Archive for Market Indicators – Page 2

Goldman Sachs Cuts Q4 GDP Forecast to 1%

By Walter Kurtz, Sober Look

As discussed earlier (see post), US manufacturing data for November shows shrinking inventories. This is true for both the ISM survey as well as the Markit PMI index (see figures below).

Goldman looks at the change in private inventories (also called “inventory investment”) as a good predictor of GDP growth. The Q3 GDP exhibited relatively strong inventory accumulation, which is being reversed this quarter (as the charts above show).

GS: – Inventory investment is often an important contributor to quarterly fluctuations in real GDP. Most recently, real GDP growth in Q3 saw a sizable boost from inventory accumulation. … Given the soft early indicators from business sentiment surveys to date, and our own econometric analysis, we expect that the boost to GDP growth from inventory investment seen last quarter will not persist into Q4. Inventories will probably be a moderate drag on GDP growth into year-end.

The recent decline in the series is consistent with a moderation in inventory investment in the current quarter, and hence a decline in the contribution from inventory investment to real GDP growth. A simple regression of quarterly inventory investment on our indicator [R-squared = 0.8] suggests that inventory accumulation could fall by $34 billion in Q4 ($135 billion at an annual rate) to $27 billion, enough to detract roughly a full percentage point from Q4 real GDP growth if taken at face value.

This reduction of inventories (which to a large extent is driven by the impasse in Washington) resulted in Goldman’s downgrade for Q4 GDP forecast to 1% (annualized rate). What makes this anemic growth projection particularly painful is that it is likely caused (see discussion) by the political gridlock over issues that have been well telegraphed for quite some time (see discussion). The irresponsible behavior of politicians is not surprising, but sad nevertheless.

ISM Inventories index (source: ISM)

US Markit PMI Inventories Index (orange line, source: JPMorgan)

 

The ISI Tech Survey Weakness Not Yet Reflected in the Market

By Walter Kurtz, Sober Look

The ISI Tech Company Index (see discussion) shows continuing weakness. The survey, which is heavily weighted towards US semiconductor firms, is now at the lows of 2008/09. It seems that firms have been postponing spending on equipment and to a lesser degree on software. The obvious explanation is the uncertainty in Washington.

So far this weakness has not been reflected in the equity markets. The PHLX Semiconductor (SOX) index is definitely off the highs but is still up for the year. At some point (probably within the next couple of months), either the sentiment in the industry will begin improving or we will see a selloff in the tech sector. Companies manufacturing and servicing business tech equipment (as opposed to retail) are particularly vulnerable.

Source: ISI Group

 

Bullish Sentiment Jumps Above 40%

By Charles Rotblut, CFA, AAII

Bullish sentiment registered above 40% for the first time since August 23, 2012 in the latest AAII Sentiment Survey. Bearish sentiment continues to stay above its historical average, however.

Bullish sentiment, expectations that stock prices will rise over the next six months, rose 5.1 percentage points to 40.9%. This reading ends a 13-week streak of optimism coming in below its historical average of 39.0%.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, edged up 1.3 percentage points to 24.7%. Even with the increase, this is the 10th time in the past 11 weeks that neutral sentiment is below 30%. The historical average is 30.5%.

Bearish sentiment, expectations that stock prices will fall over the next six months, fell 6.4 percentage points to 34.4%. This is an eight-week low. Even with the drop, pessimism is above its historical average of 30.5% for the 14th consecutive week and the 30th out of the last 34 weeks.

More individual investors are describing themselves as bullish than bearish for just the second time in the past 10 weeks. The bull-bear spread, which measures the difference between bullish and bearish sentiment, is also at its most positive level since August 23, 2012. The current bull-bear spread is 6.5.

Though this week’s survey signals an increase in the level of optimism, it is important to note that this is only the second time since March 29, 2012, that bullish sentiment is above its historical average of 39%. Individual investors remain cautious and failure by Congress and the president to avoid the fiscal cliff would likely have a damaging impact on individual investors’ moods. Though some AAII members are encouraged by signs of continued economic growth and the preliminary holiday shopping data, many remain concerned about the pace of economic growth, ongoing political gridlock and Europe’s sovereign debt crisis.

