Comstock Partners, Inc.May 09, 2013
The Market Is Facing Deteriorating Fundamentals
As we watch the market climb to new highs in the face of lackluster and deteriorating fundamentals, we have the feeling that we’ve seen this movie before in 2000 and 2007, when we were one of very few voices of caution in the wilderness. A rise that was fueled by the perception of never-ending Fed liquidity injections has now morphed into a trend that is feeding on itself as investors are afraid of missing out on further gains. As a result, any news, no matter how negative, is being given a positive spin in the media and on “the street”.
For instance, take last Friday’s payroll employment report for April, which touched off a euphoric rise in stocks. While that was a positive surprise over the expected rise of 140,000 jobs, the reported increase of 165,000 for the month was nothing to write home about. It was well below the 1st quarter average of 206,000 per month as well as the 4th quarter average of 209,000. If anything, it looks as if employment increases are decelerating, certainly not a reason for celebration.
Another example was the headline following the recent annual Berkshire-Hathaway gathering, stating “Buffett says stocks will go a lot higher”. While the quote is accurate as far as it goes, it was made in the context of an interview with CNBC’s Becky Quick, in which he actually said, “stocks will go a lot higher in YOUR (caps are ours) lifetime.” Becky Quick is 41, and, according to the life expectancy tables, can expect, on average, to live to 82, which will be in 2054. So stocks will be a lot higher in 2054. Well, yes, but is that worthy of a headline?
In addition to the mediocre employment report there was a lot of other evidence that an already lackluster economy was slowing down further as we headed into the spring. The ISM manufacturing index fell for two consecutive months to its lowest level since December. The ISM non-manufacturing index also declined for two straight months and is now below its 1st quarter average. April vehicle sales slipped to under 15 million units for the first time since October. First quarter GDP grew at a disappointing 2.5% following only 0.3% in the prior quarter. Average GDP growth for the last four quarters has averaged only 1.8%. Real consumer spending has increased only 2% over the past year, and this was accomplished on an exceedingly weak 0.9% rise in real disposable income over the period. Only a sharp drop in the savings rate enabled consumers to reach even that disappointing level.
In addition, March core capital goods orders were up only 0.2% following a 4.8% decline in February. The year-over-year gain was 0.3%. The NAHB housing market index dropped for the third straight month to its lowest level since October. While housing starts were up 7%, more than the entire gain was accounted for by multi-family units as single family starts were down for the second time in three months. The NFIB Small Business Index declined in March, and is only two points above its lowest level for the past year and three points lower than a year earlier. Although March industrial production increased 0.4%, it was almost all accounted for by 5.3% rise in utility production, while the manufacturing sector fell 0.1%.
As for foreign economies, the IMF once again reduced its 2013 global and EU growth forecasts and China reported disappointing results for 1st quarter GDP and exports. This has resulted in a significant drop in commodity prices that is having adverse effects on a number of commodity-oriented emerging and advanced economies.
Although the Fed, so far, has been able to lift stock prices, it has failed to elevate the economy to a point where growth is self-sustaining despite over four years of extremely easy monetary policy. The headwinds from fiscal policy will actually intensify in the months ahead while Washington shows few signs of alleviating the dysfunction that has plagued Congress for the last few years. Furthermore, the S&P 500 is now selling at 20 times cyclically-smoothed trailing GAAP earnings, at the very high end of the zone that was considered normal prior to the serial bubbles of the last decade and a half.