Pool Dancing

You can have your Usain Bolts, Michael Phelpses and Gabby Douglases; we prefer the anonymous practitioners of synchronized swimming, an athletic art that rivals the music of the spheres for precision and elegance – kinda like the sporting life on this side of the Atlantic.  Not.  Equity prices rose and bonds fell, sending the discordant message that economic growth and rising inflation lies ahead.

Considering the fiscal cliff the U.S. is hurtling toward, financial markets are either blissfully optimistic or whistling past the graveyard.  The Dow Jones Industrial Average gained 0.32% Friday and is up 8.9% so far in the second half of the year.  Meanwhile, the yield on the 10-year U.S. Treasury note has risen 20 basis points since June 1 to 1.65%.

The action came against a skeletal backdrop.  Productivity in the second quarter was reported to have risen 1.6% after falling 0.5% in the first quarter, when hiring was more robust.  The cruelest irony of the soft jobs market is that rising output per worker has meant less pressure for firms to add workers.

Wholesale inventories declined 0.2% in July, signaling either increasing demand or business pessimism – take your pick.  And the federal budget went $70 billion further in the red last month versus a $60 billion deficit in June.

The most encouraging news was the surprising drop in initial jobless claims to 361,000 versus an expectation of 370,000.  Our colleague Rich Bieglmeier was spot on with his call on this high-frequency series.

There will be stronger hooks to hang a hat on this week.  Tuesday brings the biggest number, retail sales for July.  Recall that last month’s report of a 0.5% decline in June kindled fresh speculation that the economy was tipping over and the Federal Reserve would be forced to act.  Economists generally expect a 0.2% increase in sales and 0.3% increase excluding automobiles.

The producer price index for July, also on Tuesday, is seen rising a benign 0.2% including and excluding food and fuel prices.  The consumer price index, to be released Wednesday is seen rising a similar amount.  Also Wednesday, the Empire State Index of August business activity in New York, industrial production in July and the homebuilders index are slated for release.

Also on tap are jobless claims, housing starts and the Philadelphia Fed’s survey on Thursday.

On the earnings front, big retailers are in the spotlight.  On tap to report quarterly results are Home Depot, Wal-Mart, Target and Sears.  The results could be key to setting the tone for the week.

This week, we inaugurate our Houdini Award with a nod to Goldman Sachs for escaping criminal prosecution for touting securities it was betting against, proving once again it’s better to be right and lucky.

And our Laurel Wreath goes to Shakespeare’s “scepter’d isle,” for hosting all the Bolts, Phelpses, Douglases and synchronized swimmers while delighting our teenage daughter with a closing ceremony performance of English boy band One Direction.

Meanwhile, U.S. investors prepare for the post-Olympics fiscal cliff-diving competition in 2013.  Good luck.

Rescue Me

Lumberjacks yelled TIMBERRR!  Golfers bellowed FORE! Markets wailed LEMMEE OUTA HERE!  Yep, last week’s reports from the Institute for Supply Management and the Bureau of Labor Statistics provided scary bookends for the mounting body of evidence the U.S. economy is rolling over.  But are equity prices anticipating rescue?

Though the major stock indices went south Friday, they remain higher than the close on June 1, when the May payrolls report ushered in the specter of recession.  The S&P 500 closed Friday at 1,354.68, down 124 points on the day and off 0.8% for the week, but up 6.0% since June 1. Similarly, the Dow Jones Industrial Average, also down 0.8% on the week, is up 5.4% since June 1.  And the NASDAQ Composite, which managed a gain of 0.1% for the week, is up 6.9% since June 1.  The market’s performance leads us to believe sentiment still clings to the expectation that policy levers will be used to keep the motor running. 

Pessimists sing along with Diana Ross and the Supremes that  “… there ain’t nothin’ I can do about it.”  Fiscal policy is all but sidelined by Washington gridlock in this election year, and some central bankers are dogged by the uneasy sense that more action is futile in an economy caught in a liquidity trap.

But Federal Reserve Chairman Ben Bernanke has rejected the notion the Fed has no arrows left in its quiver and has pledged the Fed is ready to act if necessary.  The upshot, we believe, is that QE 3 is inevitable.  We think another round of quantitative easing, that is, printing money by purchasing financial assets from commercial banks, will be launched at the Federal Open Market Committee’s next meeting in August.  The minutes from the June FOMC meeting will be parsed when they are released on Wednesday.  The policy makers extended “Operation Twist” at that meeting.