This week’s special question asked AAII members what this year’s holiday shopping trends are saying about the economy. Responses were mixed, with the largest group of respondents saying the early data shows signs of an improving economy, or at least better consumer sentiment. Several members thought consumers are either ignoring the macro environment (including the possibility of the fiscal cliff fears) or are just tired of not spending. Some respondents are worried that consumers are spending money they do not have. There were also several who thought the initial data did not provide much insight into the overall health of the economy.

Here is a sampling of the responses:

“With holiday spending up slightly, consumers are not letting the fiscal cliff threat spoil their holidays.”
“I’m encouraged by the volume of shoppers reported by the media, but I hope that folks are not spending themselves back into difficult situations.”
“Consumers have become more willing to spend.”
“Consumers don’t have much “extra” money, so they are shopping for the lowest priced products.”
“It is very hard to tell as of now, but aside from Black Friday, I feel that people are being careful with their money.”
“Black Friday does not a shopping season make.”

The historical average for neutral sentiment was adjusted down by a half a percentage point this week, from 31% to 30.5%. The historical average for bearish sentiment was revised up, from 30% to 30.5%. These revisions reflect a trend we have seen develop in the weekly readings. Over time, we make additional adjustments to the historical averages as the data warrants.

This week’s AAII Sentiment Survey results:

Bullish: 40.9%, up 5.1 percentage points
Neutral: 24.7%, up 1.3 percentage points
Bearish: 34.4%, down 6.4 percentage points

Historical averages:

Bullish: 39.0%
Neutral: 30.5%
Bearish: 30.5%

The AAII Sentiment Survey has been conducted weekly since July 1987 and asks AAII members whether they think stock prices will rise, remain essentially flat or fall over the next six months. The survey period runs from Thursday (12:01 a.m.) to Wednesday (11:59 p.m.). The survey and its results are available online at: http://www.aaii.com/sentimentsurvey.

December Seasonality – The Best Month of the Year

As always, here are some seasonal data points from the Stock Traders Almanac for the month of December.  Historically, December is the best month of the year and is especially strong for high beta names:

◆ #1 S&P (+1.6%) and #2 Dow (+1.7%) month since 1950, #2 NASDAQ (2.0%) since 1971

◆  2002 worst December since 1931, down over 6% Dow and S&P, –9.7% on NASDAQ

◆ “Free lunch” served on Wall Street before Christmas

◆ Small caps start to outperform larger caps near middle of month

◆ “Santa Claus Rally” visible in graph above and on page 110

◆ In 1998 was part of best fourth quarter since 1928

◆ Fourth quarter expiration week most bullish triple witching week, Dow up 15 of last 19

◆ In pre-presidential election years Decembers rankings slip: #3 S&P and Dow, still #2 NASDAQ month.

Rail Traffic: Still No Signs of Recession

Rail traffic continues to be a bright spot in the US economy though growth has definitely slowed some in recent months.  This week’s traffic trends showed a rise in intermodal traffic at a 2.4% year over year rate.  That brings the 3 month average to 2.35%.  I think this data is one of many indicators that continues to point to a sluggish, but expanding US economy.

Here’s more via the AAR:

“The Association of American Railroads (AAR) today reported mixed weekly rail traffic for the week ending November 17, 2012, with U.S. railroads originating 288,717 carloads, down 4.3 percent compared with the same week last year. Intermodal volume for the week totaled 249,115 trailers and containers, up 2.4 percent compared with the same week last year.

Eight of the 20 carload commodity groups posted increases compared with the same week in 2011, with petroleum products, up 54.2 percent; motor vehicles and equipment, up 16.3 percent, and primary forest products, up 14.8 percent. The groups showing a decrease in weekly traffic included metallic ores, down 15.8 percent; grain, down 13.4 percent, and nonmetallic minerals, down 12.4 percent.

Weekly carload volume on Eastern railroads was down 4.5 percent compared with the same week last year. In the West, weekly carload volume was down 4.1 percent compared with the same week in 2011.

For the first 46 weeks of 2012, U.S. railroads reported cumulative volume of 13,037,190 carloads, down 3 percent from the same point last year, and 10,943,385 trailers and containers, up 3.4 percent from last year.”

