Farrell: Data More Negative Than Not
Chief Investment Officer, Soleil Securities
Last Friday, the closely-watched University of Michigan consumer confidence survey registered a disappointing reading of 64.6, when hopes had been for a 70 or so. But maybe it shouldn't have been a surprise, figuring that, during the month, energy prices were high (since reversed, of course), the stock market was struggling, and unemployment continued to rise.
Also, Warren Buffett was interviewed at the famed Allen & Company Sun Valley Media Conference and mentioned that one of his favorite indicators, railroad car loadings, hit a new low and he found that very troubling with its implications for economic activity.
Also troubling is the recent slump in the growth of the M2 money supply. M2 was off $32 billion this past week and is now growing at a 1.8% annual rate. The Fed's balance sheet has also shrunk by some $300 billion from its peak, and we don't need to have contractionary signals at this time.
But at economic turns, the data is always conflicting. On a more positive note, the May trade data improved to a deficit of $26 billion. Exports were up a bit and imports down, so the net is a slight boost to second-quarter GDP. Lyle Gramley still feels that we will have a negative quarter, but only modestly so. While China's exports were off for the 8th month in a row, they declined at a slower pace. And Germany, with 40% of its economy dependent on exports, saw industrial production rise last month by 3.7%. India and France both had a roughly 2.5% increase in the same measure. The outcome of it all is probably best summarized by a Bloomberg survey of a large group of economists who see modest growth of 1.5% for the second half of 2009 with unemployment hitting 10%.
There is still, however, a whiff of deflation in the market place. The low 3.30% 10-year Treasury bond yield makes some sense if you feared deflation. Oil and gold are both off. We feel, however, that the greater risk over the next few years is an inflationary move, what with the enormous amount of stimulus being pumped into the economy.
We remain cautious on the market and continue to think that a 1/3rd to 1/2 correction of the advance from the March lows is at hand. Such a correction is very typical following a sharp move in a very short time period. If that were to occur, the S&P would fall to the lower 800's. The estimates for second-quarter earnings also probably got ahead of themselves, with many of us believing the "green shoots" of the economy theory. Talk of another stimulus package (which Lyle, Greg, and I don't buy) has shaken some confidence (is the economy so weak that it needs even more government juice?), as has talk of Bernanke possibly not getting reappointed. My fear is that Ben is thrown under the bus and a political appointee like Larry Summers would seriously undermine the independence of the Fed and turn it into a political instrument. Maybe this is all enough to use as an excuse to go to the beach.
If you do go to the beach consider taking along any of John Burdett's books. The crimes are gruesome, so be forewarned. But set in Thailand, Burdett gives a fascinating introduction to both the Thai culture and the Buddhist religion. And he can write up a storm: " Let's not call it heart. The sounds she is making are the sounds hearts make after they're in pieces and the fragments dissolve into the overwhelming sadness of the universe." Start with "Bangkok 8" and move on to "Bangkok Tattoo."