The argument for further Fed action got support last week from news that the ISM’s diffusion index of manufacturing activity in the U.S. slumped into contraction territory for the first time in three years, falling to 49.7% in June from 53.5% in May.  The production and employment sub-indexes were up, but a steep drop in new orders was the canary in the coal mine.

And the notion of an incipient downturn grew stronger with Friday’s news that nonfarm payrolls grew a paltry 80,000 in June, below expectations that were raised when ADP said Thursday that its survey of private sector employment showed a gain of 176,000.  The unemployment rate was unchanged at 8.2%.

Abroad, the misery continued as Eurostat reported the unemployment rate in the 17-nation euro zone rose to a record 11.1% in May from 11% the previous month.  Spain's unemployment rate was the highest in the euro zone at 24.6%, while Austria had the lowest jobless rate at 4.1%.

Next week, the producer price index and the University of Michigan consumer sentiment survey will be released Friday.  For now, though, it’s up to earnings season to set the tone.

The Week That Was and the One to Come

Oh what a week it was for relationship building.  Chief Justice Roberts and enough Supremes stopped in the name of love from jilting Obamacare, the European Union got less unperfect and Miss Data wasn’t all that into us but friendly enough.  Mr. Market responded to it all with outsized gains on the last trading day of the quarter.

Ahead, of course, is the June jobs report to be released at the end of a four-day work week.  The May report showed a disappointing 69,000 additions to nonfarm payrolls, so the June statistics will be looked at for trend confirmation or reversal and the impact on monetary policy makers.    

But let’s look at what last week told us.

SCOTUS STOCKS

Shares of hospital companies predictably shot higher because the Supreme Court’s 5-4 decision to preserve the Affordable Care Act largely intact means care providers will have more paying customers.  Insurers sagged because the Act imposes restrictions that could hurt profits. 
Despite the predictable Tea Party exasperation, we suspect corporate America was relieved that one cloud of uncertainty was gone.

A MORE PERFECT (EUROPEAN) UNION

The stock market took great pleasure in the outcome of the EU summit in Brussels.  What that outcome will lead to, however, is harder to figure out.  No matter.  Mr. Market has a story and he’s sticking to it – for now. 

As best we can tell, the EU decided to decide about recapitalizing banks and creating a pan Eurozone banking regulator, taking the first step toward a real fiscal union that would issue Eurobonds backed by everybody, including that old killjoy Germany and the prodigal sons of the south.

THE WEEKLY DATA DATE

We think the most worrisome indicators were two releases from Chicago, the city that works, the poet said.

The little noticed Chicago Fed’s national activity index reached the lowest level in a year, dropping to a three-month average of -0.34 in May from -0.13 in April. The one-month index dropped to -0.45 in May from +0.08 in April. The Chicago Fed asserts that below -0.7 on the three-month average indicates a recession has likely begun.

The much more noticed Chicago Purchasing Managers Index stayed in expansion territory at 52.9% in May vs. 52.7% in April.  But here’s what caught our attention:  New orders and order backlogs were a negative and inventories rose.  That’s not a recipe for growth.

Meanwhile, from Washington we learned that personal income increased 0.2% in May, largely on investment gains.  Personal consumption expenditures, however, were flat vs. the prior month.
Paradoxically, the brightest star in the sky continues to be housing, the keystone of sustained expansion.  The Case-Shiller price index rose 1.3% in May.

THE WEEK TO COME

As noted, the big dog will be the June employment report on Friday.  Economists are looking for about a 100,000 gain in payrolls and unchanged unemployment rate of 8.2%.  ADP will preview the Labor Department’s number with the release of its private sector payroll tally on Thursday.

If the jobs numbers come in as weak as May’s, expect talk of another round of quantitative easing by the Fed.  Ben Bernanke said the Fed was ready to act if the economy required it.
Also on tap are the ISM Purchasing Managers’ Index for manufacturing for June and construction spending for May on Monday.  Factory orders for May is out Tuesday.

The U.S. shuts down Wednesday to celebrate its independence.   Happy Fourth.

Jobs Market Goes to the Movies

Payrolls grew in April, so what’s to grouse about?  Edward G. Robinson’s reply in Key Largo to Humphrey Bogart’s observation comes to mind.  “Yeah, that’s it! More! That’s right. I want more.”

