But, by many indications the market has become oversold in recent weeks, and it is likely that the correction for stocks has run its course. We do believe that the positive trend will resume for November and December, making for a positive 4Q experience.

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