Summer 2010 Market Commentary

North Pier Market PIERspective – Jim Scheinberg

“Putting on the Fitz”

In our Fall 2009 Market Commentary, we forecasted a ‘Fits and Starts recovery’ from the Debt-Crisis; and were quite dubious of the V-shaped rebound story. Well, welcome to the ‘Fits.’ The Second Quarter saw global markets rush into risk-aversion mode again, in a dash to safety similar to the dark days of the financial crisis.

As many regular readers of the “The North PIERspective” know, I am seldom brief in my reviews or projections.

So instead let me show you what we were pounded with, day in and day out during the Second Quarter, in a picture…of words.

So how did the markets fare in Q2?  In one word, “badly.”

  • Global equity markets sold off dramatically in Q2 with substantial volatility.
  • Growth and Value stocks all retreated similarly.
  • International stocks were hurt by the further decline in the Euro, with Latin American Emerging markets faring the worst.

If we are at an inflection point and heading towards a double-dip, then the stats of Q2 will quickly deteriorate from here.  If this is nothing more than a digestive pase, then that, too will soon be proven.  That said, here are some snap shots that we can use as a baseline over the coming months:

  • Personal Income and Disposable Income are steadily increasing in excess of 5% annualized.  With Personal Expenditures growing at a slow pace, Americans are continuing to improve on their household balance sheets.
  • Wholesale inventories increased .5% in May up from .2% increase in April.  However, wholesale sales fell .3% from April’s numbers.  The inventory increase implies businesses continue to ramp up for more robust sales…but perhaps they were wrong in their predictions if a trend develops.
  • Manufacturing continued to grow in May as the PMI decreased…representing meaningful expansion expectations in the manufacturing sector.
  • Private sector job growth slowed from a healthy 241,000 in April to 33,000 in May and 83,000 in June.  The unemployment rate fell two tenths of a percent to 9.5% in June but many suspect that this is from people giving up on looking for work…actually eliminated them from the labor pool.

Oh REALITY!  There’s no time like the present….

A similar phenomenon occurred with new home sales this quarter as to the Auto sales plummett of 35% after the ‘Cash-for-Clunkers’ incentive in Q3 of 09.  New homes plunged 33% in May after the deadline for up to $8000 in tax credits expired (4/31).  Why are we concerned?

  • The pattern suggests that the effect of the stimulus was simply to pull future demand to the present.
  • However, once the present IS the present, those buyers are no longer in the market.
  • Now that the future is here…..brokers and buyers are hearing crickets.
  • Unlike the short-run Clunkers program which lasted less than 3 months, the housing incentives lasted nearly a year.
  • This magnitude of the drop-off in demand could lead to another leg down in residential real estate prices.

Could this lead us into a double dip recession??

As the summer selling season comes to a close and the reality of post stimulus market hits sellers’ pricing, the bottom is right around the corner.  The reason why buying will resume is simple and plain, is affordability….not because of government gimmicks and no money down inducements.  In the LONG RUN, buying will not be artificially driven, with a program and an expiration date, but will continue until prices have firmed to a level that homes are no longer cheap; and prices have a long way to appreciate until we get there.

In Review:

  • Just 18 months ago, business activity flat-lined similar to a natural disaster where patients suffer trauma.
  • Those patients (U.S. businesses) went into shock.  In shock, the body floods itself with adrenaline and begins to shut down non-vital organs to prepare for survival.
  • The economic stimulus and monetary policy here are that adrenaline.
  • Those massive layoffs, slashing of expenses and hording of cash were the preparation for survival.

So what now??  PIERing ahead…

  • A year later, we are still recuperating but the trauma has abated.
  • Patients are recharging after the adrenaline crash.
  • Arms and limbs of these businesses (procedures that worked and those that didn’t) are restarting.
  • Businesses are examining those next steps to see where they should deploy those resources.

This is not time for massive action from the U.S. Government, or for impatience from the patients’ friends and family.  This is time for calm and sage minds to plot the course ahead.  It is time to strengthen our recovery and get it ready to return to full activity.

That’s how I see things from my PIERspective.

Jim Scheinberg