Are these Green Shoots for Real?

Just over five years ago, then-Federal Reserve Chairman Ben Bernanke appeared on “60 Minutes.” A full three months before the official end of the recession, Bernanke correctly called the economic recovery and uttered what would become a catchphrase of economic hope: “green shoots.” In response to Scott Pelley’s question about whether the Chairman saw progress, Bernanke said, "I think all of our efforts, so far, have produced results…And I think as those green shoots begin to appear in different markets and as some confidence begins to come back that will begin the positive dynamic that brings our economy back…I do see green shoots.”

Green shoots come in lots of different types and sure, things are a lot better than they were in March 2009, when the economy contracted by 5.3 percent and LOST 650,000 jobs. But five years, one month and one week later, the new Fed Chief Janet Yellen said that there is still a good deal of slack in the labor market and the growth rate has yet to reach the post-World War II average of 3.3 percent.

While the economy is not yet operating at full potential, after the brutal winter, there is evidence that the economy may be picking up some steam…green shoots, if you will. In the most recent report, the average of new jobless claims over the past month dropped to 312,000, the lowest level since October 2007 and is now at normal levels for an expansion.

Additionally, the weekly earnings of full-time workers rose three percent in the first quarter compared to a year earlier, the fastest pace since 2008, according to a Labor Department report. Three percent might sound like chump change, but considering that inflation increases by 1.4 percent over the past year, it’s not too shabby. After adjusting for inflation, median earnings are now at their highest level since the second quarter of 2012.

That’s the good news…now for the more sobering data. Analysis by Labor Department senior economist Aaron Cobet underscores that “While average income has returned to pre-recession levels (on a nominal basis), income gains have been distributed unevenly.” How unevenly? Between 2008 and 2012, the top 20 percent of earners accounted for more than 80 percent of the total increase in household income in the United States. Income fell for the bottom 20 percent of earners. In other words, green shoots are not showing up for everyone.

MARKETS: Investors enjoyed a strong, holiday-shortened week, which mostly reversed the previous week’s losses for the broad indexes.

• DJIA: 16,408, up 2.4% on week, down 1% YTD
• S&P 500: 1864, up 2.7% on week, up 0.9% YTD
• NASDAQ: 4095, up 2.4% on week, down 1.9% YTD
• 10-Year Treasury yield: 2.72% (from 2.63% a week ago)
• May Crude Oil: $104.30, up 0.5% on week
• June Gold: $1293.90, down 1.9% on week
• AAA Nat'l average price for gallon of regular Gas: $3.66 (from $3.51 a year ago)

THE WEEK AHEAD: It will be a big week for earnings, consumer giants, technology bellwethers and momentum darlings weigh in with results. General Motors will issue its first report since the ignition switch defect put the carmaker in the regulatory spotlight.

Mon 4/21:

Hasbro, NetFlix

8:30 Chicago Fed Nat’l Activity Index

Tues 4/22:

AT&T, McDonald’s, Xerox, Yum Brands

9:00 FHFA Housing Price Index

10:00 Existing Home Sales

Weds 4/23:

Apple, Boeing, Facebook, General Dynamics, Proctor & Gamble, Texas Instruments, Zynga

10:00 New Home Sales

Thurs 4/24:

DR Horton, Pulte Homes, General Motors, Microsoft, Pandora, Verizon

8:30 Weekly Jobless Claims

8:30 Durable Goods Orders

Fri 4/25:

Colgate, Ford, Whirlpool

9:55 Consumer Sentiment

Week ahead: Debt Deal Done, Data Dump Due

After three weeks of political wrangling, the federal government is open and the debt ceiling has been increased. The good news/bad news is that there’s a 90-day grace period before the next potential round of budget/debt ceiling debates recurs. So, now the fun begins: parsing the deluge of delayed economic reports and trying to figure where the economy stands. Global/US Growth: Before the shutdown, there was ample evidence that the global economy was picking up steam. The rebound in China helped alleviate worries over a “hard landing”, the euro zone finally emerged from recession, Japan remains relatively strong and the slow down in emerging markets is picking up as worldwide demand increases.

In the U.S., the recovery was gaining momentum, until the two-headed monster of the government shut down and debt ceiling debate reared its ugly head. Moody's Analytics estimates that the whole fiasco cost $22 billion dollars and Standard and Poor’s estimates that the closure has shaved 0.6 percent from fourth quarter growth. As a result, Q4 should expand by just 2 percent, though analysts are hopeful that the hit to growth will be a blip and 2014 will make up for the short-term damage. That said, if Congressional fighting recurs in January and February, there could be more “blips” on the radar screen. Additionally, if the next round of sequester cuts go into effect, U.S. growth could be hampered in 2014.