The Bureau of Labor Statistics reported that 115,000 jobs were created last month, below the 160,000 or so economists were expecting.  Prior months were revised upward, though.  February job growth was pegged at 259,000, up from the previous 240,000 estimate, and March payrolls are now seen as having risen 154,000 vs. the 120,000 gain previously reported.

The average work week was unchanged at 34.5 hours in April. The manufacturing workweek edged up by 0.1 hour to 40.8 hours, and factory overtime rose by 0.1 hour to 3.4 hours. The average workweek for production and nonsupervisory employees was unchanged at 33.8 hours.

In April, average hourly earnings for all employees on private nonfarm payrolls rose by 1 cent to $23.38. Over the past 12 months, average hourly earnings have increased by 1.8 percent.  In April, average hourly earnings of private-sector production and nonsupervisory employees rose by 3 cents to $19.72.

The unemployment rate dipped slightly to 8.1% from 8.2%, largely because participation in the labor market shrank.

BLS data in all their glory can be found at http://www.bls.gov/news.release/empsit.nr0.htm.

This tepid growth in jobs and stagnation in wages suggests the economy remained aloft in the first month of the second quarter, though its air speed drifted to levels that should cause concern in the cockpit.

Perhaps the warm winter skewed earlier figures abnormally higher and economic growth is settling back to a more realistic level.  Perhaps the specter of the unraveling of that great fossil museum known as Europe weighs on international corporations’ animal spirits.  And perhaps the sleeping housing construction sector is a cork still lodged in the champagne bottle.

Whatever the cause, expect sideways action in the stock and bond markets for the foreseeable future.  With most of the impetus from positive first-quarter earnings surprises now spent, international events (particularly elections in France and Greece) could take center stage in the investment melodrama.

For the faint of heart (and our ticker is none too aroused right now), we nominate dividend payers such as AT&T (T) and Philip Morris (MO).  Americans may not be working as much as they would like, but they’re not going to give up cell phones or smoking.  

Job Growth Unleashed in Akron

Eldrick Woods returned to the ranks of the employed yesterday at the Bridgestone Invitational in Akron. So we know nonfarm payrolls added one in August.

In July, the beleaguered U.S. economy added 117,000 jobs, ahead of the 75,000 consensus but not enough to sate the demand from new entrants to the workplace, not to mention those that remain idle, which is 9.1% of us, according to the Bureau of Labor Statistics.

What’s more, the work week was unchanged, which bodes ill for third quarter gross domestic product, and growth in hourly earnings is lagging behind inflation, which spells trouble for increases in consumption, the key component of GDP.

We would call the labor outcome a bogey, when a birdie is needed to move up the leaderboard. Take note, Mr. Woods. The caddy you dumped last month is now carrying the bag of the first-round leader. Hey, that makes two nonfarm jobs added to payrolls this month.

Our baseball picks have followed the stock market recently. The Bronx B-52s finished their carpet-bombing of the pasty panty hose, who remained colorless except for Guillen. That brings our imaginary pile to 2,800 units. For entertainment purposes only, we’ll put 500 units on the favored hemoglobin hose of Boston and Jon Lester over the visiting poker-playing pinstripers and Bartolo Colon of New York.

On Ye Huskies!

After adding 1,300 units with KC’s win over Bos yesterday, bringing the total in the vault to 2,800, we look for the Orioles to Baltimore chop the pinstripers. We’ll invest 500 units, for entertainment purposes only, in the O’s.

Can’t get off the dog sled yet. Mush, Mush!

One can hear the same exhortation emanating from the lips of business, labor and politicians – that is, just about everybody – after the release of anemic second quarter gross domestic product data and a sharp downward revision to first-quarter growth. The chances of tipping over into a double-dip recession have gone up

We have to admit we are surprised at the sluggishness. We guessed, incorrectly, that monetary and fiscal stimulus would have worked its magic and that the Federal Reserve Board would be tightening the money spigots by now to head off inflation.

But, alas, it appears the Fed has been “pushing on a string,” as businesses hoard cash and consumers refuse to spend (personal consumption increased just 0.1% on a seasonally adjusted annualized basis from the first quarter; meanwhile, inventories rose 0.18%, down sharply from the first quarter, but still ahead of consumption).

The all but certain curtailment of government spending tied to the debt ceiling bills couldn’t come at a worse time. The stock market is headed for its worst week in a year and jobs look to remain scarce.

