Nothing exciting was revealed from the Fed Minutes yesterday.
Not that we really expected anything spectacular but the lack of anything positive is a negative the way these markets are heading. The FOMC takes note of a contrast between more favorable indicators on the consumer side and weaker activity in the business sector. The committee's business community contacts indicated an "uncertain outlook" for government spending, taxes, and regulation – essentially the Fed is as worried about the Fiscal Cliff as everyone else is.
Policymakers largely deemed the Fed's September decision to begin buying $40Bn of mortgage-backed securities each month as effective in lowering long-term interest rates, in turn helping to support spending and a recovering housing market. Several Fed officials thought the benefits of the bond-buying were likely to grow over time. "Looking ahead, a number of participants indicated that additional asset purchases would likely be appropriate next year after the conclusion of the maturity extension program in order to achieve a substantial improvement in the labor market," the minutes stated. "Operation Twist," in which the Fed has been buying about $45 billion of long-term Treasury securities using the proceeds of selling short-term Treasurys, is due to expire in December. Bernanke has said the Central Bank would review all of its asset purchases at its final policy meeting of the year on Dec. 11-12 – so more uncertainty until then.
What we are certain about is that, coming on the heels of yesterday's disappointing Retail Sales Report, WMT released very weak numbers with comp store sales up just 1.5% for the quarter while expenses climbed 2.5% and the World's #1 Retailer (accounting for 10% of all US sales) MISSED on top-line revenues by $1.8Bn out of $113.2Bn.
Not exactly a confidence-booster to reverse a down-trending market, is it? WMT, a Dow component, is down 3% in pre-market trading while TGT, who were in-line with their earnings report, is trading flat on a 2.9% increase in comp-store sales and uninspiring guidance.
As noted by Doug Short: Even if we go with the “Sandy impacted retail sales” argument – the Hurricane excuse doesn’t really justify that the gross gain in retail sales nationwide over the last year was only $20.42 billion (not seasonally adjusted). Of the $20.42 billion in sales the major category percentage contribution is shown in the adjacent table.
Importantly, over the past year the bulk of retail sales have come from Motor Vehicle sales as sub-prime auto loans have made a vast resurgence and nearly as much simply went into the gas tank. Non-store retailers also comprised a large chunk of consumer dollars as more shoppers gravitated toward the internet leaving companies like Best Buy (BBY) gasping for air. However, while consumers did spend money over the past 12 months, it has been a slowing rate of growth since June of 2011. This decline in the annual growth rate of sales is troubling.
With incomes under pressure, food and energy costs rising, and businesses being impacted by a recession in Europe combined with an inability to pass along cost increases to consumers – the economy is set to continue grinding along at a very sub-par growth rate. For investors – corporate earnings are being impacted as demand slows, rising input costs cannot be passed along and cost-cutting measures have primarily been exhausted. Short contends that this leads to concerns about the validity of exuberant forward earnings expectations and current market valuations.
Also of concern is Europe officially entering a double-dip Recession (did it ever really end?) with Q3 GDP down 0.1% after falling 0.2% last quarter. Year over year, GDP for the Euro-Zone is down 0.6% with France and Germany the only positives – and just barely at +0.2% each. "That was the last good number from Germany for the time being," says Commerzbank economist Joerg Kraemer. "The German economy will probably shrink somewhat in the fourth quarter."
Back home in the US, we have plenty of crappy numbers, with Jobless Claims up 78,000 for the week to 439,000 but that's likely storm-related – as we had an extra-low 361,000 last week. Not storm related is the Empire State Manufacturing Index at -5.2 with Labor Conditions at -14.6 – the worst level since 2009. We'll get the Philly Fed at 10 but that's not likely to be any better. The October CPI was an anemic 0.1% with Core CPI remaining at the usual 0.2% and, as you can see from the chart on the left – how can we expect any better if our Corporate Masters continue to pay our workers less and less money, no matter how hard they work?
All this is pushing bearishness to a 15-month high, according to the AAII Investor Sentiment Survey, which is up 8.9 points to 48.8% bearish while the percent of investors who consider themselves bullish has dropped 9.7 points for the week to finish at just 28.8%. The long-term average for the bulls is 39%, for bears – 30%.
In-line with our short play on Visa (see yesterday's Disaster Hedges update), COF is reporting deteriorating credit quality in October with the 30-day delinquency rate rising to 3.66% from 3.52% previously. Charge-offs on credit cards rose to 4.25% from 3.93%, for auto loans to 2.14% fro 1.97%. The numbers jibe with a report from Fitch, which shows worsening U.S. credit performance in October for the first time in a year.
All this horrible news makes me doubt my bottom call here, at our Must Hold lines, which failed on the S&P and the NYSE yesterday (which is why we are layering our Disaster Hedges – in case I'm wrong) but it is all news we've been warning about for months and the only difference is that now the media is picking up on it all and hitching it to the wagon of Fiscal fears and driving the whole thing off a cliff to really freak out investors.
On a positive note, negative equity improved across the nation in Q3 with 28.2% of homeowners underwater vs. 30.9% in Q2, according to Zillow and AGNC's CEO, Gary Kain, must have been at our PSW Investor Conference this weekend as he made a presentation showing the company is still capable of double-digit returns – even in this low-rate environment and, more importantly, he emphasized my point that Mortgage REIT dividends aren't facing a tax increase as they never qualified for the discounted rate in the first place! So the panic sell-off that is plaguing this sector is completely ridiculous.
Almost as ridiculous as AAPL at $540 – but that's an article for another day.