Jobs: There will be two employment reports released within a short period of time: September will be released this Tuesday, with expectations that 180,000 jobs were created and the unemployment rate will remain at 7.3 percent. Then just 2 ½ weeks later on November 8th, the October report will be available. Over the first eight months of the year, the economy has added an average of 180,000 non-farm positions per month, but the August and July numbers were weaker than expected. The economy has added 6.8 million total jobs (7.5 million private sector jobs) since employment bottomed in February 2010.There are still 1.4 million fewer private sector jobs now than when the recession started in 2007.

Housing: The increase in mortgage rates combined with rising inventories will likely slow down the sizzling pace of the housing recovery, but should not snuff it out. Housing should continue to be a positive force in the economy.

Consumers: It was hard to hit the stores with gusto when the government was shut down and the U.S. was on the verge of defaulting on its obligations. ShopperTrak said that total retail store shopper traffic during the week of Sept. 29-Oct. 5 decreased 7.5 percent compared to the same time period last year. During the week of Oct. 6-12, foot traffic decreased 7.1 percent compared to 2012. But consumers are a mercurial bunch - visions of sugarplums may help them forget about Washington and engage in a bit of retail therapy during the holiday season.

Federal Reserve: Remember way back in September when Ben Bernanke raised the concern over “fiscal uncertainty”? (See: Congress is the biggest near-term risk to the U.S. economy) Well, that fear was well founded and probably the main reason that the central bank kept its current policies in place, including the $85 billion worth of monthly bond purchases. There are two more policy meetings before the end of the year, in October and December. It is almost a certainty that the Fed will do nothing in October, but if the economy were to pick up substantially, there is a chance of a small pull back in bond purchases at the December meeting. It is more likely that Bernanke would use his last FOMC meeting in January to change course, unless fiscal uncertainty returns to the fore. If things heat up in Congress, Janet Yellen may use her first FOMC meeting to announce the reduction in bond purchases.

Congress: Are we in for déjà vu all over again (h/t Yogi)? The agreed upon three-month time horizon has invoked a chorus of “kick the can down the road”, but wait - it could last even longer! The debt ceiling date of February 7^th could be extended when Treasury Secretary Jack Lew invokes extraordinary measures.

MARKETS: Investors typically do not like uncertainty. Except last week, when they brushed aside worries over the debt ceiling and then celebrated when the deal was sealed. With indexes up sharply on the year, optimists are touting a resurgent economy,  decent earnings and a Fed policy that will remain market-friendly. Pessimists argue that the bulls are confusing the avoidance of disaster with real economic progress...it is October, after all!

• DJIA: 15,399 up 1% on week, up 17.5% on year
• S&P 500: 1744, up 2.4% on week, up 22.3% on year (new all-time closing high)
• NASDAQ: 3914, up 3.2% on week, up 29.6% on year
• 10-Year Treasury yield: 2.59% (from 2.68% a week ago)
• Nov Crude Oil: $100.83, down 1.2% on week
• Dec Gold: $1314.60 up 3.6% on week
• AAA Nat'l average price for gallon of regular Gas: $3.36

THE WEEK AHEAD: Get ready for a “Jobs Tuesday”! Reports in BOLD are rescheduled releases of reports that were on hold until the government reopened. It is possible additional data will be released later this week by other government entities.

Mon 10/21:

Halliburton, McDonald’s, Netflix, Texas Instruments

8:30 Chicago Fed Nat’l Activity Index

10:00 Existing Home Sales

Tues 10/22:

Coach, DuPont, Kimberly Clark,

8:30 September Jobs Report

10:00 Richmond Fed Manufacturing Index

Weds 10/23:

AT&T, Boeing, eTrade

8:30 Import/Export Prices

9:00 FHFA Housing Price Index

Thurs 10/24:

3M, Altria, Amazon, Ford, Colgate, Palmolive Microsoft, Zynga

8:30 Jobless claims

10:00 Job Opening and Labor Turnover (JOLTS)

10:00 New Home Sales

Fri 10/25:

P&G, UPS

8:30 Durable goods orders

9:55 Consumer Sentiment

Week ahead: Debt Ceiling Thaw Warms Traders’ Hearts

Traders seemed convinced that Congress will come to an agreement on the debt ceiling, which propelled stocks higher on Thursday and Friday, and saved what was starting to look like an ugly week. Presuming that the collective wisdom is correct, then fears of financial catastrophe and recession will recede and everyone can start chewing on the boring old stuff: the pace of economic growth and corporate earnings. Of course it’s difficult to analyze the economy while the government is shut down. Menzie Chinn of EconBrowser notes that even the Fed is forced to conduct “macroeconomic policymaking with increasingly sparse or mis-measured data. If one doesn’t believe in expertise and information, then this is not a problem. If one believes that knowledge should inform decision-making, it is.” (You can almost hear Larry Summers saying, “Good luck with the new gig, Janet Yellen!”)