(Chart via Orcam Investment Research)

Rail Traffic: Still Showing Signs of Softening

More of the same here.  Rail traffic is still expanding, but showing definite signs of sluggishness.  This week’s reading of 1.9% brought the 3 month average to 2.6% growth.  That’s certainly in-line with the growing, but very sluggish economy. Here’s more from the AAR:

“The Association of American Railroads (AAR) today reported mixed weekly rail traffic for the week ending November 10, 2012, with U.S. railroads originating 283,414 carloads, down 5.4 percent compared with the same week last year. Intermodal volume for the week totaled 249,531 trailers and containers, up 1.9 percent compared with the same week last year.

Twelve of the 20 carload commodity groups posted increases compared with the same week in 2011, with petroleum products, up 45.5 percent; farm products excluding grain, up 24 percent, and motor vehicles and equipment, up 13.6 percent. The groups showing a decrease in weekly traffic included metallic ores, down 20.9 percent; coal, down 15.5 percent, and grain, down 9.8 percent.

Weekly carload volume on Eastern railroads was down 5.7 percent compared with the same week last year. In the West, weekly carload volume was down 5.2 percent compared with the same week in 2011.

For the first 45 weeks of 2012, U.S. railroads reported cumulative volume of 12,784,473 carloads, down 3 percent from the same point last year, and 10,694,270 trailers and containers, up 3.4 percent from last year.”

 

Pessimism Surges to Highest Level Since August 2011

By Charles Rotblut, CFA, AAII

Bearish sentiment spiked to its highest level since August 2011, as bullish sentiment fell in the latest AAII Sentiment Survey.

Bullish sentiment, expectations that stock prices will rise over the next six months, fell 9.7 percentage points to 28.8%. The drop puts optimism at a four-week low. Bullish sentiment is below its historical average of 39% for the 12th consecutive week and the 32nd time in 33 weeks.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, edged up 0.8 percentage points to 22.4%. Even with the increase, neutral sentiment stayed below its historical average of 31% for the ninth time in 10 weeks.

Bearish sentiment, expectations that stock prices will fall over the next six months, surged 8.9 percentage points higher to 48.8%. This is the highest pessimism has been since August 4, 2011. It is also the 12th consecutive week and the 28th out of the last 32 weeks that bearish sentiment has been above its historical average of 30%.

Bearish sentiment is at unusually high levels, but not so high that it would be considered extraordinarily high. (In statistical terms, pessimism is less than two standard deviations away from its historical average.) The sharp increase comes as the market has pulled back, some large-cap stocks have declined notably over the past several weeks and uncertainty about the fiscal cliff looms. Many individual investors also continue to fret about the slow pace of economic growth and Europe’s sovereign debt crisis.

This week’s special question asked AAII members whether they planned to alter their portfolio or keep it unchanged given last week’s election results. About two-thirds of respondents said they haven’t made any or weren’t planning on making any changes. Approximately 20% said they are either reducing their stock holdings or favoring less volatile stocks. A few said they were waiting to see what Congress does, or doesn’t do, to resolve the upcoming fiscal cliff.

Here is a sampling of the responses:

“I will keep to my present strategy of emphasizing solid dividend stocks and a couple of well-performing growth stocks.”
“I’m happy with my asset allocation and don’t need to change it.”
“No changes other than taking some capital gains prior to year’s end.”
“I plan to continue to tweak my portfolio as opportunities arise, but do not expect to make major sector changes.”
“I’m reducing risk and holding more gold.”
“My plan is to neither buy nor sell until after Congress acts on the fiscal matters.”

This week’s AAII Sentiment Survey results:

Bullish: 28.8%, down 9.7 percentage points
Neutral: 22.4%, up 0.8 percentage points
Bearish: 48.8%, up 8.9 percentage points

Historical averages:

Bullish: 39%
Neutral: 31%
Bearish: 30%

The AAII Sentiment Survey has been conducted weekly since July 1987 and asks AAII members whether they think stock prices will rise, remain essentially flat or fall over the next six months. The survey period runs from Thursday (12:01 a.m.) to Wednesday (11:59 p.m.). The survey and its results are available online at: http://www.aaii.com/sentimentsurvey.

