As Carol Ann once so
innocently said, They’re Baaack! Our government shut down but somehow
the Capitol remained open and our directionless leadership remained
gainfully employed. So we’re left to ponder whether our fearless
leaders would have been so willingly and stubbornly ideological had the
threat of holding back their own paychecks been on the table as was for
most other government employees.
George
Santayana said those that don’t learn from history are doomed to repeat
it. Our current bunch of representatives must be totally dismissive
of old George. How else to explain them risking yet another default on
our debt and yet another rating downgrade on our debt and ability to
borrow? History clearly shows the results of the last standoff in
2011. As we moved ever closer to deadlock and default the market
tremored then cratered moving the S&P 500 index from 1356 down to
1074 a 20% move in less than 3 months. It then took investors and the
markets 5 months to claw back to break even. Maybe DC needs a little
history lesson.
Where we are:
Consumer Confidence Index.
“Consumer confidence eroded sharply in October down to 71.5 from
Septembers 80.2 reading as the government shutdown and debt ceiling
crisis took a considerable toll on consumer expectations according to
Lyn Franco Director of Economic Indicators. She pointed to similar
declines with consumers after the payroll tax hike earlier this year as
well as the timing of the fiscal cliff at the end of 2012. The
expectations are for continued volatility as the budget discussions are
apt to take front and center over the coming months. Confidence is key
as we head into the holiday sales season which for most retailers
accounts for almost 20% of full year sales and revenues.
Purchasing managers Index. There were two released very close together that are worth mentioning. The Chicago Purchasing Managers
report was released two days ago and surged strongly and unexpectedly
to 65.9 the strongest showing since March 2011. This report suggested
manufacturing was finally breaking out. Many economists thought there
was a misprint in the reading. The number showed strength across the
board. New orders rose to 74.3 the highest since February 2011. Order
backlog jumped to 61 from 46.7. Even the employment component moved
higher. All would suggest strength in manufacturing should continue
through the coming months. A few days later the National Purchasing Managers
report was released confirming the Chicago report as no fluke coming in
at 56.4. Of the 18 reporting industries 14 reported growth with some
commentary from the following:
Textiles: “New business is booming”
Chemicals: ”The government shutdown has not had an impact on our business or suppliers”.
Telecom: “ Wireless and VOIP seem to be spiking”.
Furniture: “ Business continues to improve every month”.
Most
commentary continued along the same lines which again seems
surprising. Many market watchers had expected a fallout from the day to
day DC headline watching. It appears to have impacted consumer
confidence but not spending, thus far.
Employment:
Non-farm payrolls for September came out at 148,000 a bit weaker than
we all were looking for. Commentary for hesitancy to add new employees
ranged from nervousness due to the DC budget drama along with the
rollout of the affordable care health exchanges. We’ll be getting
October’s numbers at the end of the upcoming week. In the interim
we’ll continue to look at the real time employment gauges, weekly
unemployment claims which fell 10,000 to 340,000. We’ll want to see
continued progress down closer to 300,00 before we start doing the wave
here, but we’re continuing to make progress.
Home Sales:
Total existing homes sales slipped in September declining 1.9% to an
annualized 5.29 million rate down from a 5.39 million rate the prior
month but up 10.7% from a year ago. Higher interest rates along with
the tight supplies of inventory may both be restraining growth but the
recovery chugs on. Some of the strongest areas of pricing recovery are
coming from the hardest hit from the real estate bust, with Detroit
+44.6%, Las Vegas +30.7%, and Sacramento + 28.9%. Progress is being
made but continued hikes in borrowing rates along with strengthening
home prices may begin to squeeze out buyers as incomes just are not
keeping pace.
Going Forward:
Financial
data issued by various government agencies continues to drip out which
is why we’re still awaiting October’s Jobs figures among others. Early
indications suggests the budget drama had limited effects on US economic
output. As many have come to believe the budget/debt script is already
written. Act I. Argue. Act.II. Retreat to your corners and dig in
your heels. Act. III. Repeat act II. Act IV. Take us to the brink.