While Wall Street was instantly soothed by the thaw in Congressional relations, Main Street was not yet convinced. Beyond the massive reputational damage lawmakers have inflicted on themselves, many Americans are now worried that the economy will be harmed. Consumer sentiment fell in October to its weakest level in nine months, according to the Thomson Reuters/University of Michigan preliminary sentiment index.

Additionally, a recent Wall Street Journal poll showed that 42 percent of Americans think the economy will worsen over the next year, which is double the amount observed in September, and the number of those surveyed who think the country is on the right track has fallen by half. The WSJ results jibes with Gallup, which showed that consumer confidence now measures at the same low levels as that of the 2008 economic collapse.

Suffice it to say, if political gridlock goes on too long, then consumer confidence could drop, which could lead to slower than expected spending during the holiday shopping season. To underscore the risk of sliding consumer confidence, the Leaders of the National Retail Federation sent a letter to Congress, warning:

“For retailers – who represent the sector of the American economy most closely tied to consumer attitudes – these numbers are deeply disturbing…Moreover, since the very modest growth the U.S. economy has experienced following the 2008 recession has been attributed to the willingness of the American consumer to keep shopping, a lasting decline in consumer confidence is likely to translate into increased unemployment and slower growth in coming months.” The NRF also detailed practical problems the shutdown has created for retailers – from the lack of economic data and reports to concerns over processing of imported merchandise.

If the economy were to slow, it would be bad news for companies, which were at the precipice of doing something that have not done in a while: spending some of the piles of cash they have accumulated. As a reminder, non-financial companies held a record $1.78 trillion in cash and other liquid assets as of the first quarter of the year. Many analysts thought that the companies would start to spend money in order to expand their businesses and drive more sales. If Congressional bickering drags on too long, some companies may rethink those plans.

MARKETS:

• DJIA: 15,237 up 1.1% on week, up 16.3% on year
• S&P 500: 1703, up .7% on week, up 19.4% on year
• NASDAQ: 3791, down 0.4% on week, up 25.6% on year
• 10-Year Treasury yield: 2.68% (from 2.65% a week ago)
• Nov Crude Oil: $102.02, down 1.7% on week
• Dec Gold: $1268.20, down 3.2% on week
• AAA Nat'l average price for gallon of regular Gas: $3.34

THE WEEK AHEAD: Government reports in italics are due to be released, subject to the status of the shutdown. Reports that were delayed over the past two weeks, including the all-important jobs report, could be released this week, if a deal is reached. Q3 earnings season gets into full swing, with a slew of S&P 500 companies reporting this week.

Mon 10/14: Columbus Day: US stock markets open, bond markets and banks closed

Tues 10/15:

Citigroup, Intel, Johnson & Johnson, Coca Cola, Yahoo, Schwab

8:30 Empire State Manufacturing Index

Weds 10/16:

AMEX, Bank of America, BNY Mellon, Pepsi, IBM, eBay

8:30 CPI

10:00 Housing Market Index

2:00 Fed Beige Book

Thurs 10/17: DEBT CEILING D-DAY

Capital One, Goldman Sachs, Verizon, Google

8:30 Jobless claims

8:30 Housing Starts

9:15 Industrial Production

10:00 Philadelphia Fed Survey

Fri 10/18:

GE, Honeywell, Morgan Stanley, Schlumberger

10:00 Leading Indicators

Week ahead: Earnings, Boomerang Stocks, Bernanke to Capitol Hill

Let's start at the very beginningA very good place to start When you read you begin with A-B-C When you sing you begin with do-re-mi

- The Sound of Music (1959, music by Richard Rodgers, lyrics by Oscar Hammerstein II)

Investors used to think that starting at the very beginning meant examining corporate earnings. After all, buying stock in a company (or through a stock mutual fund) is a bet that the company will increase its ability to earn money over time. Yet there is ample proof that companies are having a harder time making money by selling more goods and services and have instead been relying more on cost containment and financial engineering to meet their earnings objectives.

