Good Evening: This may sound like a recording, but stocks overcame another early dip to again finish higher on Tuesday. At least the averages had some economic data behind this rally, with retail sales and the Empire Manufacturing survey both coming in well ahead of expectations. Then again, PPI rose at a stagflationary pace, and Fed Chairman. Ben Bernanke declared the recession all but over. That equities were able to surmount these minor obstacles, especially the Chairman’s begging-to-be-jinxed forecast, is not a surprise. Nor will it turn many heads that two former Salomon Brothers department heads disagree over the future direction of the capital markets. No; the shocker, one year after the demise of Lehman Brothers, is that anyone ventures a forecast at all in this environment.
Overnight activity was a bit of a snooze, but those reading sections of the newspaper not marked Business had to put the newsprint down once this morning’s batch of data hit the tape. Retail sales were the most anticipated figures of the bunch, and they didn’t disappoint the bulls. Headline sales in August were + 2.7%, +1.1% ex the cash for clunkers phenomenon, and +0.6% ex autos and gasoline sales. All of these numbers were well above consensus expectations and confirmed hopes for a solidly positive reading for GDP in Q3. One of the factors used to determine whether the nominal growth in the economy is “real’ or not is inflation, and, on this front, investors were disappointed with the +1.7% PPI reading in August.
Perhaps market participants were confused, since 1.7% isn’t much of an annualized rate. The inconvenient truth is that this reading is a monthly rate, one more worthy of a South American nation, but after last month’s 0.9% decline, investors weren’t in the mood to worry about the stagflationary implications in today’s PPI release. Finally, the Empire Manufacturing survey printed a positive 19 (after rounding), rather than the positive 14 that had been expected. All things considered, the government-issue data was supportive of the thesis that the economy is, at least for now, on the mend.
Less confusing to all concerned, at least on the surface, was Chairman Bernanke’s remark today about the U.S. economy. “Even though from a technical perspective the recession is very likely over at this point, it’s still going to feel like a very weak economy for some time,” (source: Bloomberg article below). In receipt of this official economic forecast from the Fed Chairman himself, market participants seemed to immediately suffer a mild case of vertigo. U.S. stocks actually started sinking after a nearly unchanged open, and the downticks may in part have been due to the discomfort economic bulls felt over having Mr. Bernanke agree with them. If the Fed is saying the recession is over, or so the logic went, who is left to convert to the growth camp?
Stocks bounced after this brief dip when investors considered the second half of the Chairman’s remark. The “feel weak for some time” phrase can be interpreted literally, but most chose to infer a policy meaning. The term “weak” calls to mind low policy rates and easy money for most market observers, especially when those words are uttered by the man who sits at the head of the table during FOMC meetings.
The resulting rally in the major averages for the rest of the session was thus fairly easy to understand. When Tuesday’s closing bell rang, the major indexes had posted gains of between 0.3% (S&P) and 0.8% (Russell 2000). Treasury prices gave a little ground, but the 2 to 4 basis point increases in yield were modest. The dollar declined 0.2%, but commodity prices took flight. Oil was up 3%, the precious metals were up 1% or more, and parts of the agricultural complex flirted with “limit up” levels. It is strange, therefore, that two separate pricing sources depicted no change in the CRB index today. Given the changes in the markets I could measure, the CRB should have finished higher by 1% or more.
Since the meltdown in home values and mortgage-backed securities (not to mention a toxic amount of leverage) brought down Lehman Brothers one year ago, it was interesting to see Lewis Ranieri’s comments hit the tape today. The Chairman of Hyperion Partners was one of the founding fathers of the mortgage-backed securities market while he served time as the head of the mortgage unit at Salomon Brothers. This man is no stranger when it comes to the inner workings of structured credit, and he said today that the U.S. “financial system isn’t fixed yet, it only looks like it’s fixed” (source: Bloomberg article below) Perhaps Mr. Ranieri agrees with Nassim Taleb, who proffers the common sense argument that the solution to a debt crisis isn’t more debt. Certainly today’s reports of credit card performance in August only buttressed Mr. Ranieri’s arguments (see below), but before we could all look for beds under which to hide, one of his former colleagues piped up to offer a different take on the state of our capital markets.
U.S. stocks “have a lot of room to run”, says Laszlo Birinyi, who heads the firm bearing his name (see below). What’s more, Mr. Birinyi sees a growing economy and a firm stock market lasting at least until the U.S. averages have surpassed their old highs. His case seems to rest on a firm tape (i.e. momentum), but such is the type of forecast that technically-oriented analysts are paid to issue. When Mr. Ranieri was busy inventing different ways to slice up and repackage mortgage loans, Mr. Birinyi was chief technical strategist at the same firm. Both left Salomon before it was sold to Travelers and integrated into Smith Barney (now Citigroup), but it’s interesting to see them offer up such different perspectives.
So which of these two veterans will ultimately be proven right with their opposing forecasts? Let us recall that someone once said, in effect, that opinions about where the stock market is headed are like the terminal destination of the human digestive tract. “Everyone has one and they are useless more than 95% of the time”. With said warning affixed, I will offer a forecast of my own. I think they’ll both be proven right. Stocks could indeed continue to run, especially if portfolio managers who are currently underweight start to panic. At some point, though, the reality will set in that we are not likely headed back to the heady days of 2006 anytime soon. As for just when these twin predictions will come to pass, and from what level in the S&P 500 the next decline will begin, I’ll leave it to readers to decide for themselves. Like everyone else’s, my opinion about where the market is headed is useful only some of the time.
— Jack McHugh
Retail Sales in U.S. Jump 2.7%, Most in Three Years
U.S. Credit-Card Defaults Resume Ascent as Unemployment Worsens
Bernanke Says U.S. Recession ‘Very Likely’ Has Ended
U.S. Stocks Have ‘A Lot of Room to Run,’ Birinyi Says
Financial System ‘Only Looks’ Fixed, Ranieri Says