Over the last couple of days I have been finishing my slide presentation for the upcoming X-Factor Investment Strategy conference this coming Friday with one eye watching the markets move higher on the “hopes” that the Euro will somehow save itself. This has promulgated a very good short covering rally in the markets as my friend David Rosenberg pointed out this morning; “The markets seem to like this perpetual game of kicking the can down the road, so that strategy in Europe to come up with a plan of some sort to continuously fund insolvent sovereigns while helping weak banks recapitalize has won applause from the investment community. At the very least, the shorts have been forced to run for cover yet again.”
This short covering rally could likely push the S&P 500 to between 1230 and 1250. However, without the assistance of QE 3 in any immediate form, the weakness pouring into the economy is likely to continue unabated which in turn will ultimately cap this rally. Just take a look at the releases from the last couple of days.
The National Federation of Independent Business (NFIB) Small Business Survey was released yesterday with only a small uptick (statistically insignificant) but sporting weakness in crucially important subcomponents. When the report was released yesterday the media spin was that while employment remained weak the positive was an uptick in plans for business capital expenditures. This is not a good sign in reality. Companies will spend money to improve productivity in order to offset the need to increase employment. Furthermore, with “Poor Sales” as a major concern of small businesses taking a sharp uptick in just the last two months, this doesn’t bode well for either increased employment in the coming months or a stronger economic environment.
What is more distressing was the sharp decline in the number of respondents expecting a stronger economic environment in the next 3-6 months. Generally, when expectations are this dour, the economy is already in a recession. However, despite the media frenzy that the economy is going to “muddle” through over the next couple of quarters and come in with a much high economic growth rate in the last half of this year compared to the first, small businesses aren’t buying it. NFIB’s Chief Economist Bill Dunkleberg cautioned that in spite of the slight uptick in the index there is “little” among the 10 components that could be considered “positive”.
As the government continues to cloud the business outlook with bipartisan debacles on solutions for the economy from spending cuts to more deficit spending, the reality is that temporary fixes won’t fix the long term economic issues. “An increase in consumer spending would be the best imaginable stimulus right now, not gimmicky Washington policies,” said Bill. “Promising temporary tax cuts financed by permanent income tax increases will not help many small-business owners who pay taxes based on personal—not corporate—tax rates. The key to economic recovery is restoring the confidence of consumers; only then will small businesses begin to see the sales they need to expand. If consumers fear the path we are on, then ‘less is more’ policies that reduce the size of government will increase confidence.”
The Ceridian-UCLA Pulse of Commerce Index was released today showing a marked decrease in the three month average. The index is based on real-time diesel fuel consumption data for over the road trucking. By tracking the volume and location of fuel being purchased, the index closely monitors the over the road movement of raw materials, goods-in-process and finished goods to U.S. factories, retailers and consumers. What is very discouraging is that the index failed to reach a new high during the economic recovery and may have peaked in the most recent quarter. The year-over-year change in the index is flirting with slipping into negative territory as well.
The Index fell 1.0 percent in September on a seasonally and workday adjusted basis, following a 1.4 percent decline in August and a 0.2 percent decline in July. In the last three months, the PCI has declined at an annualized rate of 10 percent per year. This rate of decline has been exceeded only in the deep recession of 2008/09, and equaled only once outside of a recession in March 2000. In other words, since June, trucking activity has been receding at a pace that would be expected to show up in other economic measures soon. According to report’s statistical analysis, two or three more months like this would confirm an official recession.
It is clearly evident that the economy is weakening more than the headlines show. However, this doesn’t mean that the markets are going to immediately crash and it certainly doesn’t mean that can’t be significant “bear market” rallies during a recessionary decline. The rules of selling rallies is still in force as long as we are in a negative trend. We have seen counter trend bounces before and the trick will be determining when it changes from a “bear market” bounce to a new “bull market” rally.