Week of 3/30/09
Day Description Time (ET)
31-Mar Consumer Confidence 9:00 AM
31-Mar S&P Case-Shiller Home Price Index 9:00 AM
31-Mar Chicago PMI 9:45 AM
1-Apr ADP Employment Report 8:15 AM
1-Apr ISM Index 10:00 AM
1-Apr Construction Spending 10:00 AM
1-Apr Pending Home Sales 10:00 AM
1-Apr Auto Sales 1:00 PM
1-Apr Crude Inventories 10:35 AM
2-Apr Initial Claims 8:30 AM
2-Apr Factory Orders 10:00 AM
3-Apr Employment Report 8:30 AM
3-Apr ISM Services 10:00 AM
Although consumer confidence is likely to improve slightly over the prior month, the survey will remain near its record low in the high 20s. Note that this report is based off of a monthly survey of 5,000 households with expectations constituting 60% of the index while current conditions account for the remainder.
The S&P Case-Shiller Home Price Index operates on a two month lag, so the information published this week represents the January data. Last month, the 20 city composite fell to a seasonally adjusted price of $150K, resulting in a near 17% decline over the prior year and 30th straight month-over-month price decline. I expect prices to continue on their downward trend for January and come in around $147K.
As illustrated by the chart below, national home prices have receded down to late 2003 levels, giving back five years worth of illusionary gains. In total, prices, as measured by the 20-city composite, have fallen 27% below their 2006 highs. However, home price will likely fall another 15% to $125K over the next year bringing prices down to 2002 levels. Record low mortgage rates may provide some relief, but rising unemployment and the general lack of affordability will continue to pressure home values. These forecasts assume that the U.S. dollar remains stable around current levels because a significant devaluation will artificially inflate home values. It is entirely possible for prices to fall below 2000 levels because housing inventories have risen at a faster rate than the U.S. population.
Chicago Purchasing Managers Index (PMI), a regional manufacturing survey of purchasing managers gauges activity on new orders, production, employment, and prices paid. A reading of 50 or above indicates expansion while readings below 50 show contraction. The readings over the past five months have leveled off in the mid 30s, but I expect the current month to rebound slightly into the high 30s. The Chicago PMI is a great indicator of the National ISM index released the next day as there is a high historical correlation (over 90%) between the results of the two surveys. Again, I expect the ISM results to improve slightly over the prior month as companies slowly begin to rebuild drawn inventories. Aside from the initial knee-jerk reaction by the market, it has largely ignored the manufacturing statistics over the past three months because the slow-down has been largely priced into equities.
Investors have largely ignored the horrible auto sales numbers released over the past several months even as sales came in well below analyst expectations. This is not surprising given that the general state of the auto industry has been well discussed and priced into the market. The reports would have more of a market impact during normal economic times, but you can only beat a dead horse so many times. That being said, if there is an unexpected rise or stabilization in auto sales, the markets would rally on the news. This will not be a problem for the current month, however.
The March employment report will continue to show monthly job losses in excess of 600,000 workers. Economists are forecasting a rise in the employment rate to 8.5% and roughly 650K in job losses. These estimates appear reasonable, but it is hard to forecast accurately because the government’s numbers typically have large prior month revisions. The bulls will tell you that the market has priced in an unemployment rate over 9%, which is probably true in the short-term. Many also view the employment statistics as a lagging indicator, and although this may hold true during a typical recession, I believe that this theory is based on faulty logic in the current climate.
The headline unemployment figures that you read about in the mainstream press dramatically under represent the number of displaced workers. The Bureau of Labor Statistics (BLS) releases alternative measures of unemployment. During the Great Depression, the government calculated unemployment based on statistics akin to the U-6 measure as opposed the U-3 measure currently in use. This rate calculates unemployment by taking the number of unemployed and adding back marginally attached workers and part time workers looking for full time employment. Marginally attached individuals represent people who would like to work but have given up looking for a job because they are discourage and cannot find one. Once these people are added back in to the calculation, the true unemployment rate equals 14.8% based on the February statistics. I have included the BLS table link for your reference. http://www.bls.gov/news.release/empsit.t12.htm
Traders have driven the market down on the day prior to the employment report over the past several months. Then, regardless of the actual job loss number, buyers usually enter the market following the report’s release. I expect to see a similar pattern emerge this week unless the mark-to-market meeting set for Thursday, April 2nd, yields any significant rule changes. From the initial commentary over the topic, it appears that the FASB will adjust the rules and allow banks more flexibility in marking their “toxic” assets to model. Shorts should remain cognizant of this meeting as the bulls could use any news to ignite a significant and baseless rally.
As a side note, I believe that allowing banks to circumvent mark-to-market in certain instances is a horrible idea that is politically driven and destined to fail. This decreases transparency and makes these black boxes (aka banks) even harder to value. How can an investor trust a bank to value their assets to model when their faulty models are what created this mess in the first place? The market will do what it does best after the initial knee-jerk reaction; price financial stocks for this uncertainty, which means lower prices.
The S&P has rallied 23% off of its March 6th low of 666. This bailout driven rally is not supported by broader fundamentals, but government programs that are designed to artificially inflate the book value of banks’ toxic assets. This bear market rally could run another 10%, but I have little doubt that the indices have yet to see their bear market lows. For those of you in 401Ks, I would use any possible move in the DOW north of 8,000-9,000 over the next several months to go to cash and protect your remaining capital. For the current week, I would expect to see some consolidation given market’s sharp run-up. I will discuss some of this week’s upcoming earnings reports in tomorrow’s post.
Nice summary, thanks!
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