Trading last week was driven by widely anticipated economic data this week. Monday’s strong December ISM Manufacturing data kicked the week off on a positive note, with the headline number higher than at any time since April 2006 and the critical new orders component hitting its highest level since late 2004. Investors waited eagerly for Friday’s US December employment reports, with the intervening ADP and weekly claims numbers dampening hopes for positive job growth. Analyst expectations for the Non-farm data called for breakeven job growth but the actual number was a very disappointing -84 thousand, while the annualized December unemployment rate didn’t budge from the 10% level. In the wake of the report, the Fed’s Rosengren asserted that slow job growth justifies low interest rates, while the spin from the White House’s Christina Romer was that hesitant employers were not rushing to hire full-time employees. PIMCO’s Bill Gross reiterated that he is worried about the Fed’s exit strategy and does not believe the US economy is ready for the Fed to take away the punch bowl. In its minutes from the December 16th meeting, FOMC members noted that more stimulus in the form of large scale asset purchases may become necessary, especially if the economic outlook weaken. In any case, markets took the jobs data in stride, with equity indices sustaining levels that had been seen all week long. For the week, the DJIA gained 1.8%, the Nasdaq rose 2.1%, and the S&P 500 added 0.3%.
There were mixed signals on US housing this week. The m/m November pending home sales data fell much more than expected, registering its biggest sequential decline since 2001. Apparently the expiration of the first time homebuyer tax credit is partially to blame for the decline; the NAR’s chief economist warned that it would be early spring before any sales gains were seen from the reauthorization of the tax credit. Meanwhile, Lennar’s very strong Q4 earnings report sent the entire homebuilder sector higher on Thursday. Lennar was well ahead of revenue expectations, and the company’s CEO noted that continued stabilization in housing is being seen throughout the business. On Friday, the Fed’s Lacker said that housing was no longer a drag on growth, although he also warned that commercial real estate would remain a problem for the economy in the near term.
Friday’s US employment reports were the decisive event of the week and for bond longs, the data certainly didn’t disappoint. The worse than expected reading saw Treasury yields move sharply lower and the yield curve steepen, with the 2-year note falling back below 1% and the benchmark 10-year back towards 3.75%. Rate hike expectations have been pared back as well. Heading into the figures the August fed fund future was pricing in better than an 80% probability the Fed will begin cutting rates by the middle of this summer. It has since slipped back towards 50%.
Friday’s disappointing US employment report prevented the greenback from breaking several key technical levels that might have supported further upside momentum, leaving the dollar vulnerable to the issues that plagued it throughout 2009, including the reserve currency question. But the dollar held up remarkably well in the face of the employment data, thanks in part to the sovereign jitters holding back the euro and Japan’s cabinet shake up. I still think the buck goes higher and the chart remains very bullish.
My longs currently include: JPM warrants, GS,VNO, MEE, AAPL, IBM and V. The latter I added to the portfolio mid-day on Friday via the audio alert.
The markets are bullish, everyone is complacent and there is nary a negative word from anyone other than the perma-bears. That’s when I get a little nervous. Still playing it all long here, but I am being very careful as well. Have you seen the VIX and the VXX? No fear.
I saw “Avatar” this weekend in 3-D with my 13 year old JD and we loved it, I recommend it for adults and the kiddies.
Please check out the comments below from David Rosenberg regarding his view on the current status of the markets. He’s a pundit that I follow and so far his timing has been off on the downside, but he makes some valid points.
INVESTOR COMPLACENCY RUNNING HIGH
- According to Investors Intelligence, there are now three times as many bulls as there are bears. Almost everyone is a performance chaser.
- Market Vane sentiment on equities has firmed to 57%, higher than it was in September 2007 when the market was beginning to crest. We didn’t see a number this strong in the last cycle until September 2003 when the recession was already two year’s behind us. By way of comparison, at the March lows, it was sitting at 32.
- Not one of the 12 seers polled by Bloomberg sees a down-market for 2010. The median increase in the S&P 500 is +11%.
- The VIX is down to 19, right where it was at the market peaks back in October 2007.
- The S&P 500 dividend yield is back below 2% for the first time in over two years.
- Corporate bond spreads and CDS credit default swaps have collapsed to levels not seen since two years ago.
- Based on the Shiller normalized P/E ratio, which is based on the 10-year trend in real corporate earnings, the S&P 500 is trading with a 20x multiple versus the long-run average (back to 1881) of 16x. This market, in other words, is more overvalued now (25%) than it was in heading into October 1987. To be sure, the average ‘overvaluation gap’ at a market peak is 50% so the argument can certainly be made that the market can go even higher from here until it rolls over. That may well be the case. But investors should be aware that at this stage, they are buying into a very expensive market and the ability to time the exit strategy is more than just an art. Those buying stocks in hopes of catching a classic blow-off to a bubble peak — remember, this market is already 25% overvalued based on the most tried, tested and true valuation metric.
******Don’t forget to click our new P&L tab for the spreadsheet which is updated daily.