AAII: Optimism at Highest Level Since August

By Charles Rotblut, CFA, AAII

Bullish sentiment rose to its highest level since August, while bearish sentiment remained above its historical average in the latest AAII Sentiment Survey.

Bullish sentiment, expectations that stock prices will rise over the next six months, rose 2.8 percentage points to 38.5%. Optimism was last higher on August 23, 2012. The rise puts bullish sentiment close to its historical average of 39%.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, declined 1.7 percentage points to 21.6%. The last time neutral sentiment was lower was October 6, 2011. The historical average is 31%.

Bearish sentiment, expectations that stock prices will fall over the next six months, declined 1.1 percentage points to 39.9%. This is the first time in four weeks that pessimism is below 40%, though the current reading is admittedly just barely below that mark. This is also the 11th consecutive week and the 27th out of the last 31 weeks that bearish sentiment has been above its historical average of 30%.

Bullish sentiment came in above 38% for the just the second time since April 5, 2012, a sign of just how much this year’s rally has been mistrusted. Bullish sentiment has been below its historical average of 39% during 31 of the past 32 weeks. Whether this week’s numbers mark a turning point or just a temporary blip remains to be seen. It is worth noting, however, that it is not just our survey that has shown an improvement in individual investor sentiment. Data published by the Investment Company Institute shows that the amount of weekly estimated outflows from domestic equity mutual funds has decreased during four out of the past five weeks.

Due to the survey’s period of Thursday through Wednesday, the impact of the election’s results are only partially reflected in the survey’s results. Many individual investors are also cautiously watching Washington to see what will be done about avoiding the fiscal cliff, reducing the debt and aiding stronger economic growth.

This week’s special question asked AAII members how much the European sovereign debt crisis is influencing their six-month outlook for stocks, especially relative to six months ago. Responses varied, though about half of the respondents said Europe’s debt crisis was not having much of an impact or that their sentiment has not changed because of the crisis. About a third of the respondents said they have a negative outlook or their sentiment has worsened because of the crisis. A smaller group said the crisis has not changed their outlook.

Here is a sampling of the responses:

“Not a lot. I’m more concerned with our do nothing Congress and the fiscal cliff.”
“Less than six months ago. I think we are suffering from impending-crisis-fatigue.”
“A lot less. I don’t know why, because the problem has not gone away, but the anxiety about the situation is gone.”
“I’m not sure that the European Union has the problem solved and wrapped up in a bow, but it’s out of the headlines as the fiscal cliff is the worry du jour.”
“It’s having a greater influence because the actions thus far have just put off an inevitable disaster.”
“It does cause me to have a concern about how this is going to affect our own markets in the future.”

AAII Sentiment Survey:

Bullish: 38.5%, up 2.8 percentage points
Neutral: 21.6%, down 1.7 percentage points
Bearish: 39.9%, down 1.1 percentage points

Historical averages:

Bullish: 39%
Neutral: 31%
Bearish: 30%

The AAII Sentiment Survey has been conducted weekly since July 1987 and asks AAII members whether they think stock prices will rise, remain essentially flat or fall over the next six months. The survey period runs from Thursday (12:01 a.m.) to Wednesday (11:59 p.m.). The survey and its results are available online at: http://www.aaii.com/sentimentsurvey.

 

Euro-Coin Index: Still Recession in Europe

The October reading from the Euro-Coin index, a private expansion/contraction model developed by CEPR, is still pointing towards contraction across Europe.  The latest reading of -0.29 is slightly improved from the September reading of -0.32, but still contracting.  The recent readings are the worst since 2009 and consistent with the view that Europe remains mired in a deep economic hole.  CEPR has a bit more:

€-coin continues to stagnate in October at a negative level

  •  In October €-coin was at -0.29 % (-0.32% in September).
  •   The deeper pessimism recorded by the surveys largely offset the positive contribution arising from recent developments in manufacturing.

Earnings Expectations Take a Turn for the Worse

By Walter Kurtz, Sober Look

The recent earnings guidance from Apple has hit a reset button on earnings growth expectation for the whole US stock market. Earnings per share (EPS) growth expectations for the S&P500 companies corrected sharply to the downside.