Act V. Ride in on white horse and save the day. Boring and won’t
play long as the midterm elections are coming up after all. We are
roughly half way through earnings season and the greater majority of
companies having reported beat on revenues and earnings street analysts
had estimated. Company guidance remains somewhat cautious as the US
economic expansion is uneven and job creation seeing stronger part
timers entering the workforce than full timers. Rays of sunshine and
hope come in from the European Union and China. Just the other day
China’s Purchasing Managers figures were released showing the strongest
growth in 18 months rising to 51.4. Also strong figures just released this Sunday
morning for China’s Non-Manufacturing PMI (services) were reported at
56. 3 the highest in 12 months. Fears of a dramatic economic
contraction in China are proving overblown thus far as the slowdown in
their export engine are being offset with the pickup in domestic
consumption. All very good news for the global economy and US
exports. The EU economy expanded at a .3% growth rate in the second
quarter and the third quarter is anticipated to show a similar rate of
expansion or a small tick higher as the economies of Spain, Ireland and
even Greece seemed to show signs of stabilization. The EU has proved a
significant source of negative drag for the global economy along with
Corporate America’s revenues/earnings for the prior three years as
structural reforms coupled with austerity measures proved difficult to
stomach for many. With that drag from a slowing China and
contracting EU removed we would anticipate a reacceleration of US
exports and revisions by analysts to upcoming earnings expectations for
US multinationals.
Black Condors:
1.Syria. While
Syria’s current Assad regime now talks nice they still carry a big
stick they seem very willing to bash over the heads of their very own
citizenry. They appear willing to kill as many as it takes to silence
the masses and return to business as usual. Israel does not appear as
willing as the US to stand by on a wait and see plan of action. On Thursday
Israeli warplanes struck a suspected Syrian weapons cache inside Syrian
borders fearful there was a missile transfer taking place to
Hezbollah. With Iran still a rising powerbroker in the area there
remains a very real risk of the Middle East irrupting into a firestorm
between Israel and Syria, Iran, Lebanon etc., forcing the US to reenter
yet another front.
2.Iraq and Afghanistan governments are routed.
The US and its allies ousted Saddam and the Taliban to defend US
interests abroad as well as liberate their people. We then installed
new leadership friendly to ourselves. The problem? The new government
figures jetting back “home” from the safety of London and abroad proved
to be corrupt, thieves, killers and generally disliked by the very
people we “liberated”. This appears to one of our primary blunders of
both operations. Not the missions themselves, more so the leaders we
backed.
3. Illinois defaults.
Illinois is a financial mess looking to DC for a bailout. After
decades of overly generous benefits, pay increases and pension promises
the time has come to tell the emperor (Governor and Union Presidents) he
has no clothes or in this case no more money. Illinois
can’t make good on their promises. Elected officials after years of
buying votes in the form of pay raises for government union employees
must now face difficult decisions. Union members and officials must all
look no further than the UAW in the weeks before GM and Chrysler went
bankrupt. Union officials dug in their heels and said firmly NO MORE!
Then the auto giants filed bankruptcy and found plenty more.
Rational minds need to prevail and cuts need to be made. As it stands
Illinois is losing new business opportunities and companies that
currently call Illinois home are exploring other geographical options
due to the possibility of yet another round of tax hikes. There are
two roads to be taken here. One would hamstring the local economy’s
ability to retain and attract existing and new businesses with higher
taxes while the other leads to reasonable negotiation and givebacks and
the potential rebirth of a great city. Do nothing and one of the
largest defaults ever will most assuredly take place. It would be a
spectacular catastrophe rattling markets to the core.
We
remain more optimistic than most the US and our economy’s best days are
ahead of us. The resourcefulness and entrepreneurial spirit of
Americans overall are vastly underrated. From Silicon Valley to the
Shale Energy Revolution, from I-pads I didn’t even know I needed, to
breakthroughs in cancer research that are by the day getting us closer
to fully understanding and one day curing are why I stand by our global
leadership position. Lead from behind is a good tag line not a
strategy. What continues to hinder the US economy is no longer the
deleveraging of both citizenry and corporations that had to happen, it
now is DC’s inability to DO THEIR JOBS. Tax reform is talked about on
both sides in a fair manner. Close loopholes allowing for lower taxes
for everyone. Entitlement reform again is talked about similarly on
both side, means testing for Social Security and Medicare. Eliminating
unnecessary subsidies to special interests such as oil companies,
ethanol producers and ending handouts to farmers when land prices and
profitability are at record levels just all makes sense. Tackle
immigration reform. Just a short few weeks back Sen. Rubio made
Immigration reform his signature issue to run on. Then partisan
politics and the tea party forced him to meekly withdraw his support.
All these issues are a “third rail” for someone, but our officials were
elected to lead not by checking tweets to learn how they should think
on a given day. In other word DC needs to get out of the way and we’ll
all do much much better.
We
maintain our aggressive posture to the market and will continue to
monitor economic, geopolitical and market releases for any signs to
adjust our positions.
We thank you for your patience and confidence in this very challenging environment.
Yours in Pursuit of the Kwan.
James
