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November 16, 2010 Economic Commentary
MARKET MUSINGS & DATA DECIPHERING
Breakfast with Dave
RETAIL SALES NOTHING TO WRITE HOME ABOUT Yes, yes, the headline came in at +1.2% MoM in October, above consensus views. What of it? The headline also came in at +0.6% in September (now revised to +0.7%) and that translated into a sub 0.1% gain in real personal consumer spending for the month. Keep in mind that retail sales is only onethird of the spending pie, and that we also have to consider what prices are doing since it is the “real” GDP data, not the nominal figure, that ultimately dominates investor attention. The component of retail sales that feeds right into personal consumer spending in the GDP data is “retail control,” which removes autos, building materials and gasoline. This metric edged up 0.2% MoM in November and based on our estimates of what prices did, strongly suggests a flat month for real consumer outlays. Recall that we finished Q3 with the consumer losing momentum, in real terms. So based on our analysis, what we are “building” into the early part of Q4 is so weak, as far as the U.S. consumer is concerned, that it looks like we will see little more than a 1% annualized growth rate for real PCE for Q4. Looking at the other parts of the economy, it looks as though real GDP is going to slow a touch this quarter, to a 1.7% annual rate — well below the 2.6% pace being penned in by the consensus currently. This may come as a surprise to the growth bulls but also possibly help reverse this selloff in the Treasury market. If there is a war being waged at the current time it is over all the surveys and their findings regarding the holiday shopping season outlook. The International Council of Shopping Centers sound very optimistic, as we highlighted yesterday (though less so for the low-end). The Wall Street Journal cited a Wedbush poll that found that holiday budgets are down 5.7% from last year. And, while only 9% of upper-end income earners see their financial position as having deteriorated in the past year (what could they have been long? Greek bonds?), fully 34% of the low-end universe feel as though their financial situation is worse. For 73% of respondents, “price” is the top consideration and the number-one destination ... you guessed it, Wal-mart. Go ahead and squeeze a bond-bearish inflationary scenario out of that backdrop. NO EMPIRE BUILDING HERE The New York Fed’s Empire index of manufacturing activity took a dive in the current reporting month — swinging from +15.73 in October to -11.14 in November, the largest swing ever recorded in a single month and the worst showing since the depths of recession in April 2009. The consensus was looking for +14. The question is why the pro-QE2 New York Fed would want to publish such an ugly statistic. Doesn’t it want to do everything it can to bolster confidence?
Please see important disclosures at the end of this document.
IN THIS ISSUE • U.S. retail sales, nothing to write home about: yes, yes, the headline retail sales data came in above consensus in October, but the “retail control” measure, which goes directly into the consumer spending component of GDP, points to a flat consumer outlay trend • The New York Fed Empire Index, no empire building here: manufacturing activity in the New York area plunged in November … and the components were worse than the headline • Income theme still intact: spasm don’t throw secular trends away. The bond market is going through a corrective phase right now. Nothing more, nothing less
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the market is down 18% in the past decade in terms of ”price”.08 in November from 30. the 46 stocks that make up the so-called Dividend Aristocrats Index has outperformed the market by around 300bps so far this year (with a near-14% total return). nothing more. INCOME THEME STILL INTACT Spasm don’t throw secular trends away.13). crude. the appetite for fixed-income product remains healthy. how could we forget … so inflationary. Oh.S.33 in October. The bond market is going through a corrective phase right now. But as we saw with the response to Intel’s dividend hike to close out last week and the positive response the banks received from the news that the Fed may allow them to lift their dividends if they can meet certain criteria. Companies are sitting on a record stash of cash and payout ratios are at historic lows of 28. bond market is going through a corrective phase right now. Spasm don’t throw secular trends away.6%. Not only that. while prices-received deflated outright to -2. But maybe there was more to Cisco’s recent disappointment than meets the eye.00 in October. the components were even worse than the headline. investors have paid more attention to dividend-paying companies Page 2 of 5 .09 from 21. This index is correlated to technology — the new darling sector of the investment community. nothing less Even in the equity market. The U. which was the lowest since March 2009. but even in the equity market. at least saw their returns flat-line instead of deflate (small though some consolation).38 in November. But those that reinvested the dividend. cotton and corn have been doing or maybe they are resisting the raw material cost increases just as they find it next to impossible to pass anything along to their customers because the prices-paid index slowed to 22.60 from +8. Nothing more. led by California (which has a $25 billion fiscal gap that needs to be closed) and the looming end to the BABs (Build America Bonds). 2010 – BREAKFAST WITH DAVE Meanwhile.67 in October and hours worked came in negative for the second month in a row (-16.November 16. which is how Corporate America managed to float a record (for November) $41 billion of newlyminted investment-grade debt over the past two weeks. Meanwhile. attests to the view that income-equity is finally in vogue. These are companies that have consistently raised their dividends for at least 25 years in a row. nothing less. According to the Wall Street Journal. to -24. New orders were crushed. and the inflation components. investors have paid more attention to dividend-paying companies and for quality than they were last year in what can only be described as a junky bungee-jump off a depressed low. Either manufacturers in the New York area are ignorant of what copper. The sharp selloff in the municipal bond market is an over-reaction to default risks — there is a lot of supply coming onto the market. As our friend Howard Silverblatt at S&P has observed. the first time this year this has happened. Everyone and their mother is awaiting a sustained turnaround in the jobs market but there was scant evidence of this in the Empire report — the employment component receded to 9.32 from -4.
are only serving to exacerbate volatility both in the data and in the markets. balanced by raw materials on the other. 2010 – BREAKFAST WITH DAVE We have been advocating relatively low weightings in the equity market.November 16. A market that is now back in corrective mode — “exhaustion gaps” and “bullish complacency” as Bob Farrell just boiled it down to in four words. but certainly not a zero exposure despite our cautious outlook Page 3 of 5 . but certainly not a zero exposure despite our cautious outlook. Reliable dividend growth and yield have been a consistent theme of ours — it’s not just about the allocation to equities but also which sectors to be exposed to. which ironically enough. Our exposure is running between 20-25% with a barbell approach — income equity on one side. That is the key to performance in a secular bear market punctuated by whippy but unsustainable rallies and a deflationary backdrop that is recurringly being met by a myriad of government reflationary policies. and Walter Murphy’s latest report exposes the “sign that the 20-week cycle has finally peaked.” We have been advocating relatively low weightings in the equity market.
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