We wonder what the Vegas odds are for another recession in the second half or in 2012? We might not want to speculate on this dog.

The De-Tanning of America

This sporting life brought us recently to the banks of a somnolent tributary of the mighty Mississippi. The evening was drowsy with lingering heat, but the young Texas Leaguers in a ballpark named for Yankees great Bill Dickey and the local investment banking legend seemed quite alert, though unaware they were about to engage in nine innings of cat and mouse that probably has never happened before in organized professional baseball.

You can look it up.

At least, we are reasonably sure it was a first – a game in which a no-hitter was hurled by the combined efforts of two Northwest Arkansas Naturals pitchers, who were bailed out of trouble by an around-the-horn triple play. A scorching ground ball to the hot corner after two walks, the latter a 12-pitch duel that put runners at first and second, started the fun at Dickey-Stephens Park.

The Arkansas Travelers, the singular of which was the creation of an antebellum troubadour, found no way out of the wilderness of futility, just as the itinerant woodsman of lore was baffled by the fiddler who wouldn’t mend his cabin roof and let the rain pour in.

We enjoy the same bafflement in the standoff in Washington (first in war, first in peace and last in the trust of its countrymen) over the debt ceiling increase.

As unprecedented as a combined no-hitter with a triple play, House Speaker John Boehner has lost his perpetual bronze glow, no doubt from hours better spent on the golf course wrangling with Democrats and the renegade Republican rump known as the Tea Party. What an air-conditioned mess! For a man to lose his tan because he’s inside conference rooms fencing with Obama and GOP cultists is simply outrageous.

Be that as it may, we trust all will not turn out well. Though an agreement would prevent financial market Armageddon, it won’t alter the cruel facts on the ground. Unemployment will remain stubbornly high. The government reported a disappointing drop in durable goods orders in June, and the Fed’s “Beige Book” report on conditions in the 12 reserve bank districts points to slowing economic growth.

We, however, are on a roll, having booked 1,500 units by taking Seattle over New York yesterday. We expect no triple plays, much less a no-hitter today in Boston, where the Kansas City blue bloods will face the bloody ankles and Beckett soon. KC will not be waiting for Godot, though, as Vladimir and Estragon did in Samuel Beckett’s absurdist play. Rather, the visiting dogs merit an investment of 500 units from yesterday’s win.
Woof, Woof!

Stitch It Up, Doc

Recall the metallic taste and smell of blood? Seldom do middle-aged urban, sedentary adults experience it, but it is one of those startling sensations of childhood, when we are fearless and the physical world abruptly slaps some sense into us and it’s off to the emergency room for a stitch here and there. Needless to say, we and our offspring have been sewn up multiple times, only to be surprised when it happens anew.

The United States Department of Labor reported that employers shed far more jobs than anticipated in June and stocks beat a hasty retreat to the ER, much like Kev and his fellow sissies on the golf course today, who heard the rumble of thunder on the 18th hole and picked up their well-struck balls plugged in the squishy sod of Split Rock where the family Bronks used to live and the Battle of Pelham was waged in October of 1776. The latter “saved the revolution” according to the hole markers. We’ll have to look it up.

Times being what they are, this patriot wished for a shotgun in his bag to bag a family of “wild” turkeys clucking around a tee box, oblivious to the swack of titanium on Titleist as they pecked the ground for their daily bread. Oh well, probably would have sprayed buckshot at the Acela train speeding by on the outskirts and missed the plucky fowl, much like missing the fairway most of the showery day, requiring the services of a savvy lawyer.

The jobs data need a fast-talking spinmeister, too. All of the components – jobs lost, wages, hours worked, average work week – were inescapably grim. We won’t bother you with the particulars, but the anticipated recovery in the second half is thrown into serious doubt.

We remain hopeful, though. Not to put lipstick on a pig, but we remain enamored of the glamour of filthy lucre. It is our opinion that the choice between God and mammon (that is, excruciating destruction of wealth vs. happy days are here again) is a false premise. Listening to Wall Street “economists” bloviate on facts that are apparent to all but the illiterate is the equivalent of reading yesterday’s newspaper. Money supply growth and fiscal stimulus (and more to come until it works) will kick in.

No one will be blamed for taking money off the table (Kev wishes he had done so with his baseball picks last week), but the jobs report makes stocks cheaper. Which means we’ll get back in when they look too cheap. Now, where’s our shotgun? Dinner, like youth, must be served.