S&P 500 corporate profits are expected to rise 2.9 percent in Q1 vs. a year earlier, according to analysts polled by Thomson Reuters, which would be a slowdown from 5.4 percent in Q1 and 6.2 percent in Q4. But those diminished earnings are coming on projected revenue growth of only 1.6 percent. “If companies are having a harder time making money, then why is the stock market rising?” asked a caller to my radio show recently. The answer to that question requires that we start at another beginning…or with Ben Bernanke.

In January, I jotted down 7 reasons why the stock market rally could extend well into 2013:

(1) (2) (3) The Federal Reserve is maintaining its low interest-rate policies (including the monthly purchase of $85 billion worth of bonds) until employment improves substantially

(4) Japanese officials have started to address the country’s multi-decade economic stagnation

(5) Europe is no longer on the precipice of disaster

(6) The much-feared hard landing in China never came to fruition

(7) U.S. housing is finally contributing to economic growth

You get the joke…Ben Bernanke’s Federal Reserve is responsible for the lion’s share of the stock market move. Without easy monetary policy in place, all of the other factors would not have boosted stocks to the levels that we are seeing now. Last September, the Fed launched its current round of bond buying (QE3) and also said that it would maintain low short-term interest rates until mid-2015. The announcement and the subsequent December pledge to keep the program open-ended sparked a rally in global equities.

Everything was honky dory until May 22^nd, when during Congressional testimony, Bernanke raised the prospect that the central bank could downshift from its accommodative policies, if economic data were to improve. The subsequent 7½ weeks were volatile for every asset class, with most (bonds, gold, emerging stocks) heading lower. The exception has been the U.S. stock market -- the S&P 500 and Dow Jones Industrial Average tumbled about 7 percent from their intraday record highs in June, before recouping all of those losses and recording a new nominal closing high by the close of trading on Friday.

If the boomerang stock market started its journey with Bernanke’s comments, it makes sense that markets would return home after another Bernanke speech. In it, the Chairman underscored that the central bank would continue to pursue highly accommodative policies for the “foreseeable future,” due to a weak labor market and low inflation. This time, investors took Bernanke at his word.

This week’s key event puts Ben Bernanke back on the hot seat for his semi-annual testimony to the House on Wednesday and to the Senate on Thursday. It is expected that the Chairman will draw a distinction between tapering bond buying, which is likely to begin at either the September or December Fed meeting, if all goes well in the economy; and raising interest rates, which is not likely to occur until 2015. Bernanke and company will have a lot more data to chew on between now and the September 17-18 FOMC meeting, including two more employment reports.

Markets: The risk-on trade was ON…at least for another week. For the 25th time this year, the Dow closed at an all-time closing record. The S&P 500 hit its 19th record close of the year, and the NASDAQ hit its highest closing price since September 2000.

• DJIA: 15,464, up 2.2% on week, up 18% on year (Inflation adjusted high: 15,731)
• S&P 500: 1680, up 3% on week, up 17.8% on year (Inflation adjusted high: 2036)
• NASDAQ: 3600, up 3.5% on week, up 19.2% on year (All-time closing high 5,048 on 3/10/00)
• 10-Year Treasury yield: 2.59% (from 2.72% a week ago)
• Aug Crude Oil: $105.95, up 2.6% on week
• Aug Gold: $1277.60, up 5.4% on week
• AAA Nat'l average price for gallon of regular Gas: $3.58 (up $0.11 in a week)

THE WEEK AHEAD: Bernanke’s testimony and earnings season will dominate. Readings on Retail Sales are likely to show an increase, due to a spike in energy prices and consumer inflation at the core level should remain tame.

Mon 7/15:

Citigroup

China GDP

The trial of former Goldman Sachs employee Fabrice “Fab” Tourre begins. He is charged with misleading investors in a mortgage deal begins

8:30 Retail Sales

8:30 Empire State Manufacturing Survey

10:00 Business Inventories

Tues 7/16:

Goldman Sachs, Coca-Cola, Yahoo

8:30 CPI

9:15 Industrial Production

10:00 Housing Market Index

Weds 7/17:

American Express, Bank of America, BNY/Mellon, eBay, IBM, Intel

8:30 Housing Starts

10:00 Ben Bernanke testifies before House

2:00 Fed Beige Book

Thurs 7/18

Capital One, Google, Morgan Stanley, Verizon, Microsoft

8:30 Weekly Jobless Claims

10:00 Ben Bernanke testifies before Senate

10:00 Philadelphia Fed Survey

10:00 Leading Indicators

Fri 7/19:

GE, Honeywell, Schlumberger