Barclays Capital (Barry Knapp, Eric Slover, Adam Sussi): – The early weakness in corporate earnings continued right into the last big week of the 3Q12 reporting season. With 70% of companies having reported, it is clear that even with the heaviest negative preannouncements in our series since mid-2006 and the weakest quarterly expectations since the Great Recession, the bar was set too high this quarter. We had expected weak macro-economic trends to pressure optimistic forward growth rate expectations this reporting season; indeed, since Alcoa’s release (October 9, 2012), 4Q12 expected earnings growth has fallen to 7.2% from 10% and expected 2013 growth has dropped 90bp to 10.4% from 11.3%.

AAPL’s release last Thursday had a particularly marked impact on index earnings expectations. Apple guided calendar 4Q12 EPS 25% below the Street (a ~$3.5bn difference). AAPL now represents almost 5% of 2012 S&P 500 EPS and the guidance shock – relative to estimates and taken at face value – would reduce 4Q12 S&P 500 EPS growth (y/y) by 160bp. Estimates have fallen 100bp since AAPL reported.

Source: Barclays Capital

Of course it wasn’t just AAPL. As Barclays points out above, Alcoa, Caterpillar, and others have been hit by the global slowdown – all putting pressure on earnings growth expectations. Only 38% of companies so far have beat earnings estimates – the lowest ratio since the beginning of 2009 (see chart here). The Goldman analyst index (GSAI) recent sharp declines (see discussion) may in fact be driven by the expectations of a significant slowdown in corporate earnings growth. At this stage US equities are propped up more by the Fed’s expansionary policy than by the corporate sector fundamentals. The hope of course is that the global macro picture will improve, lifting with it the S&P500 company earnings. The timing however remains uncertain.

Barclays Capital: – The global growth trajectory should continue to drive revenue and earnings, and last week’s October data were hardly encouraging for the corporate outlook. In China, the HSBC PMI trend improved for the second month – but remains below 50 – and the New Orders index reached a six-month high. However, in Europe, PMIs were broadly weaker, suggesting downside risk to euro area 4Q12 GDP forecasts. The decline in the EU new orders-less-inventories was particularly discouraging; we had viewed improvement in these series in August and September as an early sign that Asian exports and global trade would stabilize and improve in 4Q12 and into 2013.

So, broadly, although some signs of stabilization have emerged, data remain mixed and do not yet support a pickup in growth in S&P 500 forward earnings. We think the moderation in expectations is a step in the right direction, but believe there is more right-sizing to come.

ECRI: Inflation Pressures Increase Somewhat

The ECRI’s independent inflation gauge continues to point to benign levels of inflation despite a marginal recent uptick.  This month’s reading was down slightly and remains in the tight range that has been apparent for several years now.  Inflation pressures remain low.  Here’s the details via ECRI:

U.S. inflationary pressures were slightly lower in October, as the U.S. future inflation gauge slipped to 103.5 from an upwardly revised 103.6 in September, originally reported as 103.4, according to data released Friday morning by the Economic Cycle Research Institute.

“Despite its latest downtick, the USFIG remains close to its September high,” ECRI Chief Operations Officer Lakshman Achuthan said in a release. “Thus, U.S. inflation pressures have increased somewhat since August.”

Orders Trends Raise a Red Flag

Here’s some rather disconcerting analysis from Moody’s on the state of corporate America. They highlight capital goods orders and correlation with business sales noting that such declines have only occurred in the mist of recession:

“Gains in the September durable goods orders report were not enough to accelerate US business sales. Core capital goods orders tightly correlate with sales and investment, and those orders fell 6.5% yearly last quarter — the sharpest decline in almost three years. Such a shortfall has been previously seen only in the throes of a recession. Domestic consumer spending growth may protect the economy from the full brunt of this distressing development, but businesses with international operations will not be as fortunate. When core capital goods orders have shrunk on a yearly basis, business sales growth fell by an average of 3.3% (Figure 2). Core capital goods orders held flat on a monthly basis in September; we must soon see them rise — like last month’s new orders subindex from the ISM Manufacturing survey — if we are not to see a deepening business sector slump.”

Source: Moodys