Good Evening: The first day of April picked up where March left off and stocks enjoyed another solid day. The proximate cause of today’s happy results were the release of a batch of not quite as bad as expected economic statistics. The “improvement” in both our economy and our markets caught the attention of Treasury Secretary, Tim Geithner, who noted “encouraging signs” while in London today. As we all prepare for whatever the BLS has in store for the markets with Friday’s nonfarm payrolls figures, however, it might make some sense to heed the latest views from PIMCO’s Bill Gross.
U.S. stock index futures were down overnight when the first pieces of economic news came out prior to this morning’s opening bell. Mortgage purchase applications eked out a tiny gain during the latest reporting week, and the Challenger job-cut report revealed fewer layoffs than had been expected. Next up was the only disappointing data point, as the ADP employment report estimated that our nation employed 742,000 fewer paycheck earners in March than in February. Given ADP’s spotty record and recent revisions to their methodology, however, most market participants discounted the importance of this release.
Equities opened lower and were down some 2% when the ISM data and other reports came to the rescue. Estimated to come in at a lowly 36, the uptick to 36.3 was greeted with surprising enthusiasm. Since the vast majority of ISM readings fall within a range bound by 45 and 55, I believe the joyous response today was a bit premature. Then again, markets tend to move on perception as much as reality, so if people want to believe the economy is picking up, then why fight it? Coming out at the same time were slightly better than expected reports on pending home sales and construction spending, which only buttressed the case made by the believers in the crowd.
The major averages vaulted back above the unchanged mark less than thirty minutes later, and then came even better news. Auto sales were definitely better than expected, up significantly in March versus February. That massive financing incentives (including “job loss” guarantees) played a role, or that sales are still some 40% below trend were details left for another day. The averages spent the rest of the session heading irregularly higher, with the Dow’s 2% gain besting the other indexes. Unimpressed by either the economic stats or the equity rally, Treasurys held their ground for most of the day before finishing mixed. The dollar was also virtually unchanged, but commodities took a breather. The energy complex fell after crude oil inventories inconveniently swelled and the CRB index gave back 1.3% in response.
After a nice run from the March lows, equity investors are asking themselves if this move is the start of a new bull market or yet another head fake. Two men whose last names both begin with the letter G weighed in on this subject this week. While in London today, Treasury Secretary Geithner told a Bloomberg T.V. audience not to overlook the wealth-generating upside possibilities:
“’You’re seeing encouraging signs of improvement in our markets — we want to reinforce that,’ Geithner said today in a Bloomberg Television interview in London. ‘I’ve never seen this much support around the world.’
“Geithner’s remarks reflect the view of some analysts that the worst of the economic downturn may be past, even as some banks are likely to fail and unemployment is set to worsen. The Treasury chief said the main danger is that banks and investors take too little risk and refrain from betting on a recovery.” (source: Bloomberg article below)
Guarding against taking too little risk may be Mr. Geithner’s warning, but it would be just what the Doctor orders for investors if PIMCO’s Bill Gross were an M.D. (the hard-earned medical degree, not the bestowed Wall Street title). Fresh off PIMCO’s annual secular forum, Mr. Gross penned a piece earlier this week that would have been of great value three years ago to the banks under Mr. Geithner’s charge when he was president of the New York Fed. Starting with an outlook for the global economy, Mr. Gross cites three major headwinds for growth in the years ahead — delevering, deglobalization, and reregulation. The reciprocal of each of these factors was ascendant for 25 years, says PIMCO’s head honcho, so the reversal of these trends will take years, not months.
As for how this economic forecast translates into an investment strategy, Mr. Gross is a little short on specific trade ideas. But he does tell investors what won’t work, saying that the asset classes that benefited from increasing leverage, rising global trade volumes, and deregulation are definite picks NOT to click in the future. The areas he says to avoid in general are the U.S. dollar, credit, equities, and emerging markets. His buy recommendations can only be inferred, but Mr. Gross is generally friendly toward safer securities that produce returns based on income generation rather than capital gains. If this sounds like a game plan suited to PIMCO’s strengths, they are. But it doesn’t mean his advice isn’t sound.
With regard to riskier securities, the ones that depend upon fickle risk appetites, Mr. Gross says the critical factor is the price one pays going in. “Buy low” may sound trite and obvious, but given his firm’s economic outlook, his real advice is to rethink just what the term “cheap” really means. In a very challenging environment, “cheap” should be lower than during the growthy bull phase.
So which advice to follow from these G-men? Should we act on the don’t-be-too-timid-and-miss-the-rally thinking of Mr. Geithner, or should we heed Mr. Gross’s let-the-decline-come-to-you approach? Constant readers will be surprised to learn that I’m now bullish and thus whole-heartedly agree with Secretary Geithner. Then again, remember that today is April Fool’s day.
— Jack McHugh