Overseas equity indices remain mostly closed for the long Easter Weekend…historically British-linked markets in Asia (Australia, Hong Kong, etc.) remain closed as well…activity was fairly light in the markets which were open…US futures indicate a slightly lower opening for the Dow and S&P while slightly higher for the NASDAQ as the tech resurgence continues.
Earnings calendar is light today with only nine companies reporting…most watched will be Johnson Controls (beat earnings and sales), Netflix (after the close) and Kimberly-Clark (after the close)
US Economic releases – New home sales data for March and the Dallas Federal Reserve bank manufacturing activity index…
• Commodities continue their record run as gold, silver and oil all continue to press higher…this weighed on Chinese equities as economists predict inflation for April of +5.5% which raises expectations of further monetary restraint action taken by the Chinese central banking authorities which in turn will negatively impact growth.
• Japan announced supermarket sales for March today which were +0.3%...or ½ the gain from February. This isn’t surprising given the turmoil following the earthquake but clearly leads to weak expectations for other retail sales numbers reflecting consumer discretionary purchases. Tomorrow we’ll get retail trade numbers for March and expectations are UGLY with Year over year -6.1% (+0.1% in February) and month over month -5.4% (+0.8% in February) and Chain store sales are expected to be little better at -4.7% (+0.5% in February). The fear for the world’s 3rd largest economy is that the fear of radioactivity (10% of the population seems to walk around with surgical masks on in “normal” times) and continuing aftershocks will keep consumers at home when not at work and could pitch the economy back into recession.
• Toyota Motor, the world’s largest auto manufacturer said that global output fell 30% in March following the earthquake in Japan…output in Japan was down 63%.
• On the plus side of the ledger, Q1 earnings reports have so far provided consistent earnings “beats”. In the last two weeks, 71% of global companies reporting earnings have topped analyst expectations by an average of +8.8%. The key continues to be added productivity as the application of technology and a “leaned out” workplace continue to drive productivity gains which keeps per unit labor costs down and helps offset the impact of higher commodity prices. Below is the chart of US Non-farm percentage change in output per hour on a quarterly basis (seasonally adjusted). The colored lines are 3 (12 quarter); 5 (20 quarter) and 10 (40 quarter) year moving averages. What’s most interesting to me is the fact that the 3/5/10 year MA are converging as the last three years are pulling the 5 year numbers higher…this suggests that (a). the continued application of technology in the workplace continues to add to productivity and (b). producers had gotten sloppy as we got later in the decade…this is simply a reflection of human behavior and the “crash” focused attention once again cost containment and productivity improvements.
• The arguments continue to rage between those who view US Treasuries as a money losing bet in real terms (PIMCO most notably) and those who think that the market will continue to perform well as the US considers some measure of austerity in budgetary reform, China attempts to contain inflation and the Japanese economy slowly recovers from the March earthquake disaster…the logic here is that removing fiscal (budget reform) and monetary (end of QE2) stimuli from the world’s largest economy while the Chinese (world’s growth driver) and Japanese economies could slow as well will constrain growth, strengthen the dollar and cause commodity prices to roll-over. The other guys say that the inflation genie is out of the bottle (see +5% inflation in the developing world) add to this continued budgetary and hence monetary control issues in the OECD countries (no way out other than to print money which simply adds to inflationary pressures)…we likely won’t know the answer for sometime to come but what is certain is that as long as productivity is rising, unit wage rate increases will remain small and for the OECD countries, that is the key to containing inflation. The unfortunate aspect of all of this is that it continues to expand the divide between the “haves and have not’s” as higher food and energy prices consume a higher % of disposable income for all but it’s felt more at lower/fixed income consumer level which will keep the pressure on those in high political office to keep the spigot of government largesse open in order to get votes or hold off civil war as the case may be.
• S&P option “skew” argues for higher market…as fears of an economic roll-over in the global economy rise (see above bullet point) options traders have bid up near the money prices of put options on the S&P signaling growing bearishness for the summer months. For example, the market closed on Thursday at 1,337.4…put options that expire 8/20/11 struck at 1,325 (12 ½ pts “out of the money” cost $49.70 while calls at the same level or 12 ½ points “in the money” cost $52.50) on the other hand puts that expire 8/20/11 struck at 1,350 (12 ½ pts “in the money) were $63.40 while calls with the same expiration / same strike were $38.00…this is a perfect illustration of “skewness” in options prices…the highest level since July 2007 (remember the market peaked in October)…
• “Cairo Spring” rolls on with more violence in Syria as that situation appears set to spin out of control…meanwhile the President of Yemen (Saleh) refused to step down immediately saying that he will not pitch the country into anarchy and the process must be democratic…the original plan, brokered by the GCC, was for Saleh to step down in 30-days. Meanwhile, oil continues to push higher with WTI @ $112 ¾ per barrel this morning on the NYMEX…
Phillip Pennell, CFA
Turnberry Capital Management
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