David Rosenberg of Gluskin-Sheff welcomes you back to work with seven economic datapoints requiring you to look behind the headlines.
1. U.S. consumer spending in the first quarter is higher because the savings
rate has slipped to 3.1% from 4.7% at the end of last year. Organically,
spending is actually doing quite poorly and that reflects the fact that
wage-based incomes remain under pressure. So, without that
unsustainable decline in what is already a low personal savings rate,
consumer spending in January would have actually contracted 0.4% and
0.6% in February. In other words, what we are seeing unfold right now is
a ‘low quality’ consumer recovery in the U.S., not deserving of the P/E
multiple expansion that the retailers have enjoyed in recent months. A
sector to clearly fade going forward is consumer discretionary.
2. On home prices, the seasonally adjusted data did indeed show an
increase of 0.4% MoM (using the Case-Shiller Composite-10), but the raw
data revealed a 0.2% dip — the fourth decline in a row! Now it would be
one thing if January was an unusually weak seasonal month for home
prices deserving of an upward skew from the adjustment factors; however,
from 1998 through to 2006, they rose in each and every January and by
an average of 0.6%. But what happened is that home prices collapsed in
each of the past three Januarys — by an average of 1.8%, or a 25%
annual rate. And, seasonal factors typically weigh the experience of the
prior three years disproportionately so what looks like steady gains in
housing prices may be little more than a statistical mirage.
Consumer confidence (Conference Board version) rose to 52.5 in March
and yet again this was treated gleefully on the Street and in the media
because it beat the consensus estimate. But here is the reality: in
recessions, this confidence index averages out to be 71.0, and in
expansions, it averages 102.0. What does that tell you?
4. The ISM index came out before the payroll numbers did and injected a big
round of enthusiasm into the pro-cyclical camp. The index did shoot up in
March, to 59.6 from 56.5, and while many of the components were up,
the prime reason for the increase was the eight-point surge in the
inventory component, to 55.3. Moreover, the orders-to-inventories ratio
slid to a level suggesting that we could be in for a big pullback in the next
few months. Meanwhile, very little attention has been made to the
construction spending data, which sagged 1.3% MoM in February with
broad-based declines across sectors — and January’s 0.6% drop was
revised to -1.4% (the fourth slippage in a row).
5. Stock buybacks are widely (and erroneously) viewed as being a major
fund-flow driver of the equity market, and many a pundit points to the
37% QoQ jump (+98% from the 2009 lows) in buybacks as source of
comfort. But here’s the rub: The vast majority of companies are buying
back their stock to avoid the dilutive effects of expiring stock options — of
the 214 companies that did a buyback in Q4, only 50 resulted in share
count reductions (see page B2 of the weekend WSJ). Moreover, it really
says something about the widespread excess capacity in the economy
and poor perceived rates of return on new investments that companies
would opt to deploy cash for buyback strategies at this presumed early
stage of the business expansion. If there is one trend that is indeed
constructive — certainly for our income theme — it is that companies are
beginning to pay out more of their retained earnings in the form of
dividends — $5.1 billion in net dividend increases in Q1, the most since
2007Q4 (but still down 21% from two years ago).
6. There seems to be this entrenched view now that the government can be
expected to come in and resolve all the problems in the economy. This
view is deserving in some sense because not only did the Fed and the
Treasury break the boundaries between the private and public economy
this cycle to bail out the banks, auto sector and housing companies, but
they have continued in these efforts despite a record $1.5 trillion deficit.
With no other goal, it would seem, than to allow the residential real estate
market to clear at lower prices, the government now intends to
permanently reduce the mortgage balance for all homeowners who are
“under water” and unemployed homeowner mortgage borrowers are also
going to be recipient of taxpayer assistance (but not the renter). The
problem ahead is that the bond market may no longer be in a cooperating
mood to finance all this largesse. With the 10-year yield now pressing
against the 4% threshold, we have a crucial week ahead for the Obama
team’s financing capacity as a further $82 billion of debt sales are being
put to the market for added digestion.
Another source of concern for the bulls who continue to rely on
government support for the recovery is the general population — the part
of the public that took in a mortgage it could afford and never used the
house as an ATM. Resentment is starting to build as Uncle Sam is
increasingly being viewed as Robin Hood at best, or the Artful Dodger at
worst. There were two great reads over the weekend pertaining to this
theme of emerging class warfare — Tea Party Anger Reflects Mainstream
Concerns on page A13 of the weekend WSJ and Help Paying Mortgages
7. While everyone is treating the nonfarm payroll report as gospel, let’s keep
in mind that the ADP count showed that private payrolls fell 23k,
completely at odds with the Bureau of Labor Statistics (BLS), which claims
that this metric was up 123k. Now, we are not going to dismiss the BLS
data at all, but wouldn’t it be nicer if both surveys said the same thing?
The ADP is a pretty simple concept — and does not have any “plug”
factors to try and assume how many new businesses were created or
destroyed in any given month. Meanwhile, wages are now deflating and
the 0.1% decline in March could be the thin edge of the wedge as the
Gallup Daily tracking finds that 20.3% of the U.S. workforce was
underemployed in March — a slight uptick from January and February.
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