Young Girls They Do Get Weary

One lesson Kev thinks he has finally learned as he approaches the turn to the home stretch is that you can’t tell people how to feel. Least of all Miss Market. Our pouting paramour will not succumb to sunny encouragement, snapping her feral fangs at the hand on her shoulder, laughing maniacally at such bromides as: “Hey, it’s not so bad,” or “Remember all the good times,” or “There’ll be blue birds over the white cliffs of Dover.”

You tell her that Pudge Rodriguez has now crouched behind the plate more times than Carlton Fisk and exhort her to do the same. You tell her that even the graceful, intricate – nay, beautiful – pitching motion of Tim Lincecum must lose a game now and then. To no avail. We must let her edge back to us in her own good time. Not helping her in this direction are the latest economic data.

Wholesale inflation was 0.2% in May. Higher energy prices offset a drop in food prices, according to the government. The core producer price index, which excludes food and energy prices, fell 0.1%. At the retail level, inflation also rose just 0.1% last month.


Industrial production fell 1.1% in May to the lowest level in 11 years and is down 13.4% in the past year, the largest year-over-year decline since 1946. And capacity utilization fell to a record-low 68.3% last month, down from 69%. The Krugmanites have a point. This indicates much slack to be taken up before inflation becomes a problem, a condition much to be wished for.


Inflation and interest rates must rise to convince her she has pricing power again, but the mills of the gods grind slowly. We can’t tell her or anyone else how to feel.

Meanwhile (our fallback transition), stay with PALM. Much chatter about a takeover by industry giants looking for an avenue into the smart phone market. F still has value. Wait for GMGMQ to slip. Hoping NVAX catches fire again.

Wish I had taken the underdog Nationals against the pinstripers last night. Long Islander John Lannan outpitched the suspect Chien-Ming Wang, who nevertheless showed some gumption against the new “first in war, first in peace, last in the American (now National) league” team.

Sign of the Times

Gross domestic product plummeted at a stunning 6.1% annual rate in the first quarter, the government tells us. Throw a tea party, not the one with bags from Ceylonese plantations tossed into Boston harbor, but the one on a sunlit yawn with crumpets and lots of jam. Wear ascots.

The story is in the mix – the cleansing decline in inventories and the rise in consumer spending is making our party. The train is leaving the station. Sure, there will be more tales of financial malfeasance and outbreaks of torch and pitchfork curmudgeons at various stops when we take on more coal and water and let Gary Cooper off to duel at high noon, but the path of least resistance has been paved. The choo-choo, fired by fiscal and monetary stimulus, is staying on the rails. The 2009 second-half recovery is playing out.

All that said, the inflationary world where savings evaporate and borrowing booms will meet us down the track. Great Depression II has turned into garden variety recession. Take what God has given us, which are cycles. Stock prices recover ahead of GDP.

In the event, though, things go awry. My Redbirds’ ace Lohse did his job last night with six scoreless innings, but the Cards lost 2-1 to the Braves. Nevertheless, I’m laying another dime on St. Louis and the stock market, even though the Steinbrenners are cutting ticket prices, a good sign because they are behind the curve. Prediction: Phil Hughes remains in the bigs and Joba is back in the bullpen.

Smoke 'em if you got 'em

Cheer deflation if you are, as am I, enslaved to legally lethal products.

"U.S. consumer prices posted a second straight record decline last month, falling 1.7% on a seasonally adjusted basis. That is the largest drop since the government started compiling the figures in 1947 and well in excess of the 1.3% decline Wall Street economists had expected. Excluding food and energy, prices were unchanged."
Source:WSJ news alert.

The markets for real goods and services are clearing. Even we nicotine addicts have reason to cheer. Just bought a package of Marlboro from my friendly neighborhood Hess station in New York (the cheapest legal outlet I can find) and was delighted to learn the price had dropped from $7.86 to $7.15. Just a week or two ago, the price was $8.06. It seems that even products with inelastic demand must bend to the harsh whip of demand for cheap substitutes.

"Something must be going on," said my gregarious friend who clerks behind bullet proof glass. He said it ominously, conditioned, I assumed, to prices of tobacco forever rising in sync with the drumbeat of the influential healthy lifestyle lobby that heaps steep taxes upon sinners in this state.

So in this season of light, let us light up with butane or paper matches. Those $100 bills we used in boom times are becoming more valuable day by day.